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Goldman SachsFinancing the Growth of Tomorrow’s Companies Today™ H e r c u l e s T e c h n o l o g y G r o w t h C a p i t a l 2 0 1 4 A n n u a l R e p o r t Financing the Growth of Tomorrow’s Companies Today™ Palo Alto, CA (Headquarters) 400 Hamilton Avenue Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 McLean, VA 1600 Tysons Boulevard 8th Floor McLean, VA 22102 T +1 703 245 3184 F +1 703 245 3001 Boston, MA 31 St. James Avenue Suite 790 Boston, MA 02116 T +1 617 314 9973 F +1 617 314 9997 New York, NY 100 Park Avenue 34th Floor New York, NY 10017 T +1 212 774 3611 F +1 212 843 3411 Chicago, IL 777 Church Street Elmhurst, IL 60126 T +1 847 542 1858 Radnor, PA Three Radnor Corporate Center Suite 410 100 Matsonford Road Radnor, PA 19807 T +1 610 947 6408 www.htgc.com 2014 Annual Report 16323_HER-Cvr_CC.r1.indd 1 4/21/15 4:44 PM Corporate Information Corporate Headquarters 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 www.htgc.com Independent Registered Public Accounting Firm PricewaterhouseCoopers, LLP Three Embarcadero Center San Francisco, CA 94111 www.pwc.com/us Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 T +1 800 937 5449 www.amstock.com The transfer agent maintains shareholder records for Hercules Technology Growth Capital, Inc. Please contact American Stock Transfer & Trust Company, LLC, directly for changes of address, transfers of stock, and replacement of lost certificates. Form 10-K Annual Report The company is pleased to provide corporate information without charge upon written request to: Investor Relations Department Hercules Technology Growth Capital, Inc. 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 Stock Listing Common stock traded on the New York Stock Exchange under the symbol: HTGC Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY, HTGX Board of Directors Robert P. Badavas Director Thomas J. Fallon Director Manuel A. Henriquez Chairman, President, and Chief Executive Officer Joseph F. Hoffman Director Susanne D. Lyons Director Allyn C. Woodward, Jr. Director Management Manuel A. Henriquez Chairman, President, and Chief Executive Officer Jessica Baron Chief Financial Officer Scott Bluestein Chief Investment Officer Investor Relations on the Web For more information related to investing in the company, please see the Investor Relations tab on our website at www.htgc.com. This annual report is printed on paper and at a printing facility certified by the Forest Stewardship Council (FSC). From forest management to paper production to printing, FSC certification represents the highest social and environmental standards. The paper contains wood from well-managed forests and controlled sources. This is certified in accordance with the rules of the Forest Stewardship Council. Design by: Michael Patrick Partners www.michaelpatrickpartners.com The statements contained in this Annual Report that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks, uncertainties, including the uncertainties surrounding the current market, and other factors we identify from time to time in our filings with the Securities and Exchange Commission. 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 incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this Annual Report are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events. Our founding mission was to provide investors with the opportunity to invest in some of America’s most innovative, venture capital and private equity-backed companies in technology-related markets. Today we are one of the largest business development companies focused on the venture capital industry that enable investors to engage in these unique opportunities. Our focus is to work with entrepreneurial companies to help them grow their businesses. Our financing solutions offer the flexibility that growing companies require as they evolve and change. We seek to serve our shareholders’ interests through disciplined due diligence processes and the ability to work closely with our portfolio companies. New York Stock Exchange symbol: HTGC. Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY, HTGX. 16323_HER-Cvr_CC.r1.indd 2 4/21/15 4:44 PM Financing the growth of tomorrow’s companies today – that’s what we do. Since 2003, Hercules Technology Growth Capital has committed over $5 billion in tailored financing solutions helping hundreds of young, innovative entrepreneurs grow their companies. We know what it takes to reach the next level and understand the industries we cover. But let’s let our clients tell the story. 16323_HER-Editorial_CS6-r3.indd 5 4/27/15 5:06 PM 2014 Annual Report | 1 To Our Valued Shareholders, 2014 was marked by a number of outstanding achievements for Hercules Technology Growth Capital. Once again the Company achieved a record level of new commitments and fundings, reflecting our strong leadership position within the venture debt marketplace as well as the continued strength and influence of our brand and reputation. Since inception (December 2003), we have originated more than $5 billion in commitments to over 320 companies that we believe have made Hercules their financing partner of choice. 2014 Financial Highlights and Achievements • Record level of new debt and equity commitments of more than $900 million, a 28% increase from 2013 • Total investment assets at fair value of approximately $1.02 billion, an increase of 12% year-over-year • A taxable income spillover of approximately $17 million, or $0.27 per share • Record total new fundings of approximately $621 million, up approximately 25% from 2013 • Record net realized gains of approximately $20 million, or $0.33 per share • A well-positioned portfolio with 20 completed liquidity events • Investment–grade corporate rating of BBB- from Standard & Poor’s Delivering Strong Total Shareholder Returns* As a result of our financial and operational achievements in 2014, for the quarter ended December 31, 2014, Hercules declared its 38th consecutive dividend since its IPO in June 2005, bringing the total cumulative dividends declared to $414.7 million, or $10.30 per share. We also generated earnings spillover in 2014 of approximately $17 million, or $0.27 per share, which should allow us to maintain our dividend levels in 2015 as we build up our investment portfolio in the coming year. • Three-Year Average Total Shareholder Return: We outperformed the majority of our Peer Group by generating an average total shareholder return of 93.6% over three years, compared to the median of 34.6% for our Peer Group. • 2014 Total Shareholder Return: We successfully navigated trends affecting our business and outperformed more than 84% of our Peer Group with respect to 2014 total shareholder return. • 2014 Return on Average Equity: We generated a 10.9% return on average equity, outperforming 90% of our Peer Group. • 2014 Return on Average Assets: We exceeded the performance of 83% of our Peer Group by generating a 6.0% return on average assets. “Hercules has been a great partner for Box since 2008. They were very supportive during the financial crisis and grew through multiple transactions as our business started to scale. The Hercules team is flexible, creative, and easy to work with. I would highly recommend them for any growth company looking for capital.” Dylan Smith, CFO, Box For additional information, including information regarding Peer Group and calculations, please see the “Executive Compensation” section of our Proxy Statement. A Vibrant Venture Capital Market Created Both Opportunities and Challenges Hercules’ performance during 2014 should be viewed within the larger context of the venture capital and venture debt industry, which experienced a remarkable year. 2014 saw record levels * Past performance of the Company or information about the market should not be viewed as indicative of future results, the achievement of which cannot be assured. 2 | Hercules Technology Growth Capital 2014 Annual Report | 3 16323_HER-Editorial_CS6-r3.indd 6 4/27/15 5:06 PM of venture-backed IPOs and M&As, and the highest levels of venture capital fundraising and financings in seven years. These trends, along with the strong equity market and low interest rate environment, created an unprece- dented amount of capital flow in and out of the industry. “Hercules is a fantastic partner. The credit line we have in place with them allows us equity-like flexibility without the dilution. I’ve been impressed since day one when they offered unmatched terms and In Q4 2014, Dow Jones VentureSource reported that U.S. venture capital funds raised a total of $33 billion, making it the highest total since 2008. Even more impressive, $52.1 billion of new investments were made, exceeding the annual total level of investments for each of the past eight years. Furthermore, venture capital exits and liquidity events continued to deliver excellent results with 105 companies, completing IPOs and raising $9.2 billion, and 531 companies being acquired from venture capitalists for a total of $85.8 billion, eight of which were Hercules’ portfolio companies. performed a thoughtful diligence in short order. Without hesitation, I’d recommend Hercules to any tech CFO.” David Sherry, CFO, LightSpeed These incredibly strong numbers had a profound influence on our annual performance. For the year we secured more than $900 million in new commitments, a 28% increase over 2013, and funded approxi- mately $621 million of debt and equity commitments, an increase of nearly 25% year-over-year. We have purposely structured many of our unfunded commitments to fund only when our portfolio companies achieve specific milestones that serve to enhance our overall collateral position. Our total investment assets were over $1 billion in fair value, an increase of 12% from 2013. We also finished the year with record net realized gains of more than $20 million. While the Hercules team was able to produce record results in 2014, the year was not without its challenges. As a result of the increased venture capital activity, there was an unprecedented and unexpected level of transactions and repayments of loans within our portfolio. We received nearly $500 million in principal repayments, of which $358 million were unscheduled payoffs. This meant a turnover of more than 50% in our portfolio assets. Not only were we able to fully absorb and replace the turnover, but we actually grew our investment portfolio by more than $120 million and ended the year with record unfunded commitments of approximately $339 million. This achievement is a true testament to the resiliency and tenacity of the Hercules team, and it speaks volumes about our leadership position, brand reputation, and access to high-quality deal flow that we have earned from our venture capital partners and entrepreneurs. It is an accomplishment that should not be underestimated and, more importantly, is one by our team of which I am extremely proud. Leveraging Our Leadership Position As our business continued to evolve and became ever more competitive in 2014, our position as the leading business development company (BDC) focused on venture debt lending remained strong. We believe our competitive advantage is the combination of four key attributes. * Past performance of the Company or information about the market should not be viewed as indicative of future results, the achievement of which cannot be assured. 2 | Hercules Technology Growth Capital 16323_HER-Editorial_CS6-r3.indd 7 4/27/15 5:06 PM 2014 Annual Report | 3 “Hercules Technology “Hercules Technology “Hercules Technology Growth Capital is a strong long-term partner for TransMedics. The Hercules team took the time to work with the management team to understand the business opportunity and challenges that we faced. They have used that knowledge to strategically support the company throughout its key stages of development. They are more than a venture debt lender, they are a business partner that focuses on helping their portfolio companies succeed and grow. TransMedics and I are fortunate to be working with the Hercules team.” Waleed Hassanein, M.D, President & CEO, Transmedics The first is Hercules’ ability to identify the most promising growth companies in our chosen industries. From there our decades of combined expertise in debt financing, investment banking, and running startups, in addition to our unique and proprietary originations platform, enable us to understand each company’s key business dynamics and then create a flexible and customized financial solution that we believe will help each com- pany meet its growth objectives. Since our founding there have been more than 100 IPO or M&A events from our portfolio of innovative technology companies. The second is the fact that Hercules is an internally managed BDC. This means that our focus is on creating long-term, sustainable results through investment income generation and realized gains, and our compensation structure balances origination growth with credit quality and expected yields. Unlike externally managed firms that are compensated with flat management fees mostly based on assets under management (AUM) and with less regard to actual financial performance, our management’s interests are in alignment with those of our shareholders. The third is our steadfast commitment to maintaining a high-quality credit portfolio. This is achieved by maintaining a rigorous credit discipline, employing a robust credit analysis process when evaluating investment opportunities, refusing to be pressured by the competitive lending environment, and insisting on underwriting principally first-lien senior secured financing facilities. In 2014 we also expanded and launched our new financing solutions to better serve the needs of our companies by offering asset-based lending (ABL) and equipment-based financing solutions. The results of this process are clear: after 11 years, our cumulative net GAAP losses are a mere $12 million, representing an annual loss rate of just two basis points. When measured against our cumulative total of more than $5 billion in commitments since inception, it is a remarkable benchmark. The fourth attribute is our strong and diversified balance sheet of more than $377 million of liquidity, including $227 million in cash as of December 31, 2014. During the year we successfully accessed the debt capital markets and further strengthened our balance sheet with two offerings consisting of $103 million in 10-year senior notes and a $129.3 million securitization. In 2014 Hercules was the first BDC primarily focused on venture lending to receive an investment–grade rating of BBB- from Standard & Poor’s Rating Services. We believe that these offerings and our credit rating further enhanced our balance sheet and should allow us to continue to access the debt capital markets and lower our overall cost of capital, positioning us to opportunistically and patiently build a high-quality portfolio that is well diversified across sectors, geography, and all stages of a company’s development. 2015 Is a Year We Build for Growth We enter 2015 with a singular mission: to build our loan investment portfolio to new record levels with senior secured high-quality investments that we believe will set the stage for even greater long–term shareholder returns. 4 | Hercules Technology Growth Capital 2014 Annual Report | 5 16323_HER-Editorial_CS6-r3.indd 8 4/27/15 5:06 PM By successfully rebuilding nearly half of our investment portfolio and ending 2014 with $1 billion in loan assets, we have effectively lowered the composite age of our loan portfolio and expect to see materially lower levels of early repayments in 2015. As a result, our core yields will be a better reflection of what we believe to be the most representative and sustainable aspect of our business: interest income and realized gains. In addition, without the “drag” of early payoffs offsetting underwriting new originations, we can take the opportunity to use our balance sheet at a disciplined pace and underwrite only those transactions that meet our credit and yield standards. We are very confident in our ability to compete while maintaining an unwavering discipline to execute our business in 2015. We are setting a corporate objective to grow our loan portfolio by as much as 30% to 50% to our target of $1.3 billion to $1.5 billion by the end of 2015, assuming the venture capital market remains strong and produces healthy deal flow and we are able to find the appropriate quality of credit underwriting opportunities in the marketplace. We also believe that Hercules will begin to generate further revenue growth as we build up our loan portfolio throughout the year as well as continue to see upside earnings potential from further IPO and M&A events of our portfolio companies in 2015. During the first quarter of 2015, three Hercules portfolio companies,which include, Box, Zosano Pharma, and Inotek Pharmaceuticals, have already completed their IPOs. Box was one of the largest IPOs in our portfolio and could potentially represent the single largest gain in Hercules’ history. We also expect to see continued consolidation among venture debt lending platforms and may continue to evaluate potential acquisition opportunities throughout the year. We will be just as disciplined and selective in analyzing these opportunities as we are when we evaluate credits for our portfolio. Although 2014 was an extraordinary and transformative year for Hercules, I am even more excited about 2015 as we build and grow our portfolio and position ourselves to generate returns that our shareholders have come to expect from us. Thank you for your continued support. Sincerely, Manuel A. Henriquez Chairman, President and Chief Executive Officer 4 | Hercules Technology Growth Capital 2014 Annual Report | 5 16323_HER-Editorial_CS6-r3.indd 9 4/27/15 5:06 PM Financial Highlights U.S. dollars in millions, except per-share amounts 2010 2011 2012 2013 2014 $ 59.5 $ 79.9 $ 97.5 $ 139.7 $ 143.7 Total Investment Income Net Investment Income Net Investment Income per Share Declared Dividends per Share Investments, Fair Value Cash and Cash Equivalents Total Assets Total Liabilities Total Net Assets 29.4 0.80 0.80 472.0 107.0 591.2 178.7 412.5 39.6 0.91 0.88 652.9 64.5 747.4 316.4 431.0 48.1 0.96 0.95 906.3 183.0 1,123.6 607.7 516.0 73.1 1.22 1.11 910.3 268.4 1,221.7 571.7 650.0 Comparison of 5-Year Cumulative Total Return* Among Hercules Technology Growth Capital, the NYSE Composite Index, and the NASDAQ Financial 100 Index $250.0 NYSE Composite NASDAQ Financial 100 $200.0 Hercules Technology Growth Capital *$100 invested on December 31, 2009 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. $150.0 $100.0 $50.0 71.8 1.13 1.24 1,020.7 227.1 1,299.2 640.3 658.9 217.22 170.49 162.95 Dec. 31 2009 Jun. 6 2010 Dec. 31 2010 Jun. 31 2011 Dec. 31 2011 Jun. 31 2012 Dec. 31 2012 Jun. 31 2013 Dec. 31 2013 Jun. 31 2014 Dec. 31 2014 $414.7 Million in Historical Dividends Declared since June 2005 IPO More than 100 Portfolio Company Liquidity Events from 2006 Dividends Declared (per share) $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 Dividends Declared Per Year Cumulative Dividends Declared $6.69 $5.81 $9.99 $8.75 $7.64 $0.80 2010 $0.88 2011 $0.95 2012 $1.11 2013 $1.24 2014 6 | Hercules Technology Growth Capital 60 50 40 30 20 10 0 IPO M&A 7 2 2010 11 4 2011 54 24 42 16 20 11 2012 2013 2014 16323_HER-Editorial_CS6-r3.indd 10 4/27/15 5:06 PM Form 10-K 16323_HER-10K Cvr_CC-r1.indd 1 16323_HER-10K_CS6-r4.indd 1 4/22/15 5:36 PM 4/28/15 2:53 PM SECURITIES AND EXCHANGE COMMISSION UNITED STATES Washington, D.C. 20549 FORM 10-K OR Commission File No. 814-00702 (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Hercules Technology Growth Capital, Inc. (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 74-3113410 (I.R.S. Employer Identification Number) 400 Hamilton Avenue, Suite 310 Palo Alto, California 94301 (Address of principal executive offices) (Registrant’s telephone number, including area code) (650) 289-3060 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, par value $0.001 per share 7.00% Notes due 2019 7.00% Notes due 2019 6.25% Notes due 2024 Name of each exchange on which registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $970.5 million based upon a closing price of $16.16 reported for such date on the New York Stock Exchange. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended and shall not be deemed to be an admission that, such persons are affiliates of the Registrant. On February 26, 2015, there were 64,707,137 shares outstanding of the registrant’s common stock, $0.001 par value. Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed within 120 days after the close of the registrant’s year end are incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE This page is intentionally left blank. 16323_HER-10K Cvr_CC-r1.indd 2 16323_HER-10K_CS6-r4.indd 2 4/22/15 5:36 PM 4/28/15 2:53 PM This page is intentionally left blank. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 814-00702 Hercules Technology Growth Capital, Inc. (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 74-3113410 (I.R.S. Employer Identification Number) 400 Hamilton Avenue, Suite 310 Palo Alto, California 94301 (Address of principal executive offices) (650) 289-3060 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, par value $0.001 per share 7.00% Notes due 2019 7.00% Notes due 2019 6.25% Notes due 2024 Name of each exchange on which registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $970.5 million based upon a closing price of $16.16 reported for such date on the New York Stock Exchange. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended and shall not be deemed to be an admission that, such persons are affiliates of the Registrant. On February 26, 2015, there were 64,707,137 shares outstanding of the registrant’s common stock, $0.001 par value. Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed within 120 days after the close of the registrant’s year end are incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE 16323_HER-10K Cvr_CC-r1.indd 2 4/22/15 5:36 PM 16323_HER-10K_CS6-r4.indd 3 4/28/15 2:53 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. FORM 10-K ANNUAL REPORT In this Annual Report on Form 10-K, or Annual Report, the “Company,” “HTGC,” “we,” “us” and “our” refer to Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part I. Business ..................................................................................................................................................................... Risk Factors ............................................................................................................................................................... Unresolved SEC Staff Comments ............................................................................................................................. Properties ................................................................................................................................................................... Legal Proceedings ..................................................................................................................................................... Mine Safety Disclosures ............................................................................................................................................ Part II. Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Securities .............................................................................................................................................................. Selected Consolidated Financial Data ....................................................................................................................... Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................... Quantitative and Qualitative Disclosure About Market Risk .................................................................................... Financial Statements and Supplementary Data ......................................................................................................... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................... Controls and Procedures ............................................................................................................................................ Other Information ...................................................................................................................................................... Part III. Directors, Executive Officers and Corporate Governance ........................................................................................ Executive Compensation ........................................................................................................................................... Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................. Certain Relationships and Related Transactions and Director Independence............................................................ Principal Accountant Fees and Services .................................................................................................................... Page 3 25 57 57 57 57 58 62 63 102 103 169 169 170 171 171 171 171 171 Part IV. Item 15. Exhibits and Financial Statement Schedules ............................................................................................................. Signatures ......................................................................................................................................................................................... 172 179 as in select cases for acquisitions or recapitalizations. Hercules Technology Growth Capital, Inc., our logo and other trademarks of Hercules Technology Growth Capital, Inc. are the property of Hercules Technology Growth Capital, Inc. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners. requires. Item 1. Business PART I GENERAL We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. 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, and McLean, VA. Our goal is to be the leading structured debt financing provider for venture capital-backed companies in 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, biotechnology, life science, and energy and renewables 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. We invest primarily in private companies but also have investments in public companies. 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 rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. Our equity ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a controlling interest under the Investment Company Act of 1940, as amended, or 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 directly to venture capital-backed companies in technology-related industries is generally used for growth and general working capital purposes as well We also make investments in qualifying small businesses through our two wholly-owned small business investment companies, or SBICs. Our SBIC subsidiaries, Hercules Technology II, L.P., or HT II, and Hercules Technology III, L.P., or HT III, hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding Small Business Administration, or SBA, guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. See “— Regulation—Small Business Administration Regulations” for additional information regarding our SBIC subsidiaries. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion 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 including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, 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. 3 16323_HER-10K_CS6-r4.indd 4 4/28/15 2:53 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. FORM 10-K ANNUAL REPORT In this Annual Report on Form 10-K, or Annual Report, the “Company,” “HTGC,” “we,” “us” and “our” refer to Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise requires. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business ..................................................................................................................................................................... Risk Factors ............................................................................................................................................................... Unresolved SEC Staff Comments ............................................................................................................................. Properties ................................................................................................................................................................... Legal Proceedings ..................................................................................................................................................... Mine Safety Disclosures ............................................................................................................................................ Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .............................................................................................................................................................. Selected Consolidated Financial Data ....................................................................................................................... Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................... Item 7A. Quantitative and Qualitative Disclosure About Market Risk .................................................................................... Financial Statements and Supplementary Data ......................................................................................................... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................... Controls and Procedures ............................................................................................................................................ Other Information ...................................................................................................................................................... Directors, Executive Officers and Corporate Governance ........................................................................................ Executive Compensation ........................................................................................................................................... Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................. Certain Relationships and Related Transactions and Director Independence............................................................ Principal Accountant Fees and Services .................................................................................................................... Item 6. Item 7. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Part I. Part II. Part III. Part IV. Item 15. Exhibits and Financial Statement Schedules ............................................................................................................. Signatures ......................................................................................................................................................................................... Hercules Technology Growth Capital, Inc., our logo and other trademarks of Hercules Technology Growth Capital, Inc. are the property of Hercules Technology Growth Capital, Inc. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners. Page 3 25 57 57 57 57 58 62 63 102 103 169 169 170 171 171 171 171 171 172 179 Item 1. Business PART I GENERAL We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. 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, and McLean, VA. Our goal is to be the leading structured debt financing provider for venture capital-backed companies in 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, biotechnology, life science, and energy and renewables 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. We invest primarily in private companies but also have investments in public companies. 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 rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. Our equity ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a controlling interest under the Investment Company Act of 1940, as amended, or 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 directly to venture capital-backed companies in technology-related industries is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We also make investments in qualifying small businesses through our two wholly-owned small business investment companies, or SBICs. Our SBIC subsidiaries, Hercules Technology II, L.P., or HT II, and Hercules Technology III, L.P., or HT III, hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding Small Business Administration, or SBA, guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. See “— Regulation—Small Business Administration Regulations” for additional information regarding our SBIC subsidiaries. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion 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 including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, 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. 16323_HER-10K_CS6-r4.indd 3 4/28/15 2:53 PM 3 We are a Maryland corporation formed in December 2003 that began investment operations in September 2004. We are an We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S. CORPORATE HISTORY AND OFFICES OUR MARKET OPPORTUNITY internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, 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,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. A business development company also must meet a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) except for debentures issued by the SBA and any preferred stock we may issue in the future, of at least 200% subsequent to each borrowing or issuance of senior securities. See “—Regulation as a Business Development Company—.” 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. Consistent with regulatory requirements, we invest primarily in United States based companies and, to a lesser extent, in foreign companies. equity funds. We focus our investments in companies active in the technology industry sub-sectors characterized by products or services that require advanced technologies, including, but not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, internet consumer and business services, telecommunications, telecommunications equipment, renewable or alternative energy, media and life science. Within the life science sub-sector, we generally focus on medical devices, bio-pharmaceutical, drug discovery, drug delivery, health care services and information systems companies. Within the energy technology sub-sector, we focus on sustainable and renewable energy technologies and energy efficiency and monitoring technologies. We refer to all of these companies as “technology-related” companies and intend, under normal circumstances, to invest at least 80% of the value of our assets in such businesses Effective January 1, 2006, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. As an investment company, we follow accounting and reporting guidance as set forth in Accounting Standards Codification (“ASC”) 946. Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, and our telephone number is (650) 289-3060. We also have offices in Boston, MA, New York, NY and McLean, VA. We maintain a website on the Internet at www.htgc.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report. We file annual, quarterly and current periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. In addition, the SEC maintains an Internet website, at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, who file documents electronically with the SEC. economy and that continued growth is supported by ongoing innovation and performance improvements in technology products as well as the adoption of technology across virtually all industries in response to competitive pressures. We believe that an attractive market opportunity exists for a specialty finance company focused primarily on investments in structured debt with warrants in technology- related companies for the following reasons: Technology-related companies have generally been underserved by traditional lending sources; Unfulfilled demand exists for structured debt financing to technology-related companies as the number of lenders has declined due to the recent financial market turmoil; and Structured debt with warrants products are less dilutive and complement equity financing from venture capital and private Technology-Related Companies are Underserved by Traditional Lenders. We believe many viable technology-related companies backed by financial sponsors have been unable to obtain sufficient growth financing from traditional lenders, including financial services companies such as commercial banks and finance companies because traditional lenders have continued to consolidate and have adopted a more risk-averse approach to lending. More importantly, we believe traditional lenders are typically unable to underwrite the risk associated with these companies effectively. The unique cash flow characteristics of many technology-related companies typically include significant research and development expenditures and high projected revenue growth thus often making such companies difficult to evaluate from a credit perspective. In addition, the balance sheets of these companies often include a disproportionately large amount of intellectual property assets, which can be difficult to value. Finally, the speed of innovation in technology and rapid shifts in consumer demand and market share add to the difficulty in evaluating technology-related companies. Due to the difficulties described above, we believe traditional lenders generally refrain from entering the structured debt financing marketplace, instead preferring the risk-reward profile of asset based lending. Traditional lenders generally do not have flexible product offerings that meet the needs of technology-related companies. The financing products offered by traditional lenders typically impose on borrowers many restrictive covenants and conditions, including limiting cash outflows and requiring a significant depository relationship to facilitate rapid liquidation. Unfulfilled Demand for Structured Debt Financing to Technology-Related Companies. Private debt capital in the form of structured debt financing from specialty finance companies continues to be an important source of funding for technology-related companies. We believe that the level of demand for structured debt financing is a function of the level of annual venture equity investment activity. related companies. We believe that demand for structured debt financing is currently underserved. The venture capital market for the technology- related companies in which we invest has been active and is continuing to show signs of increased investment activity. Therefore, to the extent we have capital available, we believe this is an opportune time to be active in the structured lending market for technology- Structured Debt with Warrants Products Complement Equity Financing From Venture Capital and Private Equity Funds. We believe that technology-related companies and their financial sponsors will continue to view structured debt securities as an attractive source of capital because it augments the capital provided by venture capital and private equity funds. We believe that our structured debt with warrants product provides access to growth capital that otherwise may only be available through incremental investments by existing equity investors. As such, we provide portfolio companies and their financial sponsors with an opportunity to diversify their capital sources. Generally, we believe technology-related companies at all stages of development target a portion of their capital to be debt in an attempt to achieve a higher valuation through internal growth. In addition, because financial sponsor- backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended period prior to liquidity events. 16323_HER-10K_CS6-r4.indd 4 4/28/15 2:53 PM 4 5 We are a Maryland corporation formed in December 2003 that began investment operations in September 2004. We are an We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S. CORPORATE HISTORY AND OFFICES OUR MARKET OPPORTUNITY internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, 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,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. A business development company also must meet a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) except for debentures issued by the SBA and any preferred stock we may issue in the future, of at least 200% subsequent to each borrowing or issuance of senior securities. See “—Regulation as a Business Development Company—.” 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. Consistent with regulatory requirements, we invest primarily in United States based companies and, to a lesser extent, in foreign companies. We focus our investments in companies active in the technology industry sub-sectors characterized by products or services that require advanced technologies, including, but not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, internet consumer and business services, telecommunications, telecommunications equipment, renewable or alternative energy, media and life science. Within the life science sub-sector, we generally focus on medical devices, bio-pharmaceutical, drug discovery, drug delivery, health care services and information systems companies. Within the energy technology sub-sector, we focus on sustainable and renewable energy technologies and energy efficiency and monitoring technologies. We refer to all of these companies as “technology-related” companies and intend, under normal circumstances, to invest at least 80% of the value of our assets in such businesses Effective January 1, 2006, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. As an investment company, we follow accounting and reporting guidance as set forth in Accounting Standards Codification (“ASC”) 946. Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, and our telephone number is (650) 289-3060. We also have offices in Boston, MA, New York, NY and McLean, VA. We maintain a website on the Internet at www.htgc.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report. We file annual, quarterly and current periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. In addition, the SEC maintains an Internet website, at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, who file documents electronically with the SEC. economy and that continued growth is supported by ongoing innovation and performance improvements in technology products as well as the adoption of technology across virtually all industries in response to competitive pressures. We believe that an attractive market opportunity exists for a specialty finance company focused primarily on investments in structured debt with warrants in technology- related companies for the following reasons: Technology-related companies have generally been underserved by traditional lending sources; Unfulfilled demand exists for structured debt financing to technology-related companies as the number of lenders has declined due to the recent financial market turmoil; and Structured debt with warrants products are less dilutive and complement equity financing from venture capital and private equity funds. Technology-Related Companies are Underserved by Traditional Lenders. We believe many viable technology-related companies backed by financial sponsors have been unable to obtain sufficient growth financing from traditional lenders, including financial services companies such as commercial banks and finance companies because traditional lenders have continued to consolidate and have adopted a more risk-averse approach to lending. More importantly, we believe traditional lenders are typically unable to underwrite the risk associated with these companies effectively. The unique cash flow characteristics of many technology-related companies typically include significant research and development expenditures and high projected revenue growth thus often making such companies difficult to evaluate from a credit perspective. In addition, the balance sheets of these companies often include a disproportionately large amount of intellectual property assets, which can be difficult to value. Finally, the speed of innovation in technology and rapid shifts in consumer demand and market share add to the difficulty in evaluating technology-related companies. Due to the difficulties described above, we believe traditional lenders generally refrain from entering the structured debt financing marketplace, instead preferring the risk-reward profile of asset based lending. Traditional lenders generally do not have flexible product offerings that meet the needs of technology-related companies. The financing products offered by traditional lenders typically impose on borrowers many restrictive covenants and conditions, including limiting cash outflows and requiring a significant depository relationship to facilitate rapid liquidation. Unfulfilled Demand for Structured Debt Financing to Technology-Related Companies. Private debt capital in the form of structured debt financing from specialty finance companies continues to be an important source of funding for technology-related companies. We believe that the level of demand for structured debt financing is a function of the level of annual venture equity investment activity. We believe that demand for structured debt financing is currently underserved. The venture capital market for the technology- related companies in which we invest has been active and is continuing to show signs of increased investment activity. Therefore, to the extent we have capital available, we believe this is an opportune time to be active in the structured lending market for technology- related companies. Structured Debt with Warrants Products Complement Equity Financing From Venture Capital and Private Equity Funds. We believe that technology-related companies and their financial sponsors will continue to view structured debt securities as an attractive source of capital because it augments the capital provided by venture capital and private equity funds. We believe that our structured debt with warrants product provides access to growth capital that otherwise may only be available through incremental investments by existing equity investors. As such, we provide portfolio companies and their financial sponsors with an opportunity to diversify their capital sources. Generally, we believe technology-related companies at all stages of development target a portion of their capital to be debt in an attempt to achieve a higher valuation through internal growth. In addition, because financial sponsor- backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended period prior to liquidity events. 4 5 16323_HER-10K_CS6-r4.indd 5 4/28/15 2:53 PM Our strategy to achieve our investment objective includes the following key elements: OUR BUSINESS STRATEGY Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals. We have assembled a team of experienced investment professionals with extensive experience as venture capitalists, commercial lenders, and originators of structured debt and equity investments in technology-related companies. Our investment professionals have, on average, more than 15 years of experience as equity investors in, and/or lenders to, technology-related companies. In addition, our team members have originated structured debt, debt with warrants and equity investments in over 313 technology-related companies, representing over $4.9 billion in commitments from inception to December 31, 2014, and have developed a network of industry contacts with investors and other participants within the venture capital and private equity communities. In addition, members of our management team also have operational, research and development and finance experience with technology-related companies. We have established contacts with leading venture capital and private equity fund sponsors, public and private companies, research institutions and other industry participants, which should enable us to identify and attract well-positioned prospective portfolio companies. We concentrate our investing activities generally in industries in which our investment professionals have investment experience. We believe that our focus on financing technology-related companies will enable us to leverage our expertise in structuring prospective investments, to assess the value of both tangible and intangible assets, to evaluate the business prospects and operating characteristics of technology-related companies and to identify and originate potentially attractive investments with these types of companies. Mitigate Risk of Principal Loss and Build a Portfolio of Equity-Related Securities. We expect that our investments have the potential to produce attractive risk-adjusted returns through current income, in the form of interest and fee income, as well as capital appreciation from equity-related securities. We believe that we can mitigate the risk of loss on our debt investments through the combination of loan principal amortization, cash interest payments, relatively short maturities, security interests in the assets of our portfolio companies, and on select investment covenants requiring prospective portfolio companies to have certain amounts of available cash at the time of our investment and the continued support from a venture capital or private equity firm at the time we make our investment. Historically our structured debt investments to technology-related companies typically include warrants or other equity interests, We expect that our investments will generally range from $1.0 million to $40.0 million. We typically structure our debt giving us the potential to realize equity-like returns on a portion of our investment. In addition, in some cases, we receive the right to make additional equity investments in our portfolio companies, including the right to convert some portion of our debt into equity, in connection with future equity financing rounds. We believe these equity interests will create the potential for meaningful long-term capital gains in connection with the future liquidity events of these technology-related companies. Provide Customized Financing Complementary to Financial Sponsors’ Capital. We offer a broad range of investment structures and possess expertise and experience to effectively structure and price investments in technology-related companies. Unlike many of our competitors that only invest in companies that fit a specific set of investment parameters, we have the flexibility to structure our investments to suit the particular needs of our portfolio companies. We offer customized financing solutions ranging from senior debt to equity capital, with a focus on structured debt with warrants. We use our relationships in the financial sponsor community to originate investment opportunities. Because venture capital and purposes certain other amounts prior to receiving the related cash. private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our debt investments will be viewed as an attractive and complimentary source of capital, both by the portfolio company and by the portfolio company’s financial sponsor. In addition, we believe that many venture capital and private equity fund sponsors encourage their portfolio companies to use debt financing for a portion of their capital needs as a means of potentially enhancing equity returns, minimizing equity dilution and increasing valuations prior to a subsequent equity financing round or a liquidity event. Invest at Various Stages of Development. We provide growth capital to technology-related companies at all stages of development, including select publicly listed companies and select special opportunity lower middle market companies that require additional capital to fund acquisitions, recapitalizations and refinancings and established-stage companies. We believe that this provides us with a broader range of potential investment opportunities than those available to many of our competitors, who generally focus their investments on a particular stage in a company’s development. Because of the flexible structure of our investments and the extensive experience of our investment professionals, we believe we are well positioned to take advantage of these investment opportunities at all stages of prospective portfolio companies’ development. 16323_HER-10K_CS6-r4.indd 6 4/28/15 2:53 PM 6 7 Benefit from Our Efficient Organizational Structure. We believe that the perpetual nature of our corporate structure enables us to be a long-term partner for our portfolio companies in contrast to traditional investment funds, which typically have a limited life. In addition, because of our access to the equity markets, we believe that we may benefit from a lower cost of capital than that available to private investment funds. We are not subject to requirements to return invested capital to investors nor do we have a finite investment horizon. Capital providers that are subject to such limitations are often required to seek a liquidity event more quickly than they otherwise might, which can result in a lower overall return on an investment. Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured query language-based (SQL) database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance. As of December 31, 2014, our proprietary SQL-based database system included approximately 42,000 technology-related companies and approximately 9,100 venture capital firms, private equity sponsors/investors, as well as various other industry contacts. This proprietary SQL system allows us to maintain, cultivate and grow our industry relationships while providing us with comprehensive details on companies in the technology-related industries and their financial sponsors. with warrants. We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on structured debt OUR INVESTMENTS AND OPERATIONS We generally seek to invest in companies that have been operating for at least six to 12 months prior to the date of our investment. We anticipate that such entities may, at the time of investment, be generating revenues or will have a business plan that anticipates generation of revenues within 24 to 48 months. Further, we anticipate that on the date of our investment we will generally obtain a lien on available assets, which may or may not include intellectual property, and these companies will have sufficient cash on their balance sheet to operate as well as potentially amortize their debt for at least three to nine months following our investment. We generally require that a prospective portfolio company, in addition to having sufficient capital to support leverage, demonstrate an operating plan capable of generating cash flows or raising the additional capital necessary to cover its operating expenses and service its debt, for an additional six to 12 months subject to market conditions. securities to provide for amortization of principal over the life of the loan, but may include a period of interest-only payments. Our loans will be collateralized by a security interest in the borrower’s assets, although we may not have the first claim on these assets and the assets may not include intellectual property. Our debt investments carry fixed or variable contractual interest rates which generally ranged from the prevailing U.S. prime rate, or Prime or the LIBOR rate to approximately 14% as of December 31, 2014. As of December 31, 2014, 98.2% of our loans were at floating rates or floating rates with a floor and 1.8% of the loans were at fixed rates. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual payment-in-kind, or PIK, interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such PIK interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax In addition, the majority of our investments in the structured debt of venture capital-backed companies generally have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for potential capital appreciation. The warrants typically will be immediately exercisable upon issuance and generally will remain exercisable for the lesser of five to ten years or three to five years after completion of an initial public offering. The exercise prices for the warrants varies from nominal exercise prices to exercise prices that are at or above the current fair market value of the equity for which we receive warrants. We may structure warrants to provide minority rights provisions or on a very select basis put rights upon the occurrence of certain events. We generally target a total annualized return (including interest, fees and value of warrants) of 12% to 25% for our debt investments. Our strategy to achieve our investment objective includes the following key elements: OUR BUSINESS STRATEGY Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals. We have assembled a team of experienced investment professionals with extensive experience as venture capitalists, commercial lenders, and originators of structured debt and equity investments in technology-related companies. Our investment professionals have, on average, more than 15 years of experience as equity investors in, and/or lenders to, technology-related companies. In addition, our team members have originated structured debt, debt with warrants and equity investments in over 313 technology-related companies, representing over $4.9 billion in commitments from inception to December 31, 2014, and have developed a network of industry contacts with investors and other participants within the venture capital and private equity communities. In addition, members of our management team also have operational, research and development and finance experience with technology-related companies. We have established contacts with leading venture capital and private equity fund sponsors, public and private companies, research institutions and other industry participants, which should enable us to identify and attract well-positioned prospective portfolio companies. We concentrate our investing activities generally in industries in which our investment professionals have investment experience. We believe that our focus on financing technology-related companies will enable us to leverage our expertise in structuring prospective investments, to assess the value of both tangible and intangible assets, to evaluate the business prospects and operating characteristics of technology-related companies and to identify and originate potentially attractive investments with these types of companies. Mitigate Risk of Principal Loss and Build a Portfolio of Equity-Related Securities. We expect that our investments have the potential to produce attractive risk-adjusted returns through current income, in the form of interest and fee income, as well as capital appreciation from equity-related securities. We believe that we can mitigate the risk of loss on our debt investments through the combination of loan principal amortization, cash interest payments, relatively short maturities, security interests in the assets of our portfolio companies, and on select investment covenants requiring prospective portfolio companies to have certain amounts of available cash at the time of our investment and the continued support from a venture capital or private equity firm at the time we make our investment. Historically our structured debt investments to technology-related companies typically include warrants or other equity interests, giving us the potential to realize equity-like returns on a portion of our investment. In addition, in some cases, we receive the right to make additional equity investments in our portfolio companies, including the right to convert some portion of our debt into equity, in connection with future equity financing rounds. We believe these equity interests will create the potential for meaningful long-term capital gains in connection with the future liquidity events of these technology-related companies. Provide Customized Financing Complementary to Financial Sponsors’ Capital. We offer a broad range of investment structures and possess expertise and experience to effectively structure and price investments in technology-related companies. Unlike many of our competitors that only invest in companies that fit a specific set of investment parameters, we have the flexibility to structure our investments to suit the particular needs of our portfolio companies. We offer customized financing solutions ranging from senior debt to equity capital, with a focus on structured debt with warrants. We use our relationships in the financial sponsor community to originate investment opportunities. Because venture capital and private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our debt investments will be viewed as an attractive and complimentary source of capital, both by the portfolio company and by the portfolio company’s financial sponsor. In addition, we believe that many venture capital and private equity fund sponsors encourage their portfolio companies to use debt financing for a portion of their capital needs as a means of potentially enhancing equity returns, minimizing equity dilution and increasing valuations prior to a subsequent equity financing round or a liquidity event. Invest at Various Stages of Development. We provide growth capital to technology-related companies at all stages of development, including select publicly listed companies and select special opportunity lower middle market companies that require additional capital to fund acquisitions, recapitalizations and refinancings and established-stage companies. We believe that this provides us with a broader range of potential investment opportunities than those available to many of our competitors, who generally focus their investments on a particular stage in a company’s development. Because of the flexible structure of our investments and the extensive experience of our investment professionals, we believe we are well positioned to take advantage of these investment opportunities at all stages of prospective portfolio companies’ development. Benefit from Our Efficient Organizational Structure. We believe that the perpetual nature of our corporate structure enables us to be a long-term partner for our portfolio companies in contrast to traditional investment funds, which typically have a limited life. In addition, because of our access to the equity markets, we believe that we may benefit from a lower cost of capital than that available to private investment funds. We are not subject to requirements to return invested capital to investors nor do we have a finite investment horizon. Capital providers that are subject to such limitations are often required to seek a liquidity event more quickly than they otherwise might, which can result in a lower overall return on an investment. Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured query language-based (SQL) database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance. As of December 31, 2014, our proprietary SQL-based database system included approximately 42,000 technology-related companies and approximately 9,100 venture capital firms, private equity sponsors/investors, as well as various other industry contacts. This proprietary SQL system allows us to maintain, cultivate and grow our industry relationships while providing us with comprehensive details on companies in the technology-related industries and their financial sponsors. OUR INVESTMENTS AND OPERATIONS We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on structured debt with warrants. We generally seek to invest in companies that have been operating for at least six to 12 months prior to the date of our investment. We anticipate that such entities may, at the time of investment, be generating revenues or will have a business plan that anticipates generation of revenues within 24 to 48 months. Further, we anticipate that on the date of our investment we will generally obtain a lien on available assets, which may or may not include intellectual property, and these companies will have sufficient cash on their balance sheet to operate as well as potentially amortize their debt for at least three to nine months following our investment. We generally require that a prospective portfolio company, in addition to having sufficient capital to support leverage, demonstrate an operating plan capable of generating cash flows or raising the additional capital necessary to cover its operating expenses and service its debt, for an additional six to 12 months subject to market conditions. We expect that our investments will generally range from $1.0 million to $40.0 million. We typically structure our debt securities to provide for amortization of principal over the life of the loan, but may include a period of interest-only payments. Our loans will be collateralized by a security interest in the borrower’s assets, although we may not have the first claim on these assets and the assets may not include intellectual property. Our debt investments carry fixed or variable contractual interest rates which generally ranged from the prevailing U.S. prime rate, or Prime or the LIBOR rate to approximately 14% as of December 31, 2014. As of December 31, 2014, 98.2% of our loans were at floating rates or floating rates with a floor and 1.8% of the loans were at fixed rates. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual payment-in-kind, or PIK, interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such PIK interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax purposes certain other amounts prior to receiving the related cash. In addition, the majority of our investments in the structured debt of venture capital-backed companies generally have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for potential capital appreciation. The warrants typically will be immediately exercisable upon issuance and generally will remain exercisable for the lesser of five to ten years or three to five years after completion of an initial public offering. The exercise prices for the warrants varies from nominal exercise prices to exercise prices that are at or above the current fair market value of the equity for which we receive warrants. We may structure warrants to provide minority rights provisions or on a very select basis put rights upon the occurrence of certain events. We generally target a total annualized return (including interest, fees and value of warrants) of 12% to 25% for our debt investments. 6 7 16323_HER-10K_CS6-r4.indd 7 4/28/15 2:53 PM Typically, our structured debt and equity investments take one of the following forms: A comparison of the typical features of our various investment alternatives is set forth in the chart below. Structured Debt with Warrants. We seek to invest a majority of our assets in structured debt with warrants of prospective portfolio companies. Traditional structured debt financing is a layer of high-coupon financing between debt and equity that most commonly takes the form of subordinated debt coupled with warrants, combining the cash flow and risk characteristics of both senior debt and equity. However, our investments in structured debt with warrants may be the only debt capital on the balance sheet of our portfolio companies, and in many cases we have a first priority security interest in all of our portfolio company’s assets, or in certain investments we may have a negative pledge on intellectual property. Our structured debt with warrants typically have maturities of between two and seven years, and they may provide for full amortization after an interest only period. Our structured debt with warrants generally carry a contractual interest rate between the prevailing U.S. prime rate, or Prime or the LIBOR rate and approximately 14% and may include an additional end-of-term payment or contractual PIK interest arrangements. In most cases we collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may prohibit a company from pledging or otherwise encumbering their intellectual property. We may structure our structured debt with warrants with restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board observation rights. Senior Debt. We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by accounts receivable and/or inventory financing of prospective portfolio companies. Senior debt has a senior position with respect to a borrower’s scheduled interest and principal payments and holds a first priority security interest in the assets pledged as collateral. Senior debt also may impose covenants on a borrower with regard to cash flows and changes in capital structure, among other items. We generally collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may obtain a negative pledge covering a company’s intellectual property. Our senior loans, in certain instances, may be tied to the financing of specific assets. In connection with a senior debt investment, we may also provide the borrower with a working capital line-of-credit that will carry an interest rate ranging from Prime or LIBOR plus a spread with a floor, generally maturing in one to three years, and will be secured by accounts receivable and/or inventory. Equipment Loans. We intend to invest a limited portion of our assets in equipment-based loans to early-stage prospective portfolio companies. Equipment-based loans are secured by a first priority security interest in only the specific assets financed. These loans are generally for amounts up to $3.0 million but may be up to $15.0 million for certain energy technology venture investments, carry a contractual interest rate between Prime and Prime plus 9.0%, and have an average term between three and four years. Equipment loans may also include end of term payments. Equity-Related Securities. The equity-related securities we hold consist primarily of warrants or other equity interests generally obtained in connection with our structured debt investments. In addition to the warrants received as a part of a structured debt financing, we typically receive the right to make equity investments in a portfolio company in connection with that company’s next round of equity financing. We may also on certain debt investments have the right to convert a portion of the debt investment into equity. These rights will provide us with the opportunity to further enhance our returns over time through opportunistic equity investments in our portfolio companies. These equity-related investments are typically in the form of preferred or common equity and may be structured with a dividend yield, providing us with a current return, and with customary anti-dilution protection and preemptive rights. We may achieve liquidity through a merger or acquisition of a portfolio company, a public offering of a portfolio company’s stock or by exercising our right, if any, to require a portfolio company to buy back the equity-related securities we hold. We may also make stand-alone direct equity investments into portfolio companies in which we may not have any debt investment in the company. As of December 31, 2014, we held equity related securities in 143 portfolio companies. Typical Structure Term debt with warrants Term or revolving debt Term debt with warrants Preferred stock or common stock Structured debt with warrants Senior Debt Equipment Loans Equity related Securities Investment Horizon Long-term, ranging from 2 to 7 Usually under 3 years Ranging from 3 to 4 years Ranging from 3 to 7 years Ranking/Security Senior secured, either first out or Senior/First lien Secured only by underlying None/unsecured years, with an average of 3 years last out, or second lien Covenants Less restrictive; Mostly financial Generally borrowing base and None Risk Tolerance Medium/High financial Low equipment High Coupon/Dividend Cash pay—fixed and Cash pay—floating or fixed Cash pay-floating or fixed rate Generally none floating rate; PIK in limited cases rate and may include PIK Customization or Flexibility More flexible Little to none Little to none Equity Dilution Low to medium None to low Low None High Flexible High Investment Criteria We have identified several criteria, among others, that we believe are important in achieving our investment objective with respect to prospective portfolio companies. These criteria, while not inclusive, provide general guidelines for our investment decisions. Portfolio Composition. While we generally focus our investments in venture capital-backed companies in technology-related industries, we seek to diversify across various financial sponsors as well as across various stages of companies’ development and various technology industry sub-sectors and geographies. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical devices and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. Continuing Support from One or More Financial Sponsors. We generally invest in companies in which one or more established financial sponsors have previously invested and continue to make a contribution to the management of the business. We believe that having established financial sponsors with meaningful commitments to the business is a key characteristic of a prospective portfolio company. In addition, we look for representatives of one or more financial sponsors to maintain seats on the Board of Directors of a prospective portfolio company as an indication of such commitment. Company Stage of Development. While we invest in companies at various stages of development, we generally require that prospective portfolio companies be beyond the seed stage of development and generally have received or anticipate having commitments for their first institutional round of equity financing for early stage companies. We expect a prospective portfolio company to demonstrate progress in its product development or demonstrate a path towards revenue generation or increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective portfolio company is a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities. Operating Plan. We generally require that a prospective portfolio company, in addition to having potential access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover its operating expenses and service its debt for a specific period. Specifically, we require that a prospective portfolio company demonstrate at the time of our proposed investment that it has cash on its balance sheet, or is in the process of completing a financing so that it will have cash on its balance sheet, sufficient to support its operations for a minimum of six to 12 months. Security Interest. In many instances we seek a first priority security interest in all of the portfolio companies’ tangible and intangible assets as collateral for our debt investment, subject in some cases to permitted exceptions. In other cases we may obtain a negative pledge prohibiting a company from pledging or otherwise encumbering their intellectual property. Although we do not intend to operate as an asset-based lender, the estimated liquidation value of the assets, if any, collateralizing the debt securities that we hold is an important factor in our credit analysis and subject to assumptions that may change over the life of the investment especially when attempting to estimate the value of intellectual property. We generally evaluate both tangible assets, such as accounts receivable, inventory and equipment, and intangible assets, such as intellectual property, customer lists, networks and databases. 16323_HER-10K_CS6-r4.indd 8 4/28/15 2:53 PM 8 9 Typically, our structured debt and equity investments take one of the following forms: A comparison of the typical features of our various investment alternatives is set forth in the chart below. Structured Debt with Warrants. We seek to invest a majority of our assets in structured debt with warrants of prospective portfolio companies. Traditional structured debt financing is a layer of high-coupon financing between debt and equity that most commonly takes the form of subordinated debt coupled with warrants, combining the cash flow and risk characteristics of both senior debt and equity. However, our investments in structured debt with warrants may be the only debt capital on the balance sheet of our portfolio companies, and in many cases we have a first priority security interest in all of our portfolio company’s assets, or in certain investments we may have a negative pledge on intellectual property. Our structured debt with warrants typically have maturities of between two and seven years, and they may provide for full amortization after an interest only period. Our structured debt with warrants generally carry a contractual interest rate between the prevailing U.S. prime rate, or Prime or the LIBOR rate and approximately 14% and may include an additional end-of-term payment or contractual PIK interest arrangements. In most cases we collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may prohibit a company from pledging or otherwise encumbering their intellectual property. We may structure our structured debt with warrants with restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board observation rights. Senior Debt. We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by accounts receivable and/or inventory financing of prospective portfolio companies. Senior debt has a senior position with respect to a borrower’s scheduled interest and principal payments and holds a first priority security interest in the assets pledged as collateral. Senior debt also may impose covenants on a borrower with regard to cash flows and changes in capital structure, among other items. We generally collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may obtain a negative pledge covering a company’s intellectual property. Our senior loans, in certain instances, may be tied to the financing of specific assets. In connection with a senior debt investment, we may also provide the borrower with a working capital line-of-credit that will carry an interest rate ranging from Prime or LIBOR plus a spread with a floor, generally maturing in one to three years, and will be secured by accounts receivable and/or inventory. Equipment Loans. We intend to invest a limited portion of our assets in equipment-based loans to early-stage prospective portfolio companies. Equipment-based loans are secured by a first priority security interest in only the specific assets financed. These loans are generally for amounts up to $3.0 million but may be up to $15.0 million for certain energy technology venture investments, carry a contractual interest rate between Prime and Prime plus 9.0%, and have an average term between three and four years. Equipment loans may also include end of term payments. Equity-Related Securities. The equity-related securities we hold consist primarily of warrants or other equity interests generally obtained in connection with our structured debt investments. In addition to the warrants received as a part of a structured debt financing, we typically receive the right to make equity investments in a portfolio company in connection with that company’s next round of equity financing. We may also on certain debt investments have the right to convert a portion of the debt investment into equity. These rights will provide us with the opportunity to further enhance our returns over time through opportunistic equity investments in our portfolio companies. These equity-related investments are typically in the form of preferred or common equity and may be structured with a dividend yield, providing us with a current return, and with customary anti-dilution protection and preemptive rights. We may achieve liquidity through a merger or acquisition of a portfolio company, a public offering of a portfolio company’s stock or by exercising our right, if any, to require a portfolio company to buy back the equity-related securities we hold. We may also make stand-alone direct equity investments into portfolio companies in which we may not have any debt investment in the company. As of December 31, 2014, we held equity related securities in 143 portfolio companies. Typical Structure Investment Horizon Ranking/Security Structured debt with warrants Term debt with warrants Senior Debt Term or revolving debt Equipment Loans Term debt with warrants Equity related Securities Preferred stock or common stock Long-term, ranging from 2 to 7 years, with an average of 3 years Senior secured, either first out or last out, or second lien Usually under 3 years Ranging from 3 to 4 years Ranging from 3 to 7 years Senior/First lien Secured only by underlying equipment None/unsecured Covenants Less restrictive; Mostly financial Generally borrowing base and None Risk Tolerance Medium/High financial Low High None High Coupon/Dividend Cash pay—fixed and floating rate; PIK in limited cases Cash pay—floating or fixed rate Cash pay-floating or fixed rate and may include PIK Generally none Customization or Flexibility More flexible Little to none Little to none Equity Dilution Low to medium None to low Low Flexible High Investment Criteria We have identified several criteria, among others, that we believe are important in achieving our investment objective with respect to prospective portfolio companies. These criteria, while not inclusive, provide general guidelines for our investment decisions. Portfolio Composition. While we generally focus our investments in venture capital-backed companies in technology-related industries, we seek to diversify across various financial sponsors as well as across various stages of companies’ development and various technology industry sub-sectors and geographies. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical devices and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. Continuing Support from One or More Financial Sponsors. We generally invest in companies in which one or more established financial sponsors have previously invested and continue to make a contribution to the management of the business. We believe that having established financial sponsors with meaningful commitments to the business is a key characteristic of a prospective portfolio company. In addition, we look for representatives of one or more financial sponsors to maintain seats on the Board of Directors of a prospective portfolio company as an indication of such commitment. Company Stage of Development. While we invest in companies at various stages of development, we generally require that prospective portfolio companies be beyond the seed stage of development and generally have received or anticipate having commitments for their first institutional round of equity financing for early stage companies. We expect a prospective portfolio company to demonstrate progress in its product development or demonstrate a path towards revenue generation or increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective portfolio company is a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities. Operating Plan. We generally require that a prospective portfolio company, in addition to having potential access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover its operating expenses and service its debt for a specific period. Specifically, we require that a prospective portfolio company demonstrate at the time of our proposed investment that it has cash on its balance sheet, or is in the process of completing a financing so that it will have cash on its balance sheet, sufficient to support its operations for a minimum of six to 12 months. Security Interest. In many instances we seek a first priority security interest in all of the portfolio companies’ tangible and intangible assets as collateral for our debt investment, subject in some cases to permitted exceptions. In other cases we may obtain a negative pledge prohibiting a company from pledging or otherwise encumbering their intellectual property. Although we do not intend to operate as an asset-based lender, the estimated liquidation value of the assets, if any, collateralizing the debt securities that we hold is an important factor in our credit analysis and subject to assumptions that may change over the life of the investment especially when attempting to estimate the value of intellectual property. We generally evaluate both tangible assets, such as accounts receivable, inventory and equipment, and intangible assets, such as intellectual property, customer lists, networks and databases. 8 9 16323_HER-10K_CS6-r4.indd 9 4/28/15 2:53 PM Covenants. Our investments may include one or more of the following covenants: cross-default, or material adverse change In addition, we have developed a proprietary and comprehensive SQL-based database system to track various aspects of our provisions, require the portfolio company to provide periodic financial reports and operating metrics and will typically limit the portfolio company’s ability to incur additional debt, sell assets, dividend recapture, engage in transactions with affiliates and consummate an extraordinary transaction, such as a merger or recapitalization without our consent. In addition, we may require other performance or financial based covenants, as we deem appropriate. investment process including sourcing, originations, transaction monitoring and post-investment performance. This proprietary SQL system allows our origination team to maintain, cultivate and grow our industry relationships while providing our origination team with comprehensive details on companies in the technology-related industries and their financial sponsors. If a prospective portfolio company generally meets certain underwriting criteria, we perform preliminary due diligence, which Exit Strategy. Prior to making a debt investment that is accompanied by an equity-related security in a prospective portfolio may include high level company and technology assessments, evaluation of its financial sponsors’ support, market analysis, company, we analyze the potential for that company to increase the liquidity of its equity through a future event that would enable us to realize appreciation in the value of our equity interest. Liquidity events may include an initial public offering, a private sale of our equity interest to a third party, a merger or an acquisition of the company or a purchase of our equity position by the company or one of its stockholders. competitive analysis, identify key management, risk analysis and transaction size, pricing, return analysis and structure analysis. If the preliminary due diligence is satisfactory, and the origination team recommends moving forward, we then structure, negotiate and execute a non-binding term sheet with the potential portfolio company. Upon execution of a term sheet, the investment opportunity moves to the underwriting process to complete formal due diligence review and approval. Investment Process Underwriting We have organized our management team around the four key elements of our investment process: The underwriting review includes formal due diligence and approval of the proposed investment in the portfolio company. Origination; Underwriting; Documentation; and Loan and Compliance Administration. Our investment process is summarized in the following chart: Origination The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring and negotiation, all leading to an executed non-binding term sheet. As of December 31, 2014, our investment origination team, which consists of approximately 39 investment professionals, is headed by our Chief Investment Officer and our Chief Executive Officer. The origination team is responsible for sourcing potential investment opportunities and members of the investment origination team use their extensive relationships with various leading financial sponsors, management contacts within technology-related companies, trade sources, technology conferences and various publications to source prospective portfolio companies. Our investment origination team is divided into special opportunity lower middle market, technology, energy technology, and life science sub-teams to better source potential portfolio companies. 16323_HER-10K_CS6-r4.indd 10 4/28/15 2:53 PM 10 11 Due Diligence. Our due diligence on a prospective investment is typically completed by two or more investment professionals whom we define as the underwriting team. The underwriting team for a proposed investment consists of the deal sponsor who typically possesses general industry knowledge and is responsible for originating and managing the transaction, other investment professional(s) who perform due diligence, credit and corporate financial analyses and, as needed, our legal professionals. To ensure consistent underwriting, we generally use our standardized due diligence methodologies, which include due diligence on financial performance and credit risk as well as an analysis of the operations and the legal and applicable regulatory framework of a prospective portfolio company. The members of the underwriting team work together to conduct due diligence and understand the relationships among the prospective portfolio company’s business plan, operations and financial performance. As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation to the investment committee. In preparing the investment memorandum, the underwriting team typically interviews select key management of the company and select financial sponsors and assembles information necessary to the investment decision. If and when appropriate, the investment professionals may also contact industry experts and customers, vendors or, in some cases, competitors of the company. Approval Process. The sponsoring managing director or principal presents the investment memorandum to our investment committee for consideration. The approval of a majority of our investment committee and an affirmative vote by our Chief Executive Officer is required before we proceed with any investment. The members of our investment committee are our Chief Executive Officer, our Chief Financial Officer, and our Chief Investment Officer. The investment committee generally meets weekly and more frequently on an as-needed basis. Documentation Our documentation group, administers the documentation process for our investments. This group is responsible for documenting the transactions approved by our investment committee with a prospective portfolio company. This group negotiates loan documentation and, subject to appropriate approvals, final documents are prepared for execution by all parties. The documentation group generally uses the services of external law firms to complete the necessary documentation. Loan and Compliance Administration Our loan and compliance administration group, headed by our Chief Financial Officer and Chief Investment Officer, administers loans and tracks covenant compliance, if applicable, of our investments and oversees periodic reviews of our critical functions to ensure adherence with our internal policies and procedures. After funding of a loan in accordance with the investment committee’s approval, the loan is recorded in our loan administration software and our SQL-based database system. The loan and compliance administration group is also responsible for ensuring timely interest and principal payments and collateral management as well as advising the investment committee on the financial performance and trends of each portfolio company, including any covenant violations that occur, to aid us in assessing the appropriate course of action for each portfolio company and evaluating overall portfolio quality. In addition, the loan and compliance administration group advises the investment committee and the Audit Committee of our Board of Directors, accordingly, regarding the credit and investment grading for each portfolio company as well as changes in the value of collateral that may occur. Covenants. Our investments may include one or more of the following covenants: cross-default, or material adverse change In addition, we have developed a proprietary and comprehensive SQL-based database system to track various aspects of our provisions, require the portfolio company to provide periodic financial reports and operating metrics and will typically limit the portfolio company’s ability to incur additional debt, sell assets, dividend recapture, engage in transactions with affiliates and consummate an extraordinary transaction, such as a merger or recapitalization without our consent. In addition, we may require other investment process including sourcing, originations, transaction monitoring and post-investment performance. This proprietary SQL system allows our origination team to maintain, cultivate and grow our industry relationships while providing our origination team with comprehensive details on companies in the technology-related industries and their financial sponsors. performance or financial based covenants, as we deem appropriate. Exit Strategy. Prior to making a debt investment that is accompanied by an equity-related security in a prospective portfolio company, we analyze the potential for that company to increase the liquidity of its equity through a future event that would enable us to realize appreciation in the value of our equity interest. Liquidity events may include an initial public offering, a private sale of our equity interest to a third party, a merger or an acquisition of the company or a purchase of our equity position by the company or one If a prospective portfolio company generally meets certain underwriting criteria, we perform preliminary due diligence, which may include high level company and technology assessments, evaluation of its financial sponsors’ support, market analysis, competitive analysis, identify key management, risk analysis and transaction size, pricing, return analysis and structure analysis. If the preliminary due diligence is satisfactory, and the origination team recommends moving forward, we then structure, negotiate and execute a non-binding term sheet with the potential portfolio company. Upon execution of a term sheet, the investment opportunity moves to the underwriting process to complete formal due diligence review and approval. Underwriting We have organized our management team around the four key elements of our investment process: The underwriting review includes formal due diligence and approval of the proposed investment in the portfolio company. Due Diligence. Our due diligence on a prospective investment is typically completed by two or more investment professionals whom we define as the underwriting team. The underwriting team for a proposed investment consists of the deal sponsor who typically possesses general industry knowledge and is responsible for originating and managing the transaction, other investment professional(s) who perform due diligence, credit and corporate financial analyses and, as needed, our legal professionals. To ensure consistent underwriting, we generally use our standardized due diligence methodologies, which include due diligence on financial performance and credit risk as well as an analysis of the operations and the legal and applicable regulatory framework of a prospective portfolio company. The members of the underwriting team work together to conduct due diligence and understand the relationships among the prospective portfolio company’s business plan, operations and financial performance. As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation to the investment committee. In preparing the investment memorandum, the underwriting team typically interviews select key management of the company and select financial sponsors and assembles information necessary to the investment decision. If and when appropriate, the investment professionals may also contact industry experts and customers, vendors or, in some cases, competitors of the company. Approval Process. The sponsoring managing director or principal presents the investment memorandum to our investment committee for consideration. The approval of a majority of our investment committee and an affirmative vote by our Chief Executive Officer is required before we proceed with any investment. The members of our investment committee are our Chief Executive Officer, our Chief Financial Officer, and our Chief Investment Officer. The investment committee generally meets weekly and more frequently on an as-needed basis. Documentation Our documentation group, administers the documentation process for our investments. This group is responsible for documenting the transactions approved by our investment committee with a prospective portfolio company. This group negotiates loan documentation and, subject to appropriate approvals, final documents are prepared for execution by all parties. The documentation group generally uses the services of external law firms to complete the necessary documentation. Loan and Compliance Administration Our loan and compliance administration group, headed by our Chief Financial Officer and Chief Investment Officer, administers loans and tracks covenant compliance, if applicable, of our investments and oversees periodic reviews of our critical functions to ensure adherence with our internal policies and procedures. After funding of a loan in accordance with the investment committee’s approval, the loan is recorded in our loan administration software and our SQL-based database system. The loan and compliance administration group is also responsible for ensuring timely interest and principal payments and collateral management as well as advising the investment committee on the financial performance and trends of each portfolio company, including any covenant violations that occur, to aid us in assessing the appropriate course of action for each portfolio company and evaluating overall portfolio quality. In addition, the loan and compliance administration group advises the investment committee and the Audit Committee of our Board of Directors, accordingly, regarding the credit and investment grading for each portfolio company as well as changes in the value of collateral that may occur. 10 11 16323_HER-10K_CS6-r4.indd 11 4/28/15 2:53 PM of its stockholders. Investment Process Origination; Underwriting; Documentation; and Loan and Compliance Administration. Our investment process is summarized in the following chart: Origination The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring and negotiation, all leading to an executed non-binding term sheet. As of December 31, 2014, our investment origination team, which consists of approximately 39 investment professionals, is headed by our Chief Investment Officer and our Chief Executive Officer. The origination team is responsible for sourcing potential investment opportunities and members of the investment origination team use their extensive relationships with various leading financial sponsors, management contacts within technology-related companies, trade sources, technology conferences and various publications to source prospective portfolio companies. Our investment origination team is divided into special opportunity lower middle market, technology, energy technology, and life science sub-teams to better source potential portfolio companies. COMPETITION Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions, federally or state chartered banks, venture debt funds, financial institutions, venture capital funds, private equity funds, investment funds and investment banks. Many of these entities have greater financial and managerial resources than we have, and the 1940 Act imposes certain regulatory restrictions on us as a business development company to which many of our competitors are not subject. However, we believe that few of our competitors possess the expertise to properly structure and price debt investments to venture companies will enable us to determine a range of potential values of intellectual property assets, evaluate the business prospects and operating characteristics of prospective portfolio companies and, as a result, identify investment opportunities that produce attractive risk-adjusted returns. For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors—Risks Related to our Business and Structure—We operate in a highly competitive market for investment opportunities, and we may not be able to The loan and compliance administration group monitors our portfolio companies in order to determine whether the companies are meeting our financing criteria and their respective business plans and also monitors the financial trends of each portfolio company from its monthly or quarterly financial statements to assess the appropriate course of action for each company and to evaluate overall portfolio quality. In addition, our management team closely monitors the status and performance of each individual company through our SQL-based database system and periodic contact with our portfolio companies’ management teams and their respective financial sponsors. Credit and Investment Grading System. Our loan and compliance administration group uses an investment grading system to capital-backed companies in technology-related industries. We believe that our specialization in financing technology-related characterize and monitor our outstanding loans. Our loan and compliance administration group monitors and, when appropriate, recommends changes to investment grading. Our investment committee reviews the recommendations and/or changes to the investment grading, which are submitted on a quarterly basis to the Audit Committee and our Board of Directors for approval. From time to time, we will identify investments that require closer monitoring or become workout assets. We develop a workout compete effectively.” strategy for workout assets and our investment committee monitors the progress against the strategy. We may incur losses from our investing activities, however, we work with our troubled portfolio companies in order to recover as much of our investments as is practicable, including possibly taking control of the portfolio company. There can be no assurance that principal will be recovered. BROKERAGE ALLOCATIONS AND OTHER PRACTICES We use the following investment grading system approved by our Board of Directors: Grade 1. Loans involve the least amount of risk in our portfolio. The borrower is performing above expectations, and the trends and risk profile is generally favorable. Because we generally acquire and dispose of our investments in privately negotiated transactions, we typically do not use brokers in the normal course of business. However, from time to time, we may work with brokers to sell positions we have acquired in the securities of publicly listed companies or to acquire positions (principally equity) in companies where we see a market opportunity to acquire such securities at attractive valuations. In cases where we do use a broker, we do not execute transactions through any Grade 2. The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially particular broker or dealer, but will seek to obtain the best net results for Hercules, taking into account such factors as price (including graded 2. Grade 3. The borrower may be performing below expectations, and the loan’s risk has increased materially since origination. We increase procedures to monitor a borrower that may have limited amounts of cash remaining on the balance sheet, is approaching its next equity capital raise within the next three to six months, or if the estimated fair value of the enterprise may be lower than when the loan was originated. We will generally lower the loan grade to a level 3 even if the company is performing in accordance to plan as it approaches the need to raise additional cash to fund its operations. Once the borrower closes its new equity capital raise, we may increase the loan grade back to grade 2 or maintain it at a grade 3 as the company continues to pursue its business plan. Grade 4. The borrower is performing materially below expectations, and the loan risk has substantially increased since origination. Loans graded 4 may experience some partial loss or full return of principal but are expected to realize some loss of interest which is not anticipated to be repaid in full, which, to the extent not already reflected, may require the fair value of the loan to be reduced to the amount we anticipate will be recovered. Grade 4 investments are closely monitored. the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably competitive execution costs, we may not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided. As of December 31, 2014, we had 65 employees, including approximately 39 investment and portfolio management professionals, all of whom have extensive experience working on financing transactions for technology-related companies. EMPLOYEES REGULATION Grade 5. The borrower is in workout, materially performing below expectations and a significant risk of principal loss is probable. Loans graded 5 will experience some partial principal loss or full loss of remaining principal outstanding is expected. Grade 5 loans will require the fair value of the loans be reduced to the amount, if any, we anticipate will be recovered. companies. The following discussion is a general summary of the material prohibitions and descriptions governing business development companies. It does not purport to be a complete description of all of the laws and regulations affecting business development At December 31, 2014, our investments had a weighted average investment grading of 2.24. Managerial Assistance As a business development company, we are required to offer, and provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may, from time to time, receive fees for these services. In the event that such fees are received, they are incorporated into our operating income and are passed through to our shareholders, given the nature of our structure as an internally managed business development company. See “—Regulation—Significant Managerial Assistance” for additional information. A business development company primarily focuses on investing in or lending to private companies and making managerial assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly-traded stock. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their directors and officers and principal underwriters and certain other related persons and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present or represented by proxy, or (ii) more than 50% of the outstanding shares of such company. 16323_HER-10K_CS6-r4.indd 12 4/28/15 2:53 PM 12 13 The loan and compliance administration group monitors our portfolio companies in order to determine whether the companies are meeting our financing criteria and their respective business plans and also monitors the financial trends of each portfolio company from its monthly or quarterly financial statements to assess the appropriate course of action for each company and to evaluate overall portfolio quality. In addition, our management team closely monitors the status and performance of each individual company through our SQL-based database system and periodic contact with our portfolio companies’ management teams and their respective financial sponsors. Credit and Investment Grading System. Our loan and compliance administration group uses an investment grading system to characterize and monitor our outstanding loans. Our loan and compliance administration group monitors and, when appropriate, recommends changes to investment grading. Our investment committee reviews the recommendations and/or changes to the investment grading, which are submitted on a quarterly basis to the Audit Committee and our Board of Directors for approval. From time to time, we will identify investments that require closer monitoring or become workout assets. We develop a workout strategy for workout assets and our investment committee monitors the progress against the strategy. We may incur losses from our investing activities, however, we work with our troubled portfolio companies in order to recover as much of our investments as is practicable, including possibly taking control of the portfolio company. There can be no assurance that principal will be recovered. We use the following investment grading system approved by our Board of Directors: Grade 1. Loans involve the least amount of risk in our portfolio. The borrower is performing above expectations, and the trends and risk profile is generally favorable. Grade 2. The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially graded 2. Grade 3. The borrower may be performing below expectations, and the loan’s risk has increased materially since origination. We increase procedures to monitor a borrower that may have limited amounts of cash remaining on the balance sheet, is approaching its next equity capital raise within the next three to six months, or if the estimated fair value of the enterprise may be lower than when the loan was originated. We will generally lower the loan grade to a level 3 even if the company is performing in accordance to plan as it approaches the need to raise additional cash to fund its operations. Once the borrower closes its new equity capital raise, we may increase the loan grade back to grade 2 or maintain it at a grade 3 as the company continues to pursue its business plan. Grade 4. The borrower is performing materially below expectations, and the loan risk has substantially increased since origination. Loans graded 4 may experience some partial loss or full return of principal but are expected to realize some loss of interest which is not anticipated to be repaid in full, which, to the extent not already reflected, may require the fair value of the loan to be reduced to the amount we anticipate will be recovered. Grade 4 investments Grade 5. The borrower is in workout, materially performing below expectations and a significant risk of principal loss is probable. Loans graded 5 will experience some partial principal loss or full loss of remaining principal outstanding is expected. Grade 5 loans will require the fair value of the loans be reduced to the amount, if any, we anticipate will are closely monitored. be recovered. At December 31, 2014, our investments had a weighted average investment grading of 2.24. Managerial Assistance As a business development company, we are required to offer, and provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may, from time to time, receive fees for these services. In the event that such fees are received, they are incorporated into our operating income and are passed through to our shareholders, given the nature of our structure as an internally managed business development company. See “—Regulation—Significant Managerial Assistance” for additional information. COMPETITION Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions, federally or state chartered banks, venture debt funds, financial institutions, venture capital funds, private equity funds, investment funds and investment banks. Many of these entities have greater financial and managerial resources than we have, and the 1940 Act imposes certain regulatory restrictions on us as a business development company to which many of our competitors are not subject. However, we believe that few of our competitors possess the expertise to properly structure and price debt investments to venture capital-backed companies in technology-related industries. We believe that our specialization in financing technology-related companies will enable us to determine a range of potential values of intellectual property assets, evaluate the business prospects and operating characteristics of prospective portfolio companies and, as a result, identify investment opportunities that produce attractive risk-adjusted returns. For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors—Risks Related to our Business and Structure—We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively.” BROKERAGE ALLOCATIONS AND OTHER PRACTICES Because we generally acquire and dispose of our investments in privately negotiated transactions, we typically do not use brokers in the normal course of business. However, from time to time, we may work with brokers to sell positions we have acquired in the securities of publicly listed companies or to acquire positions (principally equity) in companies where we see a market opportunity to acquire such securities at attractive valuations. In cases where we do use a broker, we do not execute transactions through any particular broker or dealer, but will seek to obtain the best net results for Hercules, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably competitive execution costs, we may not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided. As of December 31, 2014, we had 65 employees, including approximately 39 investment and portfolio management professionals, all of whom have extensive experience working on financing transactions for technology-related companies. EMPLOYEES REGULATION The following discussion is a general summary of the material prohibitions and descriptions governing business development companies. It does not purport to be a complete description of all of the laws and regulations affecting business development companies. A business development company primarily focuses on investing in or lending to private companies and making managerial assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly-traded stock. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their directors and officers and principal underwriters and certain other related persons and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present or represented by proxy, or (ii) more than 50% of the outstanding shares of such company. 12 13 16323_HER-10K_CS6-r4.indd 13 4/28/15 2:53 PM Qualifying Assets Temporary Investments Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) (c) is not an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and does not have any class of securities listed on a national securities exchange; or if it has securities listed on a national securities exchange such company has a market capitalization of less than $250 million; is controlled by the business development company and has an affiliate of a business development company on its board of directors; or meets such other criteria as may be established by the SEC. (2) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. (3) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. (4) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities. (5) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase time of investment. Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than 25% of the outstanding voting securities of the portfolio company. We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such investment companies in the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. Significant Managerial Assistance Code of Ethics Business development companies generally must offer to make available to the issuer of the securities significant managerial assistance, except in circumstances where either (i) the business development company controls such issuer of securities or (ii) the business development company purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance. 16323_HER-10K_CS6-r4.indd 14 4/28/15 2:53 PM 14 15 Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we invest in U.S. treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests imposed on us by the Code in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions. Warrants and Options Under the 1940 Act, a business development company is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the business development company’s total outstanding shares of capital stock. This amount is reduced to 20% of the business development company’s total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant to an executive compensation plan would exceed 15% of the business development company’s total outstanding shares of capital stock. We have received exemptive relief from the SEC permitting us to issue stock options and restricted stock to our employees and directors subject to the above conditions, among others. For a discussion regarding the conditions of this exemptive relief, see “—Exemptive Relief” below and Note 7 to our consolidated financial statements. Senior Securities; Coverage Ratio We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes. For a discussion of the risks associated with the resulting leverage, see “Item 1A. Risk Factors— Risks Related to Our Business & Structure—Because we borrow money, there could be increased risk in investing in our company.” Capital Structure We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in the best interests of the Company and our stockholders have approved the practice of making such sales. We have adopted and will maintain a code of ethics that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. Our code of ethics will generally not permit investments by our employees in securities that may be purchased or held by us. We may be prohibited under the 1940 Act from conducting certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, the prior approval of the SEC. Our code of ethics is posted on our website at www.htgc.com and was filed with the SEC as an exhibit to the registration statement (Registration No. 333-122950) for our initial public offering. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, the code of ethics is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549. Qualifying Assets the following: Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) is not an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the (c) does not have any class of securities listed on a national securities exchange; or if it has securities listed on a national securities exchange such company has a market capitalization of less than $250 million; is controlled by the business development company and has an affiliate of a business development company on its board of directors; or meets such other criteria as may be established by the SEC. (2) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. (3) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. (4) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities. (5) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment. Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than 25% of the outstanding voting securities of the portfolio company. We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such investment companies in the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. Significant Managerial Assistance assistance, except in circumstances where either (i) the business development company controls such issuer of securities or (ii) the business development company purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance. Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash Temporary Investments equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we invest in U.S. treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests imposed on us by the Code in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions. 1940 Act; and Warrants and Options Under the 1940 Act, a business development company is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the business development company’s total outstanding shares of capital stock. This amount is reduced to 20% of the business development company’s total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant to an executive compensation plan would exceed 15% of the business development company’s total outstanding shares of capital stock. We have received exemptive relief from the SEC permitting us to issue stock options and restricted stock to our employees and directors subject to the above conditions, among others. For a discussion regarding the conditions of this exemptive relief, see “—Exemptive Relief” below and Note 7 to our consolidated financial statements. Senior Securities; Coverage Ratio We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes. For a discussion of the risks associated with the resulting leverage, see “Item 1A. Risk Factors— Risks Related to Our Business & Structure—Because we borrow money, there could be increased risk in investing in our company.” Capital Structure We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in the best interests of the Company and our stockholders have approved the practice of making such sales. Code of Ethics Business development companies generally must offer to make available to the issuer of the securities significant managerial We have adopted and will maintain a code of ethics that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. Our code of ethics will generally not permit investments by our employees in securities that may be purchased or held by us. We may be prohibited under the 1940 Act from conducting certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, the prior approval of the SEC. Our code of ethics is posted on our website at www.htgc.com and was filed with the SEC as an exhibit to the registration statement (Registration No. 333-122950) for our initial public offering. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, the code of ethics is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549. 14 15 16323_HER-10K_CS6-r4.indd 15 4/28/15 2:53 PM Privacy Principles We are committed to maintaining the privacy of our stockholders and safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent). In 2014, we and our affiliates filed an exemptive application with the SEC to permit greater flexibility to negotiate the terms of potential co-investments with us and our affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. This exemptive application is still pending, and there can be no assurance that we will receive exemptive relief from the SEC to permit us to co-invest with our affiliates. Under the terms of such relief permitting us to co-invest with our affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our shareholders and is consistent with our investment objective and strategies. We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need Other for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders. Proxy Voting Policies and Procedures We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so. Our proxy voting decisions are made by our investment committee, which is responsible for monitoring each of our investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties. Exemptive Relief On June 21, 2005, we filed a request with the SEC for exemptive relief to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to business development companies. Specifically, we requested that the SEC permit us to issue stock options to our non-employee directors as contemplated by Section 61(a)(3)(B)(i)(II) of the 1940 Act. On February 15, 2007, we received approval from the SEC on this exemptive request. In addition, in June 2007, we filed an amendment to the February 2007 order to adjust the number of shares issued to the non-employee directors. On October 10, 2007, we received approval from the SEC on this amended exemptive request. On April 5, 2007, we received approval from the SEC on our request for exemptive relief that permits us to exclude the indebtedness of our wholly-owned subsidiaries that are small business investment companies from the 200% asset coverage requirement applicable to us. On May 2, 2007, we received approval from the SEC on our request for exemptive relief that permits us to issue restricted stock to our employees, officers and directors. On June 21, 2007, our shareholders approved amendments to the 2004 Equity Incentive Plan and 2006 Non-Employee Incentive Plan (collectively, the “Plans”) permitting such restricted grants. The maximum amount of shares that may be issued under the Plans will be 10% of the outstanding shares of our common stock on the effective date of the Plans plus 10% of the outstanding number of shares of our common stock issued or delivered by us (other than pursuant to compensation plans) during the term of the Plans. The amount of voting securities that would result from the exercise of all of our outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of our outstanding voting securities, except that if such amount would exceed 15% of our outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities. On June 22, 2010 we received approval from the SEC on our request for exemptive relief that permits our employees to exercise their stock options and restricted stock and pay any related income taxes using a cashless exercise program. 16323_HER-10K_CS6-r4.indd 16 4/28/15 2:53 PM 16 17 We will be periodically examined by the SEC for compliance with the Exchange Act and the 1940 Act. We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation. Our Chief Compliance Officer is responsible for administering these policies and procedures. Small Business Administration Regulations We make investments in qualifying small businesses through our two wholly-owned SBIC subsidiaries, HT II and HT III. With our net investments of $38.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At December 31, 2014, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries. We intend to seek an additional SBIC license to ensure continued access to the maximum statutory limit of SBA guaranteed debentures under the SBIC program, which currently is $225.0 million for a group of SBICs under common control, subject to periodic adjustments by the SBA. We have formed Hercules Technology IV, L.P. for that purpose. There can be no assurance of when or if we will receive SBA approval for another SBIC license. In addition, legislation has been proposed that would increase the total SBIC leverage capacity for a group of SBICs under common control from $225.0 million to $350.0 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through our wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets prior to consolidation at December 31, 2014. Privacy Principles We are committed to maintaining the privacy of our stockholders and safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent). In 2014, we and our affiliates filed an exemptive application with the SEC to permit greater flexibility to negotiate the terms of potential co-investments with us and our affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. This exemptive application is still pending, and there can be no assurance that we will receive exemptive relief from the SEC to permit us to co-invest with our affiliates. Under the terms of such relief permitting us to co-invest with our affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our shareholders and is consistent with our investment objective and strategies. We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need Other for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal We will be periodically examined by the SEC for compliance with the Exchange Act and the 1940 Act. We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation. Our Chief Compliance Officer is responsible for administering these policies and procedures. disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with Small Business Administration Regulations We make investments in qualifying small businesses through our two wholly-owned SBIC subsidiaries, HT II and HT III. With our net investments of $38.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At December 31, 2014, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries. We intend to seek an additional SBIC license to ensure continued access to the maximum statutory limit of SBA guaranteed debentures under the SBIC program, which currently is $225.0 million for a group of SBICs under common control, subject to periodic adjustments by the SBA. We have formed Hercules Technology IV, L.P. for that purpose. There can be no assurance of when or if we will receive SBA approval for another SBIC license. In addition, legislation has been proposed that would increase the total SBIC leverage capacity for a group of SBICs under common control from $225.0 million to $350.0 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through our wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets prior to consolidation at December 31, 2014. 16 17 16323_HER-10K_CS6-r4.indd 17 4/28/15 2:53 PM information of our stockholders. Proxy Voting Policies and Procedures We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so. Our proxy voting decisions are made by our investment committee, which is responsible for monitoring each of our investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties. Exemptive Relief On June 21, 2005, we filed a request with the SEC for exemptive relief to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to business development companies. Specifically, we requested that the SEC permit us to issue stock options to our non-employee directors as contemplated by Section 61(a)(3)(B)(i)(II) of the 1940 Act. On February 15, 2007, we received approval from the SEC on this exemptive request. In addition, in June 2007, we filed an amendment to the February 2007 order to adjust the number of shares issued to the non-employee directors. On October 10, 2007, we received approval from the SEC on this amended exemptive request. On April 5, 2007, we received approval from the SEC on our request for exemptive relief that permits us to exclude the indebtedness of our wholly-owned subsidiaries that are small business investment companies from the 200% asset coverage requirement applicable to us. On May 2, 2007, we received approval from the SEC on our request for exemptive relief that permits us to issue restricted stock to our employees, officers and directors. On June 21, 2007, our shareholders approved amendments to the 2004 Equity Incentive Plan and 2006 Non-Employee Incentive Plan (collectively, the “Plans”) permitting such restricted grants. The maximum amount of shares that may be issued under the Plans will be 10% of the outstanding shares of our common stock on the effective date of the Plans plus 10% of the outstanding number of shares of our common stock issued or delivered by us (other than pursuant to compensation plans) during the term of the Plans. The amount of voting securities that would result from the exercise of all of our outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of our outstanding voting securities, except that if such amount would exceed 15% of our outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities. On June 22, 2010 we received approval from the SEC on our request for exemptive relief that permits our employees to exercise their stock options and restricted stock and pay any related income taxes using a cashless exercise program. The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change In order to qualify as a RIC for federal income tax purposes and obtain the tax benefits of RIC status, in addition to satisfying of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, HT II and HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations. Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that our SBIC subsidiaries will receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does not purport to be a complete description of the income tax considerations relating thereto. Election to be Taxed as a RIC Through December 31, 2005, we were subject to Federal income tax as an ordinary corporation under subchapter C of the Code. Effective beginning on January 1, 2006 we met the criteria specified below to qualify as a RIC, and elected to be treated as a RIC under Subchapter M of the Code with the filing of our federal income tax return for 2006. As a RIC, we generally will not have to pay corporate taxes on any income we distribute to our stockholders as dividends, which allows us to reduce or eliminate our corporate level tax. On December 31, 2005, immediately before the effective date of our RIC election, we held assets with “built-in gain,” which are assets whose fair market value as of the effective date of the election exceeded their tax basis as of such date. We elected to recognize all of our net built-in gains at the time of the conversion and paid tax on the built-in gain with the filing of our 2005 federal income tax return. In making this election, we marked our portfolio to market at the time of our RIC election and paid approximately $294,000 in income tax on the resulting gains. Taxation as a Regulated Investment Company For any taxable year in which we: qualify as a RIC; and distribute at least 90% of our net ordinary income and realized net short-term gains in excess of realized net long-term capital losses, if any (the “Annual Distribution Requirement”); we generally will not be subject to 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) we distribute (or are deemed to distribute) to stockholders with respect to that year. As described above, we made the election to recognize built-in gains as of the effective date of our election to be treated as a RIC and therefore will not be subject to built-in gains tax when we sell those assets. However, if we subsequently acquire built-in gain assets from a C corporation in a carryover basis transaction, then we may be subject to tax on the gains recognized by us on dispositions of such assets unless we make a special election to pay corporate-level tax on such built-in gain at the time the assets are acquired. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders. the Annual Distribution Requirement, we must, among other things: have in effect at all times during each taxable year an election to be regulated as a business development company under the 1940 Act; derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly traded partnership” (the “90% Income Test”); and diversify our holdings so that at the end of each quarter of the taxable year: at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”). Under applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are payable in part in our common stock. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest provisions or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount. Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant. 16323_HER-10K_CS6-r4.indd 18 4/28/15 2:53 PM 18 19 The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change In order to qualify as a RIC for federal income tax purposes and obtain the tax benefits of RIC status, in addition to satisfying of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, HT II and the Annual Distribution Requirement, we must, among other things: HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations. Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that our SBIC subsidiaries will receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does not purport to be a complete description of the income tax considerations relating thereto. Election to be Taxed as a RIC Through December 31, 2005, we were subject to Federal income tax as an ordinary corporation under subchapter C of the Code. Effective beginning on January 1, 2006 we met the criteria specified below to qualify as a RIC, and elected to be treated as a RIC under Subchapter M of the Code with the filing of our federal income tax return for 2006. As a RIC, we generally will not have to pay corporate taxes on any income we distribute to our stockholders as dividends, which allows us to reduce or eliminate our corporate level tax. On December 31, 2005, immediately before the effective date of our RIC election, we held assets with “built-in gain,” which are assets whose fair market value as of the effective date of the election exceeded their tax basis as of such date. We elected to recognize all of our net built-in gains at the time of the conversion and paid tax on the built-in gain with the filing of our 2005 federal income tax return. In making this election, we marked our portfolio to market at the time of our RIC election and paid approximately $294,000 in income tax on the resulting gains. Taxation as a Regulated Investment Company For any taxable year in which we: qualify as a RIC; and distribute at least 90% of our net ordinary income and realized net short-term gains in excess of realized net long-term capital losses, if any (the “Annual Distribution Requirement”); we generally will not be subject to 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) we distribute (or are deemed to distribute) to stockholders with respect to that year. As described above, we made the election to recognize built-in gains as of the effective date of our election to be treated as a RIC and therefore will not be subject to built-in gains tax when we sell those assets. However, if we subsequently acquire built-in gain assets from a C corporation in a carryover basis transaction, then we may be subject to tax on the gains recognized by us on dispositions of such assets unless we make a special election to pay corporate-level tax on such built-in gain at the time the assets are acquired. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders. have in effect at all times during each taxable year an election to be regulated as a business development company under the 1940 Act; derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly traded partnership” (the “90% Income Test”); and diversify our holdings so that at the end of each quarter of the taxable year: at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”). Under applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are payable in part in our common stock. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest provisions or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount. Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant. 18 19 16323_HER-10K_CS6-r4.indd 19 4/28/15 2:53 PM We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement (collectively, the “Distribution Requirements”). However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “—Regulation—Senior Securities; Coverage Ratio.” We may be restricted from making distributions under the terms of our debt obligations themselves unless certain conditions are satisfied. Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by (1) the illiquid nature of our portfolio, or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirements, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are prohibited from making distributions or are unable to obtain cash from other sources to make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate-level federal income tax. In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC Distribution Requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject to corporate-level federal income tax. Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar transactions, and forward contracts will be subject to special tax rules, the effect of which may be to accelerate income to us, defer losses, cause adjustments to the holding periods of our investments, convert long-term capital gains into short-term capital gains, convert short-term capital losses into long-term capital losses or have other tax consequences. These rules could affect the amount, timing and character of distributions to stockholders. We do not currently intend to engage in these types of transactions. A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is, generally, ordinary requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net income plus net realized short-term capital gains in excess of net realized long-term capital losses). If our expenses in a given year exceed gross taxable income (e.g., as the result of large amounts of equity-based compensation), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years and such net operating losses do not pass through to the RIC’s stockholders. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC’s investment company taxable income, but may carry forward such losses, and use them to offset capital gains indefinitely. Due to these limits on the deductibility of expenses and net capital losses, we may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, you may receive a larger capital gain distribution than you would have received in the absence of such transactions. Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within various countries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as paid by its shareholders. If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (“passive foreign investment companies”), we could be subject to federal income tax and additional interest charges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is timely distributed to our shareholders. We would not be able to pass through to our shareholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability. 16323_HER-10K_CS6-r4.indd 20 4/28/15 2:53 PM 20 21 Foreign exchange gains and losses realized by us in connection with certain transactions involving non-dollar debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income. Failure to Qualify as a Regulated Investment Company If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level federal taxes or to dispose of certain assets). If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Such distributions would be taxable to our stockholders and provided certain holding period and other requirements were met, could qualify for treatment as “qualified dividend income” eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent 10 years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC. DETERMINATION OF NET ASSET VALUE We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. As of the date of this report, we do not have any preferred stock outstanding. At December 31, 2014, 78.6% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax Foreign exchange gains and losses realized by us in connection with certain transactions involving non-dollar debt securities, Avoidance Requirement (collectively, the “Distribution Requirements”). However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “—Regulation—Senior Securities; Coverage Ratio.” We may be restricted from making distributions under the terms of our debt obligations themselves unless certain conditions are satisfied. Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by (1) the illiquid nature of our portfolio, or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirements, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are prohibited from making distributions or are unable to obtain cash from other sources to make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate-level federal income tax. In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC Distribution Requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject to corporate-level federal income tax. Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar transactions, and forward contracts will be subject to special tax rules, the effect of which may be to accelerate income to us, defer losses, cause adjustments to the holding periods of our investments, convert long-term capital gains into short-term capital gains, convert short-term capital losses into long-term capital losses or have other tax consequences. These rules could affect the amount, timing and character of distributions to stockholders. We do not currently intend to engage in these types of transactions. A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is, generally, ordinary income plus net realized short-term capital gains in excess of net realized long-term capital losses). If our expenses in a given year exceed gross taxable income (e.g., as the result of large amounts of equity-based compensation), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years and such net operating losses do not pass through to the RIC’s stockholders. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC’s investment company taxable income, but may carry forward such losses, and use them to offset capital gains indefinitely. Due to these limits on the deductibility of expenses and net capital losses, we may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, you may receive a larger capital gain distribution than you would have received in the absence of such transactions. Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within various countries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as paid by its shareholders. If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (“passive foreign investment companies”), we could be subject to federal income tax and additional interest charges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is timely distributed to our shareholders. We would not be able to pass through to our shareholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability. certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income. Failure to Qualify as a Regulated Investment Company If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level federal taxes or to dispose of certain assets). If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Such distributions would be taxable to our stockholders and provided certain holding period and other requirements were met, could qualify for treatment as “qualified dividend income” eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent 10 years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC. DETERMINATION OF NET ASSET VALUE We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. As of the date of this report, we do not have any preferred stock outstanding. At December 31, 2014, 78.6% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. 20 21 16323_HER-10K_CS6-r4.indd 21 4/28/15 2:53 PM With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate, and (4) the Audit Committee discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology- related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to original issue discount, or OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment. Equity-Related Securities and Warrants In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. Determinations In Connection With Offerings In connection with each offering of shares of our common stock, the Board of Directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below our then current net asset value at the time at which the sale is made. The Board of Directors considers the following factors, among others, in making such determination: the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC; our management’s assessment of whether any material change in the net asset value has occurred (including through the realization of net gains on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed net asset value to the period ending two days prior to the date of the sale of our common stock; and the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering. Importantly, this determination does not require that we calculate net asset value in connection with each offering of shares of our common stock, but instead it involves the determination by the Board of Directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value at the time at which the sale is made. 16323_HER-10K_CS6-r4.indd 22 4/28/15 2:53 PM 22 23 With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate, and (4) the Audit Committee discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology- related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to original issue discount, or OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment. Equity-Related Securities and Warrants In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of valued at the closing market quote on the measurement date. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. Determinations In Connection With Offerings In connection with each offering of shares of our common stock, the Board of Directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below our then current net asset value at the time at which the sale is made. The Board of Directors considers the following factors, among others, in making such determination: the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC; our management’s assessment of whether any material change in the net asset value has occurred (including through the realization of net gains on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed net asset value to the period ending two days prior to the date of the sale of our common stock; and the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering. Importantly, this determination does not require that we calculate net asset value in connection with each offering of shares of our common stock, but instead it involves the determination by the Board of Directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value at the time at which the sale is made. 22 23 16323_HER-10K_CS6-r4.indd 23 4/28/15 2:53 PM Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below Item 1A. Risk Factors the then current net asset value of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we will provide to the SEC in a registration statement to which a prospectus will be a part) to suspend the offering of shares of our common stock pursuant to a prospectus if the net asset value fluctuates by certain amounts in certain circumstances until such prospectus is amended, the Board of Directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such, events or to undertake to determine net asset value within two days prior to any such sale to ensure that such sale will not be below our then current net asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine net asset value to ensure that such undertaking has not been triggered. These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act. Investing in our securities may be speculative and involves a high degree of risk. You should consider carefully the risks described below and all other information contained in this Annual Report, including our financial statements and the related notes and the schedules and exhibits to this Annual Report. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment. Risks Related to our Business Structure We are dependent upon key management personnel for their time availability and for our future success, particularly Manuel A. Henriquez, our Chief Executive Officer, and if we are not able to hire and retain qualified personnel, or if we lose any member of our senior management team, our ability to implement our business strategy could be significantly harmed. We depend upon the members of our senior management, particularly Mr. Henriquez, as well as other key personnel for the identification, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships on which we rely to implement our business plan. If we lose the services of Mr. Henriquez, or of any other senior management members, we may not be able to operate the business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. Furthermore, we do not have an employment agreement with Mr. Henriquez and our senior management is not restricted from creating new investment vehicles subject to compliance with applicable law. We believe our future success will depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect. Our business model depends to a significant extent upon strong referral relationships with venture capital and private equity fund sponsors, and our inability to develop or maintain these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. We expect that members of our management team will maintain their relationships with venture capital and private equity firms, and we will rely to a significant extent upon these relationships to provide us with our deal flow. If we fail to maintain our existing relationships, our relationships become strained as a result of enforcing our rights with respect to non-performing portfolio companies in protecting our investments or we fail to develop new relationships with other firms or sources of investment opportunities, then we will not be able to grow our investment portfolio. In addition, persons with whom members of our management team have relationships are not obligated to provide us with investment opportunities and, therefore, there is no assurance that such relationships will lead to the origination of debt or other investments. We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively. A number of entities compete with us to make the types of investments that we plan to make in prospective portfolio companies. We compete with a large number of venture capital and private equity firms, as well as with other investment funds, business development companies, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and/or access to funding sources that are not available to us. This may enable some competitors to make loans with interest rates that are comparable to or lower than the rates that we typically offer. A significant increase in the number and/or the size of our competitors, including traditional commercial lenders and other financing sources, in technology-related industries could force us to accept less attractive investment terms. We may miss opportunities if we do not match competitors’ pricing, terms and structure. If we do match competitors’ pricing, terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Furthermore, many potential competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company or that the Code imposes on us as a RIC. If we are not able to compete effectively, our business, financial condition, and results of operations will be adversely affected. As a result of this competition, there can be no assurance that we will be able to identify and take advantage of attractive investment opportunities, or that we will be able to fully invest our available capital. 16323_HER-10K_CS6-r4.indd 24 4/28/15 2:53 PM 24 25 Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below Item 1A. Risk Factors the then current net asset value of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we will provide to the SEC in a registration statement to which a prospectus will be a part) to suspend the offering of shares of our common stock pursuant to a prospectus if the net asset value fluctuates by certain amounts in certain circumstances until such prospectus is amended, the Board of Directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such, events or to undertake to determine net asset value within two days prior to any such sale to ensure that such sale will not be below our then current net asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine net asset value to ensure that such undertaking has These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain not been triggered. under the 1940 Act. Investing in our securities may be speculative and involves a high degree of risk. You should consider carefully the risks described below and all other information contained in this Annual Report, including our financial statements and the related notes and the schedules and exhibits to this Annual Report. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment. Risks Related to our Business Structure We are dependent upon key management personnel for their time availability and for our future success, particularly Manuel A. Henriquez, our Chief Executive Officer, and if we are not able to hire and retain qualified personnel, or if we lose any member of our senior management team, our ability to implement our business strategy could be significantly harmed. We depend upon the members of our senior management, particularly Mr. Henriquez, as well as other key personnel for the identification, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships on which we rely to implement our business plan. If we lose the services of Mr. Henriquez, or of any other senior management members, we may not be able to operate the business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. Furthermore, we do not have an employment agreement with Mr. Henriquez and our senior management is not restricted from creating new investment vehicles subject to compliance with applicable law. We believe our future success will depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect. Our business model depends to a significant extent upon strong referral relationships with venture capital and private equity fund sponsors, and our inability to develop or maintain these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. We expect that members of our management team will maintain their relationships with venture capital and private equity firms, and we will rely to a significant extent upon these relationships to provide us with our deal flow. If we fail to maintain our existing relationships, our relationships become strained as a result of enforcing our rights with respect to non-performing portfolio companies in protecting our investments or we fail to develop new relationships with other firms or sources of investment opportunities, then we will not be able to grow our investment portfolio. In addition, persons with whom members of our management team have relationships are not obligated to provide us with investment opportunities and, therefore, there is no assurance that such relationships will lead to the origination of debt or other investments. We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively. A number of entities compete with us to make the types of investments that we plan to make in prospective portfolio companies. We compete with a large number of venture capital and private equity firms, as well as with other investment funds, business development companies, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and/or access to funding sources that are not available to us. This may enable some competitors to make loans with interest rates that are comparable to or lower than the rates that we typically offer. A significant increase in the number and/or the size of our competitors, including traditional commercial lenders and other financing sources, in technology-related industries could force us to accept less attractive investment terms. We may miss opportunities if we do not match competitors’ pricing, terms and structure. If we do match competitors’ pricing, terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Furthermore, many potential competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company or that the Code imposes on us as a RIC. If we are not able to compete effectively, our business, financial condition, and results of operations will be adversely affected. As a result of this competition, there can be no assurance that we will be able to identify and take advantage of attractive investment opportunities, or that we will be able to fully invest our available capital. 24 25 16323_HER-10K_CS6-r4.indd 25 4/28/15 2:53 PM If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which could adversely affect our financial condition and results of operations and cause the value of your investment to decline. As of December 31, 2014, we did not have any outstanding borrowings under our Credit Facilities. In addition, as of December 31, 2014, we had approximately $190.2 million of indebtedness outstanding incurred by our SBIC subsidiaries, Our ability to achieve our investment objective will depend on our ability to sustain growth. Sustaining growth will depend, in turn, on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. Failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations. Because we intend to distribute substantially all of our income to our stockholders in order to qualify as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired. In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and realized net capital gains except for certain realized net capital gains, which we may retain, pay applicable income taxes with respect thereto and elect to treat as deemed distributions to our stockholders. As a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which includes all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. This limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. If we are unable to incur additional debt, we may be required to raise additional equity at a time when it may be disadvantageous to do so. In addition, shares of closed-end investment companies have recently traded at discounts to their net asset values. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. If our common stock trades below its net asset value, we generally will not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline. In addition, our results of operations and financial condition could be adversely affected. Because we have substantial indebtedness, there could be increased risk in investing in our company. Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leverage would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leverage would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not used leverage. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity. If we are not able to service our substantial indebtedness, our business could be harmed materially. Our secured credit facilities with Wells Fargo Capital Finance LLC (the “Wells Facility”) and MUFG Union Bank, N.A. (the “Union Bank Facility,” and together with the Wells Facility, our “Credit Facilities”) our Convertible Senior Notes, our 2019 Notes, our 2024 Notes, our 2017 Asset-Backed Notes and our 2021 Asset-Backed Notes (as each term is defined below) contain financial and operating covenants that could restrict our business activities, including our ability to declare dividends if we default under certain provisions. approximately $17.7 million in aggregate principal amount of 6.00% convertible senior notes (the “Convertible Senior Notes”), approximately $170.4 million in aggregate principal amount of 7.00% senior notes due 2019 (the “2019 Notes”), approximately $103.0 million in aggregate principal amount of 6.25% senior notes due 2024 (the “2024 Notes”), approximately $16.0 million in aggregate principal amount of fixed rate asset-backed notes issued in December 2012 (the “2017 Asset-Backed Notes”) in connection with our $230.7 million debt securitization (the “2012 Debt Securitization”) and approximately $129.3 million in aggregate principal amount of fixed rate asset-backed notes issued in November 2014 (the “2021 Asset-Backed Notes” together with the 2017 Asset Backed Notes, the “Asset-Backed Notes”) in connection with our $237.4 million debt securitization (the “2014 Debt Securitization,” together with the 2012 Debt Securitization, the “Debt Securitizations”). There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. As a business development company, generally, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. As of December 31, 2014 our asset coverage ratio under our regulatory requirements as a business development company was 250.8% excluding our SBIC debentures as a result of our exemptive order from the SEC that allows us to exclude all SBA leverage from our asset coverage ratio. Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. Corresponding return to stockholder(1) .......................... (24.83%) (14.97%) (5.11 %) 4.74 % 14.60% -10% -5% 0% 5% 10% (1) Assumes $1.3 billion in total assets, $626.6 million in debt outstanding, $658.9 million in stockholders’ equity, and an average cost of funds of 5.38%, which is the approximate average cost of borrowed funds, including our Credit Facilities, our Convertible Senior Notes, 2019 Notes, 2024 Notes, our SBA debentures and our Asset-Backed Notes for the period ended December 31, 2014. Actual interest payments may be different. Annual Return on Our Portfolio (Net of Expenses) It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business. Under our borrowings and our Credit Facilities, current lenders have, and any future lender or lenders may have, fixed dollar claims on our assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to our assets in the collateral pool. Our Credit Facilities and borrowings also subject us to various financial and operating covenants, including, but not limited to, maintaining certain financial ratios and minimum tangible net worth amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we may grant a security interest in our assets in connection with any such credit facilities and borrowings. Our Credit Facilities generally contain customary default provisions such as a minimum net worth amount, a profitability test, and a restriction on changing our business and loan quality standards. In addition, our Credit Facilities require or are expected to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially the business of our portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other things, in termination of the availability of further funds under the facilities and accelerated maturity dates for all amounts outstanding under the facilities, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we finance through the facilities. This could reduce our revenues and, by delaying any cash payment allowed to us under our facilities until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and our ability to make distributions sufficient to maintain our status as a RIC. 16323_HER-10K_CS6-r4.indd 26 4/28/15 2:53 PM 26 27 If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which could adversely affect our financial condition and results of operations and cause the value of your investment to decline. Our ability to achieve our investment objective will depend on our ability to sustain growth. Sustaining growth will depend, in turn, on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. Failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations. Because we intend to distribute substantially all of our income to our stockholders in order to qualify as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired. In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and realized net capital gains except for certain realized net capital gains, which we may retain, pay applicable income taxes with respect thereto and elect to treat as deemed distributions to our stockholders. As a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which includes all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. This limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. If we are unable to incur additional debt, we may be required to raise additional equity at a time when it may be disadvantageous to do so. In addition, shares of closed-end investment companies have recently traded at discounts to their net asset values. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. If our common stock trades below its net asset value, we generally will not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline. In addition, our results of operations and financial condition could be adversely affected. As of December 31, 2014, we did not have any outstanding borrowings under our Credit Facilities. In addition, as of December 31, 2014, we had approximately $190.2 million of indebtedness outstanding incurred by our SBIC subsidiaries, approximately $17.7 million in aggregate principal amount of 6.00% convertible senior notes (the “Convertible Senior Notes”), approximately $170.4 million in aggregate principal amount of 7.00% senior notes due 2019 (the “2019 Notes”), approximately $103.0 million in aggregate principal amount of 6.25% senior notes due 2024 (the “2024 Notes”), approximately $16.0 million in aggregate principal amount of fixed rate asset-backed notes issued in December 2012 (the “2017 Asset-Backed Notes”) in connection with our $230.7 million debt securitization (the “2012 Debt Securitization”) and approximately $129.3 million in aggregate principal amount of fixed rate asset-backed notes issued in November 2014 (the “2021 Asset-Backed Notes” together with the 2017 Asset Backed Notes, the “Asset-Backed Notes”) in connection with our $237.4 million debt securitization (the “2014 Debt Securitization,” together with the 2012 Debt Securitization, the “Debt Securitizations”). There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. As a business development company, generally, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. As of December 31, 2014 our asset coverage ratio under our regulatory requirements as a business development company was 250.8% excluding our SBIC debentures as a result of our exemptive order from the SEC that allows us to exclude all SBA leverage from our asset coverage ratio. Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. Because we have substantial indebtedness, there could be increased risk in investing in our company. Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered (1) Corresponding return to stockholder(1) .......................... -10% (24.83%) -5% (14.97%) 0% (5.11 %) 5% 4.74 % 10% 14.60% Assumes $1.3 billion in total assets, $626.6 million in debt outstanding, $658.9 million in stockholders’ equity, and an average cost of funds of 5.38%, which is the approximate average cost of borrowed funds, including our Credit Facilities, our Convertible Senior Notes, 2019 Notes, 2024 Notes, our SBA debentures and our Asset-Backed Notes for the period ended December 31, 2014. Actual interest payments may be different. Annual Return on Our Portfolio (Net of Expenses) It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business. Under our borrowings and our Credit Facilities, current lenders have, and any future lender or lenders may have, fixed dollar claims on our assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to our assets in the collateral pool. Our Credit Facilities and borrowings also subject us to various financial and operating covenants, including, but not limited to, maintaining certain financial ratios and minimum tangible net worth amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we may grant a security interest in our assets in connection with any such credit facilities and borrowings. Our Credit Facilities generally contain customary default provisions such as a minimum net worth amount, a profitability test, and a restriction on changing our business and loan quality standards. In addition, our Credit Facilities require or are expected to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially the business of our portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other things, in termination of the availability of further funds under the facilities and accelerated maturity dates for all amounts outstanding under the facilities, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we finance through the facilities. This could reduce our revenues and, by delaying any cash payment allowed to us under our facilities until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and our ability to make distributions sufficient to maintain our status as a RIC. 26 27 16323_HER-10K_CS6-r4.indd 27 4/28/15 3:12 PM a speculative investment technique. If the value of our assets increases, then leverage would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leverage would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not used leverage. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity. If we are not able to service our substantial indebtedness, our business could be harmed materially. Our secured credit facilities with Wells Fargo Capital Finance LLC (the “Wells Facility”) and MUFG Union Bank, N.A. (the “Union Bank Facility,” and together with the Wells Facility, our “Credit Facilities”) our Convertible Senior Notes, our 2019 Notes, our 2024 Notes, our 2017 Asset-Backed Notes and our 2021 Asset-Backed Notes (as each term is defined below) contain financial and operating covenants that could restrict our business activities, including our ability to declare dividends if we default under certain provisions. The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain sufficient capital in the future, we may be forced to reduce or discontinue our operations, not be able to make new investments, or otherwise respond to changing business conditions or competitive pressures. In addition to regulatory requirements that restrict our ability to raise capital, our Credit Facilities, the Convertible Senior Notes, the 2019 Notes and the 2024 Notes contain various covenants which, if not complied with, could require accelerated repayment under the facility or require us to repurchase the Convertible Senior Notes, the 2019 Notes and the 2024 Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends. The credit agreements governing our Credit Facilities, the Convertible Senior Notes, the 2019 Notes, and the 2024 Notes require us to comply with certain financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios, including asset coverage, debt to equity and interest coverage. Our ability to continue to comply with these covenants in the future depends on many factors, some of which are beyond our control. There are no assurances that we will be able to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver from the lenders under our Credit Facilities or the trustee or holders under the Convertible Senior Notes and could accelerate repayment under the facilities or the Convertible Senior Notes, the 2019 Notes or 2024 Notes and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay dividends. In addition, holders of the Convertible Senior Notes will have the right to require us to repurchase the Convertible Senior Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases. See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition—Borrowings.” We may be unable to obtain debt capital on favorable terms or at all, in which case we would not be able to use leverage to increase the return on our investments. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. We are subject to certain risks as a result of our interests in connection with the Debt Securitizations and our equity interest in the Securitization Issuers. On December 19, 2012, in connection with the 2012 Debt Securitization and the offering of the 2017 Asset-Backed Notes by Hercules Capital Funding Trust 2012-1 (the “2012 Securitization Issuer”), we sold and/or contributed to Hercules Capital Funding 2012-1 LLC, as trust depositor (the “2012 Trust Depositor”), certain senior loans made to certain of our portfolio companies (the “2012 Loans”), which the 2012 Trust Depositor in turn sold and/or contributed to the 2012 Securitization Issuer in exchange for 100% of the equity interest in the 2012 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2012 Securitization Issuer, and not the 2012 Trust Depositor or us, held all of the ownership interest in the 2012 Loans. In addition, on November 13, 2014, in connection with the 2014 Debt Securitization and the offering of the 2021 Asset-Backed Notes by Hercules Capital Funding Trust 2014-1 (the “2014 Securitization Issuer,” together with the 2012 Securitization Issuer, the “Securitization Issuers”), we sold and/or contributed to Hercules Capital Funding 2014-1 LLC, as trust depositor (the “2014 Trust Depositor,” together with the 2014 Trust Depositor, the “Trust Depositors”), certain senior loans made to certain of our portfolio companies (the “2014 Loans,” together with the 2012 Loans, the “Loans”), which the 2014 Trust Depositor in turn sold and/or contributed to the 2014 Securitization Issuer in exchange for 100% of the equity interest in the 2014 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2014 Securitization Issuer, and not the 2014 Trust Depositor or us, held all of the ownership interest in the 2014 Loans. As a result of the Debt Securitizations, we hold, indirectly through the 2012 Trust Depositor and the 2014 Trust Depositor, 100% of the equity interests in the 2012 Securitization Issuer and 2014 Securitization Issuer, respectively. As a result, we consolidate the financial statements of the Trust Depositors and the Securitization Issuers, as well as our other subsidiaries, in our consolidated financial statements. Because the Trust Depositors and the Securitization Issuers are disregarded as entities separate from their owners for U.S. federal income tax purposes, the sale or contribution by us to the Trust Depositors, and by the Trust Depositors to the Securitization Issuers, as applicable, did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service (“IRS”) were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Further, a failure of the 2012 Securitization Issuer or the 2014 Securitization Issuer to be treated as a disregarded entity for U.S. federal income tax purposes would constitute an event of default pursuant to the indenture under the 2012 Debt Securitization or the indenture under the 2014 Debt Securitization, respectively, upon which the trustee under the 2012 Debt Securitization (the “2012 Trustee”) or the trustee under the 2014 Debt Securitization (the “2014 Trustee,” together with the 2012 Trustee, the “Trustees”), respectively, may and will at the direction of a supermajority of the holders of the 2017 Asset-Backed Notes (the “2017 Noteholders”) or at the direction of a supermajority of the holders of the 2021 Asset-Backed Notes (the “2021 Noteholders,” together with the 2017 Noteholders, the “Noteholders”), respectively, declare the 2017 Asset-Backed Notes or 2021 Asset-Backed Notes, respectively, to be immediately due and payable and exercise remedies under the applicable indenture, including (i) to institute proceedings for the collection of all amounts then payable on the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, or under the applicable indenture, enforce any judgment obtained, and collect from the 2012 Securitization Issuer or 2014 Securitization Issuer, respectively, and any other obligor upon the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the applicable indenture with respect to the property of the 2012 Securitization Issuer or the 2014 Securitization Issuer, respectively; (iii) exercise any remedies as a secured party under the relevant UCC and take other appropriate action under applicable law to protect and enforce the rights and remedies of the 2012 Trustee or 2014 Trustee, respectively, and the 2017 Noteholders and 2021 Noteholders, respectively; or (iv) sell the property of the 2012 Securitization Issuer or the 2014 Securitization Issuer, respectively, or any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any matter permitted by law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or cash flows. An event of default in connection with either Debt Securitization could give rise to a cross-default under our other material indebtedness. The documents governing our other material indebtedness contain customary cross-default provisions that could be triggered if an event of default occurs in connection with either Debt Securitization. An event of default with respect to our other indebtedness could lead to the acceleration of such indebtedness and the exercise of other remedies as provided in the documents governing such other indebtedness. This could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We may not receive cash distributions in respect of our indirect ownership interests in the Securitization Issuers. Apart from fees payable to us in connection with our role as servicer of the Loans and the reimbursement of related amounts under the documents governing the Debt Securitizations, we receive cash in connection with the Debt Securitizations only to the extent that the Trust Depositors receive payments in respect of their respective equity interests in the Securitization Issuers. The respective holders of the equity interests in the Securitization Issuers are the residual claimants on distributions, if any, made by the respective Securitization Issuers after the respective Noteholders and other claimants have been paid in full on each payment date or upon maturity of the Asset-Backed Notes, subject to the priority of payments under the Debt Securitization documents governing the Debt Securitizations. To the extent that the value of a Securitization Issuer’s portfolio of loans is reduced as a result of conditions in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the loans, or for any other reason, the ability of a Securitization Issuer to make cash distributions in respect of a Trust Depositor’s equity interests would be negatively affected and consequently, the value of the equity interests in the Securitization Issuer would also be reduced. In the event that we fail to receive cash indirectly from the Securitization Issuers, we could be unable to make distributions, if at all, in amounts sufficient to maintain our status as a RIC. The interests of the Noteholders may not be aligned with our interests. The Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holder of the equity interests in the Securitization Issuers, as residual claimants in respect of distributions, if any, made by the Securitization Issuers. As such, there are circumstances in which the interests of the Noteholders may not be aligned with the interests of holders of the equity interests in the Securitization Issuers. For example, under the terms of the documents governing each Debt Securitization, the respective Noteholders have the right to receive payments of principal and interest prior to holders of the equity interests. For as long as the Asset-Backed Notes remain outstanding, the respective Noteholders have the right to act in certain circumstances with respect to the Loans in ways that may benefit their interests but not the interests of the respective holders of the equity interests in the Securitization Issuers, including by exercising remedies under the documents governing the Debt Securitizations. 16323_HER-10K_CS6-r4.indd 28 4/28/15 2:53 PM 28 29 The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain Further, a failure of the 2012 Securitization Issuer or the 2014 Securitization Issuer to be treated as a disregarded entity for U.S. sufficient capital in the future, we may be forced to reduce or discontinue our operations, not be able to make new investments, or otherwise respond to changing business conditions or competitive pressures. In addition to regulatory requirements that restrict our ability to raise capital, our Credit Facilities, the Convertible Senior Notes, the 2019 Notes and the 2024 Notes contain various covenants which, if not complied with, could require accelerated repayment under the facility or require us to repurchase the Convertible Senior Notes, the 2019 Notes and the 2024 Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends. The credit agreements governing our Credit Facilities, the Convertible Senior Notes, the 2019 Notes, and the 2024 Notes require us to comply with certain financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios, including asset coverage, debt to equity and interest coverage. Our ability to continue to comply with these covenants in the future depends on many factors, some of which are beyond our control. There are no assurances that we will be able to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver from the lenders under our Credit Facilities or the trustee or holders under the Convertible Senior Notes and could accelerate repayment under the facilities or the Convertible Senior Notes, the 2019 Notes or 2024 Notes and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay dividends. In addition, holders of the Convertible Senior Notes will have the right to require us to repurchase the Convertible Senior Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases. See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition—Borrowings.” We may be unable to obtain debt capital on favorable terms or at all, in which case we would not be able to use leverage to increase the return on our investments. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. We are subject to certain risks as a result of our interests in connection with the Debt Securitizations and our equity interest in the Securitization Issuers. On December 19, 2012, in connection with the 2012 Debt Securitization and the offering of the 2017 Asset-Backed Notes by Hercules Capital Funding Trust 2012-1 (the “2012 Securitization Issuer”), we sold and/or contributed to Hercules Capital Funding 2012-1 LLC, as trust depositor (the “2012 Trust Depositor”), certain senior loans made to certain of our portfolio companies (the “2012 Loans”), which the 2012 Trust Depositor in turn sold and/or contributed to the 2012 Securitization Issuer in exchange for 100% of the equity interest in the 2012 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2012 Securitization Issuer, and not the 2012 Trust Depositor or us, held all of the ownership interest in the 2012 Loans. In addition, on November 13, 2014, in connection with the 2014 Debt Securitization and the offering of the 2021 Asset-Backed Notes by Hercules Capital Funding Trust 2014-1 (the “2014 Securitization Issuer,” together with the 2012 Securitization Issuer, the “Securitization Issuers”), we sold and/or contributed to Hercules Capital Funding 2014-1 LLC, as trust depositor (the “2014 Trust Depositor,” together with the 2014 Trust Depositor, the “Trust Depositors”), certain senior loans made to certain of our portfolio companies (the “2014 Loans,” together with the 2012 Loans, the “Loans”), which the 2014 Trust Depositor in turn sold and/or contributed to the 2014 Securitization Issuer in exchange for 100% of the equity interest in the 2014 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2014 Securitization Issuer, and not the 2014 Trust Depositor or us, held all of the ownership interest in the 2014 Loans. As a result of the Debt Securitizations, we hold, indirectly through the 2012 Trust Depositor and the 2014 Trust Depositor, 100% of the equity interests in the 2012 Securitization Issuer and 2014 Securitization Issuer, respectively. As a result, we consolidate the financial statements of the Trust Depositors and the Securitization Issuers, as well as our other subsidiaries, in our consolidated financial statements. Because the Trust Depositors and the Securitization Issuers are disregarded as entities separate from their owners for U.S. federal income tax purposes, the sale or contribution by us to the Trust Depositors, and by the Trust Depositors to the Securitization Issuers, as applicable, did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service (“IRS”) were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. federal income tax purposes would constitute an event of default pursuant to the indenture under the 2012 Debt Securitization or the indenture under the 2014 Debt Securitization, respectively, upon which the trustee under the 2012 Debt Securitization (the “2012 Trustee”) or the trustee under the 2014 Debt Securitization (the “2014 Trustee,” together with the 2012 Trustee, the “Trustees”), respectively, may and will at the direction of a supermajority of the holders of the 2017 Asset-Backed Notes (the “2017 Noteholders”) or at the direction of a supermajority of the holders of the 2021 Asset-Backed Notes (the “2021 Noteholders,” together with the 2017 Noteholders, the “Noteholders”), respectively, declare the 2017 Asset-Backed Notes or 2021 Asset-Backed Notes, respectively, to be immediately due and payable and exercise remedies under the applicable indenture, including (i) to institute proceedings for the collection of all amounts then payable on the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, or under the applicable indenture, enforce any judgment obtained, and collect from the 2012 Securitization Issuer or 2014 Securitization Issuer, respectively, and any other obligor upon the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the applicable indenture with respect to the property of the 2012 Securitization Issuer or the 2014 Securitization Issuer, respectively; (iii) exercise any remedies as a secured party under the relevant UCC and take other appropriate action under applicable law to protect and enforce the rights and remedies of the 2012 Trustee or 2014 Trustee, respectively, and the 2017 Noteholders and 2021 Noteholders, respectively; or (iv) sell the property of the 2012 Securitization Issuer or the 2014 Securitization Issuer, respectively, or any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any matter permitted by law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or cash flows. An event of default in connection with either Debt Securitization could give rise to a cross-default under our other material indebtedness. The documents governing our other material indebtedness contain customary cross-default provisions that could be triggered if an event of default occurs in connection with either Debt Securitization. An event of default with respect to our other indebtedness could lead to the acceleration of such indebtedness and the exercise of other remedies as provided in the documents governing such other indebtedness. This could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We may not receive cash distributions in respect of our indirect ownership interests in the Securitization Issuers. Apart from fees payable to us in connection with our role as servicer of the Loans and the reimbursement of related amounts under the documents governing the Debt Securitizations, we receive cash in connection with the Debt Securitizations only to the extent that the Trust Depositors receive payments in respect of their respective equity interests in the Securitization Issuers. The respective holders of the equity interests in the Securitization Issuers are the residual claimants on distributions, if any, made by the respective Securitization Issuers after the respective Noteholders and other claimants have been paid in full on each payment date or upon maturity of the Asset-Backed Notes, subject to the priority of payments under the Debt Securitization documents governing the Debt Securitizations. To the extent that the value of a Securitization Issuer’s portfolio of loans is reduced as a result of conditions in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the loans, or for any other reason, the ability of a Securitization Issuer to make cash distributions in respect of a Trust Depositor’s equity interests would be negatively affected and consequently, the value of the equity interests in the Securitization Issuer would also be reduced. In the event that we fail to receive cash indirectly from the Securitization Issuers, we could be unable to make distributions, if at all, in amounts sufficient to maintain our status as a RIC. The interests of the Noteholders may not be aligned with our interests. The Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holder of the equity interests in the Securitization Issuers, as residual claimants in respect of distributions, if any, made by the Securitization Issuers. As such, there are circumstances in which the interests of the Noteholders may not be aligned with the interests of holders of the equity interests in the Securitization Issuers. For example, under the terms of the documents governing each Debt Securitization, the respective Noteholders have the right to receive payments of principal and interest prior to holders of the equity interests. For as long as the Asset-Backed Notes remain outstanding, the respective Noteholders have the right to act in certain circumstances with respect to the Loans in ways that may benefit their interests but not the interests of the respective holders of the equity interests in the Securitization Issuers, including by exercising remedies under the documents governing the Debt Securitizations. 28 29 16323_HER-10K_CS6-r4.indd 29 4/28/15 2:53 PM If an event of default occurs, the respective Noteholders will be entitled to determine the remedies to be exercised, subject to the There is no single standard for determining fair value in good faith. We value these securities at fair value as determined in good terms of the documents governing the Debt Securitizations. For example, upon the occurrence of an event of default with respect to the Asset-Backed Notes, the applicable Trustee may and will at the direction of the holders of a supermajority of the applicable Asset- Backed Notes declare the principal, together with any accrued interest, of the notes to be immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation on the part of the applicable Securitization Issuer. The Asset-Backed Notes then outstanding will be paid in full before any further payment or distribution on the equity interest is made. There can be no assurance that there will be sufficient funds through collections on the applicable Loans or through the proceeds of the sale of the applicable Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the Asset-Backed Notes, or to make any distribution to holders of the equity interests in the Securitization Issuers. Remedies pursued by the Noteholders could be adverse to our interests as the indirect holder of the equity interests in the Securitization Issuers. The Noteholders have no obligation to consider any possible adverse effect on such other interests. Thus, there can be no assurance that any remedies pursued by the Noteholders will be consistent with the best interests of the Trust Depositors or that we will receive, indirectly through the Trust Depositors, any payments or distributions upon an acceleration of the Asset-Backed Notes. Any failure of the Securitization Issuers to make distributions in respect of the equity interests that we indirectly hold, whether as a result of an event of default and the acceleration of payments on the Asset-Backed Notes or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. Certain events related to the performance of Loans could lead to the acceleration of principal payments on the Asset-Backed Notes. The following constitute rapid amortization events (“Rapid Amortization Events”) under the documents governing each Debt Securitization: (i) the aggregate outstanding principal balance of delinquent 2012 Loans or 2014 Loans, respectively, and restructured 2012 Loans or 2014 Loans, respectively, that would have been delinquent 2012 Loans or 2014 Loans, respectively, had such loans not become restructured loans exceeds 10% of the current aggregate outstanding principal balance of the 2012 Loans or 2014 Loans, respectively, for a period of three consecutive months; (ii) the aggregate outstanding principal balance of defaulted 2012 Loans or 2014 Loans, respectively, exceeds 5% of the initial outstanding principal balance of the 2012 Loans or outstanding principal balance of the 2014 Loans, respectively, determined as of December 19, 2012 for the 2012 Notes and November 13, 2014 for the 2014 Notes, for a period of three consecutive months; (iii) the aggregate outstanding principal balance of the 2017 Asset-Backed Notes or 2021 Asset-Backed Notes, respectively, exceeds the borrowing base for a period of three consecutive months; (iv) the 2012 Securitization Issuer’s pool of 2012 Loans or the 2014 Securitization Issuer’s pool of 2014 Loans contains 2012 Loans or 2014 Loans, respectively, to ten or fewer obligors; and (v) the occurrence of an event of default under the documents governing the respective Debt Securitization. After a Rapid Amortization Event has occurred, subject to the priority of payments under the documents governing each Debt Securitization, principal collections on the 2012 Loans or 2014 Loans, respectively, will be used to make accelerated payments of principal on the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, until the principal balance of the 2017 Asset-Backed Notes or the 2021 Asset-Back Notes, respectively, is reduced to zero. Such an event could delay, reduce or eliminate the ability of either or both Securitization Issuers to make distributions in respect of the equity interests that we indirectly hold, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We have certain repurchase obligations with respect to the Loans transferred in connection with the Debt Securitizations. As part of the Debt Securitizations, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be required to repurchase any Loan (or participation interest therein) which was sold to the Securitization Issuers in breach of certain customary representations and warranty made by us or by the Trust Depositors with respect to such Loan or the legal structure of the Debt Securitizations. To the extent that there is a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, a Trustee may, on behalf of the respective Securitization Issuer, bring an action against us to enforce these repurchase obligations. Because most of our investments typically are not in publicly-traded securities, there is uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value. At December 31, 2014, portfolio investments, which are valued at fair value by the Board of Directors, were approximately 78.6% of our total assets. We expect our investments to continue to consist primarily of securities issued by privately-held companies, the fair value of which is not readily determinable. In addition, we are not permitted to maintain a general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. faith by our Board of Directors, based on the recommendations of our Audit Committee. In making a good faith determination of the value of these securities, we generally start with the cost basis of each security, which includes the amortized OID and PIK interest, if any. The Audit Committee uses its best judgment in arriving at the fair value of these securities. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while applying a valuation process for the types of investments we make, which includes but is not limited to deriving a hypothetical exit price. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Our investments in a portfolio company, whether debt, equity, or a combination thereof, may lead to our receiving material non- public information (“MNPI”) or obtaining ‘control’ of the target company. Our ability to exit an investment where we have MNPI or control could be limited and could result in a realized loss on the investment. If we receive MNPI, or a controlling interest in a portfolio company, our ability to divest ourselves from a debt or equity investment could be restricted. Causes of such restriction could include market factors, such as liquidity in a private stock, or limited trading volume in a public company’s securities, or regulatory factors, such as the receipt of MNPI or insider blackout periods, where we are under legal obligation not to sell. Additionally, we may choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on the investment. Regulations governing our operations as a business development company may affect our ability to, and the manner in which, we raise additional capital, which may expose us to risks. Our business will require a substantial amount of capital. We may acquire additional capital from the issuance of senior securities, including borrowings, securitization transactions or other indebtedness, or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities, other evidences of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the 1940 Act, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. Our ability to pay dividends or issue additional senior securities would be restricted if our asset coverage ratio were not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such transaction may be disadvantageous. As a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights and might have rights, preferences, or privileges more favorable than those of our common stockholders and the issuance of preferred stock could have the effect of delaying, deferring, or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest. To the extent that we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of common stock to finance operations. Other than in certain limited situations such as rights offerings, as a business development company, we are generally not able to issue our common stock at a price below net asset value without first obtaining required approvals from our stockholders and our independent directors. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all. 16323_HER-10K_CS6-r4.indd 30 4/28/15 2:53 PM 30 31 If an event of default occurs, the respective Noteholders will be entitled to determine the remedies to be exercised, subject to the There is no single standard for determining fair value in good faith. We value these securities at fair value as determined in good terms of the documents governing the Debt Securitizations. For example, upon the occurrence of an event of default with respect to the Asset-Backed Notes, the applicable Trustee may and will at the direction of the holders of a supermajority of the applicable Asset- Backed Notes declare the principal, together with any accrued interest, of the notes to be immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation on the part of the applicable Securitization Issuer. The Asset-Backed Notes then outstanding will be paid in full before any further payment or distribution on the equity interest is made. There can be no assurance that there will be sufficient funds through collections on the applicable Loans or through the proceeds of the sale of the applicable Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the Asset-Backed Notes, or to make any distribution to holders of the equity interests in the Securitization Issuers. Remedies pursued by the Noteholders could be adverse to our interests as the indirect holder of the equity interests in the Securitization Issuers. The Noteholders have no obligation to consider any possible adverse effect on such other interests. Thus, there can be no assurance that any remedies pursued by the Noteholders will be consistent with the best interests of the Trust Depositors or that we will receive, indirectly through the Trust Depositors, any payments or distributions upon an acceleration of the Asset-Backed Notes. Any failure of the Securitization Issuers to make distributions in respect of the equity interests that we indirectly hold, whether as a result of an event of default and the acceleration of payments on the Asset-Backed Notes or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. Certain events related to the performance of Loans could lead to the acceleration of principal payments on the Asset-Backed Notes. The following constitute rapid amortization events (“Rapid Amortization Events”) under the documents governing each Debt Securitization: (i) the aggregate outstanding principal balance of delinquent 2012 Loans or 2014 Loans, respectively, and restructured 2012 Loans or 2014 Loans, respectively, that would have been delinquent 2012 Loans or 2014 Loans, respectively, had such loans not become restructured loans exceeds 10% of the current aggregate outstanding principal balance of the 2012 Loans or 2014 Loans, respectively, for a period of three consecutive months; (ii) the aggregate outstanding principal balance of defaulted 2012 Loans or 2014 Loans, respectively, exceeds 5% of the initial outstanding principal balance of the 2012 Loans or outstanding principal balance of the 2014 Loans, respectively, determined as of December 19, 2012 for the 2012 Notes and November 13, 2014 for the 2014 Notes, for a period of three consecutive months; (iii) the aggregate outstanding principal balance of the 2017 Asset-Backed Notes or 2021 Asset-Backed Notes, respectively, exceeds the borrowing base for a period of three consecutive months; (iv) the 2012 Securitization Issuer’s pool of 2012 Loans or the 2014 Securitization Issuer’s pool of 2014 Loans contains 2012 Loans or 2014 Loans, respectively, to ten or fewer obligors; and (v) the occurrence of an event of default under the documents governing the respective Debt Securitization. After a Rapid Amortization Event has occurred, subject to the priority of payments under the documents governing each Debt Securitization, principal collections on the 2012 Loans or 2014 Loans, respectively, will be used to make accelerated payments of principal on the 2017 Asset-Backed Notes or the 2021 Asset-Backed Notes, respectively, until the principal balance of the 2017 Asset-Backed Notes or the 2021 Asset-Back Notes, respectively, is reduced to zero. Such an event could delay, reduce or eliminate the ability of either or both Securitization Issuers to make distributions in respect of the equity interests that we indirectly hold, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We have certain repurchase obligations with respect to the Loans transferred in connection with the Debt Securitizations. As part of the Debt Securitizations, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be required to repurchase any Loan (or participation interest therein) which was sold to the Securitization Issuers in breach of certain customary representations and warranty made by us or by the Trust Depositors with respect to such Loan or the legal structure of the Debt Securitizations. To the extent that there is a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, a Trustee may, on behalf of the respective Securitization Issuer, bring an action against us to enforce these repurchase obligations. Because most of our investments typically are not in publicly-traded securities, there is uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value. At December 31, 2014, portfolio investments, which are valued at fair value by the Board of Directors, were approximately 78.6% of our total assets. We expect our investments to continue to consist primarily of securities issued by privately-held companies, the fair value of which is not readily determinable. In addition, we are not permitted to maintain a general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. faith by our Board of Directors, based on the recommendations of our Audit Committee. In making a good faith determination of the value of these securities, we generally start with the cost basis of each security, which includes the amortized OID and PIK interest, if any. The Audit Committee uses its best judgment in arriving at the fair value of these securities. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while applying a valuation process for the types of investments we make, which includes but is not limited to deriving a hypothetical exit price. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Our investments in a portfolio company, whether debt, equity, or a combination thereof, may lead to our receiving material non- public information (“MNPI”) or obtaining ‘control’ of the target company. Our ability to exit an investment where we have MNPI or control could be limited and could result in a realized loss on the investment. If we receive MNPI, or a controlling interest in a portfolio company, our ability to divest ourselves from a debt or equity investment could be restricted. Causes of such restriction could include market factors, such as liquidity in a private stock, or limited trading volume in a public company’s securities, or regulatory factors, such as the receipt of MNPI or insider blackout periods, where we are under legal obligation not to sell. Additionally, we may choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on the investment. Regulations governing our operations as a business development company may affect our ability to, and the manner in which, we raise additional capital, which may expose us to risks. Our business will require a substantial amount of capital. We may acquire additional capital from the issuance of senior securities, including borrowings, securitization transactions or other indebtedness, or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities, other evidences of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the 1940 Act, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. Our ability to pay dividends or issue additional senior securities would be restricted if our asset coverage ratio were not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such transaction may be disadvantageous. As a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights and might have rights, preferences, or privileges more favorable than those of our common stockholders and the issuance of preferred stock could have the effect of delaying, deferring, or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest. To the extent that we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of common stock to finance operations. Other than in certain limited situations such as rights offerings, as a business development company, we are generally not able to issue our common stock at a price below net asset value without first obtaining required approvals from our stockholders and our independent directors. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all. 30 31 16323_HER-10K_CS6-r4.indd 31 4/28/15 2:53 PM When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings. If we are unable to satisfy Code requirements for qualification as a RIC, then we will be subject to corporate-level income tax, which would adversely affect our results of operations and financial condition. We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make We elected to be treated as a RIC for federal income tax purposes with the filing of our federal corporate income tax return for business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings. If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy. As a business development company, we may not acquire any assets other than “qualifying assets” as defined under the 1940 Act, unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Item 1. Business –Regulation.” We believe that most of the senior loans we make will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss. A failure on our part to maintain our qualification as a business development company would significantly reduce our operating flexibility. If we fail to continuously qualify as a business development company, we might be subject to regulation as a registered closed- end investment company under the 1940 Act, which would significantly decrease our operating flexibility, and lead to situations where we might have to restrict our borrowings, reduce our leverage, sell securities and pursue other activities that we are allowed to engage in as a business development company. In addition, failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional information on the qualification requirements of a business development company, see “Item 1. Business – Regulation.” To the extent OID and PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income. Our investments may include OID instruments and contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following: The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans. Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation. OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions. For accounting purposes, any cash distributions to shareholders representing OID and PIK income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital. 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of income, asset diversification and distribution requirements contained in Subchapter M of the Code, or if we fail to maintain our election to be regulated as a business development company under the 1940 Act. If we fail to qualify for the federal income tax benefits allowable to RICs for any reason and become subject to a corporate-level income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to our stockholders and the actual amount of our distributions. Such a failure would have a material adverse effect on us, the net asset value of our common stock and the total return, if any, obtainable from your investment in our common stock. Any net operating losses that we incur in periods during which we qualify as a RIC will not offset net capital gains (i.e., net realized long-term capital gains in excess of net realized short-term capital losses), and we cannot pass such net operating losses through to our stockholders. We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income. In accordance with U.S. federal tax requirements, we include in income for tax purposes certain amounts that we have not yet received in cash, such as contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual PIK interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such PIK interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax purposes certain other amounts prior to receiving the related cash. Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that we receive. This will generally result in “original issue discount” for tax purposes, which we must recognize as ordinary income, increasing the amount that we are required to distribute to qualify for the federal income tax benefits applicable to RICs. Because these warrants generally will not produce distributable cash for us at the same time as we are required to make distributions in respect of the related OID, if ever, we would need to obtain cash from other sources or to pay a portion of our distributions using shares of newly issued common stock, consistent with IRS requirements, to satisfy such distribution requirements. Other features of the debt instruments that we hold may also cause such instruments to generate original issue discount, resulting in a dividend distribution requirement in excess of current cash interest received. Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the RIC tax requirement to distribute generally an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Under such circumstances, we may have to sell some of our assets, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify for the federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level income tax on all our income. There is a risk that you may not receive distributions or that our distributions may not grow over time. We intend to make distributions on a quarterly basis to our stockholders. We cannot assure you that we will achieve investment results, or our business may not perform in a manner that will allow us to make a specified level of distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, our Credit Facilities limit our ability to declare dividends if we default under certain provisions. 16323_HER-10K_CS6-r4.indd 32 4/28/15 2:53 PM 32 33 When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings. If we are unable to satisfy Code requirements for qualification as a RIC, then we will be subject to corporate-level income tax, which would adversely affect our results of operations and financial condition. We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make We elected to be treated as a RIC for federal income tax purposes with the filing of our federal corporate income tax return for business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings. If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy. As a business development company, we may not acquire any assets other than “qualifying assets” as defined under the 1940 Act, unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Item 1. Business –Regulation.” We believe that most of the senior loans we make will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss. A failure on our part to maintain our qualification as a business development company would significantly reduce our operating flexibility. If we fail to continuously qualify as a business development company, we might be subject to regulation as a registered closed- end investment company under the 1940 Act, which would significantly decrease our operating flexibility, and lead to situations where we might have to restrict our borrowings, reduce our leverage, sell securities and pursue other activities that we are allowed to engage in as a business development company. In addition, failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional information on the qualification requirements of a business development company, see “Item 1. Business – Regulation.” To the extent OID and PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income. Our investments may include OID instruments and contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following: The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans. Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation. OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions. For accounting purposes, any cash distributions to shareholders representing OID and PIK income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital. 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of income, asset diversification and distribution requirements contained in Subchapter M of the Code, or if we fail to maintain our election to be regulated as a business development company under the 1940 Act. If we fail to qualify for the federal income tax benefits allowable to RICs for any reason and become subject to a corporate-level income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to our stockholders and the actual amount of our distributions. Such a failure would have a material adverse effect on us, the net asset value of our common stock and the total return, if any, obtainable from your investment in our common stock. Any net operating losses that we incur in periods during which we qualify as a RIC will not offset net capital gains (i.e., net realized long-term capital gains in excess of net realized short-term capital losses), and we cannot pass such net operating losses through to our stockholders. We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income. In accordance with U.S. federal tax requirements, we include in income for tax purposes certain amounts that we have not yet received in cash, such as contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual PIK interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such PIK interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax purposes certain other amounts prior to receiving the related cash. Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that we receive. This will generally result in “original issue discount” for tax purposes, which we must recognize as ordinary income, increasing the amount that we are required to distribute to qualify for the federal income tax benefits applicable to RICs. Because these warrants generally will not produce distributable cash for us at the same time as we are required to make distributions in respect of the related OID, if ever, we would need to obtain cash from other sources or to pay a portion of our distributions using shares of newly issued common stock, consistent with IRS requirements, to satisfy such distribution requirements. Other features of the debt instruments that we hold may also cause such instruments to generate original issue discount, resulting in a dividend distribution requirement in excess of current cash interest received. Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the RIC tax requirement to distribute generally an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Under such circumstances, we may have to sell some of our assets, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify for the federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level income tax on all our income. There is a risk that you may not receive distributions or that our distributions may not grow over time. We intend to make distributions on a quarterly basis to our stockholders. We cannot assure you that we will achieve investment results, or our business may not perform in a manner that will allow us to make a specified level of distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, our Credit Facilities limit our ability to declare dividends if we default under certain provisions. 32 33 16323_HER-10K_CS6-r4.indd 33 4/28/15 2:53 PM We have and may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive. Under applicable Treasury regulations and certain private rulings issued by the IRS, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are partially payable in our common stock. We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability or the value of our portfolio General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest-earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will generally accrue interest at fixed rates. A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans incur. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may and investments. We expect that most of our current initial investments in debt securities will be at floating rate with a floor. However, in the event that we make investments in debt securities at variable rates, a significant increase in market interest rates could also result in an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations. We may expose ourselves to risks if we engage in hedging transactions. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments 16323_HER-10K_CS6-r4.indd 34 4/28/15 2:53 PM 34 35 Our realized gains are reduced by amounts paid pursuant to the warrant participation agreement. Citigroup Global Markets Realty Corp. (“Citigroup”), a former credit facility provider to Hercules, has an equity participation right through a warrant participation agreement (the “Warrant Participation Agreement”) on the pool of loans and certain warrants formerly collateralized under its then existing credit facility (the “Citibank Credit Facility”). Pursuant to the Warrant Participation Agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. As a result, Citigroup is entitled to 10% of the realized gains on certain warrants until the realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The obligations under the Warrant Participation Agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2014, we reduced our realized gain by approximately $465,000 for Citigroup’s participation in the realized gain on sale of equity securities that were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded a decrease on participation liability and an increase on unrealized appreciation by a net amount of approximately $270,000 as a result of depreciation of fair value on the pool of warrants as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments was approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid approximately $2.1 million under the Warrant Participation Agreement thereby reducing our realized gains by this amount. We will continue to pay Citigroup under the Warrant Participation Agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup Warrant Participation Agreement are set to expire between February 2016 and January 2017. Legislation may allow us to incur additional leverage. As a business development company, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). If recent legislation in the U.S. House of Representatives is passed, or similar legislation is introduced, it would modify this section of the 1940 Act and increase the amount of debt that business development companies may increase. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. Two of our wholly-owned subsidiaries are licensed by the U.S. Small Business Administration, and as a result, we will be subject to SBA regulations. Our wholly-owned subsidiaries HT II and HT III are licensed to act as SBICs and are regulated by the SBA. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and they accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. The SBA regulations require, among other things, that a licensed SBIC be examined periodically and audited by an independent auditor to determine the SBIC’s compliance with the relevant SBA regulations. Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $19.5 million and an average annual net income after Federal income taxes not exceeding $6.0 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an average annual net income after Federal income taxes not exceeding $2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause HT II and HT III to forego attractive investment opportunities that are not permitted under SBA regulations. We have and may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess Our realized gains are reduced by amounts paid pursuant to the warrant participation agreement. of the cash you receive. Under applicable Treasury regulations and certain private rulings issued by the IRS, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are partially payable in our common stock. We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability or the value of our portfolio General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest-earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will generally accrue interest at fixed rates. A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans and investments. We expect that most of our current initial investments in debt securities will be at floating rate with a floor. However, in the event that we make investments in debt securities at variable rates, a significant increase in market interest rates could also result in an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations. We may expose ourselves to risks if we engage in hedging transactions. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments Citigroup Global Markets Realty Corp. (“Citigroup”), a former credit facility provider to Hercules, has an equity participation right through a warrant participation agreement (the “Warrant Participation Agreement”) on the pool of loans and certain warrants formerly collateralized under its then existing credit facility (the “Citibank Credit Facility”). Pursuant to the Warrant Participation Agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. As a result, Citigroup is entitled to 10% of the realized gains on certain warrants until the realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The obligations under the Warrant Participation Agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2014, we reduced our realized gain by approximately $465,000 for Citigroup’s participation in the realized gain on sale of equity securities that were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded a decrease on participation liability and an increase on unrealized appreciation by a net amount of approximately $270,000 as a result of depreciation of fair value on the pool of warrants as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments was approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid approximately $2.1 million under the Warrant Participation Agreement thereby reducing our realized gains by this amount. We will continue to pay Citigroup under the Warrant Participation Agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup Warrant Participation Agreement are set to expire between February 2016 and January 2017. Legislation may allow us to incur additional leverage. As a business development company, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). If recent legislation in the U.S. House of Representatives is passed, or similar legislation is introduced, it would modify this section of the 1940 Act and increase the amount of debt that business development companies may incur. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may increase. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. Two of our wholly-owned subsidiaries are licensed by the U.S. Small Business Administration, and as a result, we will be subject to SBA regulations. Our wholly-owned subsidiaries HT II and HT III are licensed to act as SBICs and are regulated by the SBA. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and they accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. The SBA regulations require, among other things, that a licensed SBIC be examined periodically and audited by an independent auditor to determine the SBIC’s compliance with the relevant SBA regulations. Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $19.5 million and an average annual net income after Federal income taxes not exceeding $6.0 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an average annual net income after Federal income taxes not exceeding $2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause HT II and HT III to forego attractive investment opportunities that are not permitted under SBA regulations. 34 35 16323_HER-10K_CS6-r4.indd 35 4/28/15 2:53 PM Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of capital stock of a licensed SBIC. If either HT II or HT III fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/ or limit HT II or HT III from making new investments. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. See “Item 1. Business — Regulation—Small Business Administration Regulations.” SBA regulations limit the outstanding dollar amount of SBA guaranteed debentures that may be issued by an SBIC or group of SBICs under common control. common stock. The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to $150.0 million or to a group of SBICs under common control to $225.0 million. Bills have been proposed in the U.S. Senate that would increase the total SBIC leverage capacity for affiliated SBIC funds from $225.0 million to $350.0 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. An SBIC may not borrow an amount in excess of two times (and in certain cases, up to three times) its regulatory capital. As of December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC Subsidiaries, which is the maximum allowed for a group of SBICs under common control. During times that we reach the maximum dollar amount of SBA-guaranteed debentures permitted, and if we require additional capital, our cost of capital is likely to increase, and there is no assurance that we will be able to obtain additional financing on acceptable terms. Moreover, the current status of our SBIC subsidiaries as SBICs does not automatically assure that our SBIC subsidiaries will continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding available to SBICs is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by our SBIC subsidiaries. The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. Our SBIC subsidiaries will need to generate sufficient cash flow to make required interest payments on the debentures. If our SBIC subsidiaries are unable to meet their financial obligations under the debentures, the SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under such debentures as the result of a default by us. Our wholly-owned SBIC subsidiaries may be unable to make distributions to us that will enable us to maintain RIC status, which could result in the imposition of an entity-level tax. In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors and lenders to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse. Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of our common stock. Nevertheless, any such changes could materially and adversely affect our business and impair our ability to make distributions to our stockholders. Changes in laws or regulations governing our business could negatively affect the profitability of our operations. Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern business development companies, SBICs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations, in addition to applicable foreign and international laws and regulations, and are subject to judicial and administrative decisions that affect our operations, including our loan originations maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures, and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, then we may have to incur significant expenses in order to comply or we may have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, then we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business results of operations or financial condition. Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results. We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the New York Stock Exchange, or NYSE, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act, and the SEC has adopted, and will continue to adopt, additional rules and regulations that may impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. In addition, our failure to keep pace with such rules, or for our management to appropriately address compliance with such rules fully and in a timely manner, exposes us to an increasing risk of inadvertent non-compliance. While the Company’s management team takes reasonable efforts to ensure that the Company is in full compliance with all laws applicable to its operations, the increasing rate and extent of regulatory change increases the risk of a failure to comply, which may result in our ability to operate our business in the ordinary course or may subject us to potential fines, regulatory findings or other matters that may materially impact our business. 16323_HER-10K_CS6-r4.indd 36 4/28/15 2:53 PM 36 37 Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of capital stock of a licensed SBIC. If either HT II or HT III fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/ or limit HT II or HT III from making new investments. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. See “Item 1. Business — Regulation—Small Business Administration Regulations.” SBA regulations limit the outstanding dollar amount of SBA guaranteed debentures that may be issued by an SBIC or group of SBICs under common control. The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to $150.0 million or to a group of SBICs under common control to $225.0 million. Bills have been proposed in the U.S. Senate that would increase the total SBIC leverage capacity for affiliated SBIC funds from $225.0 million to $350.0 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. An SBIC may not borrow an amount in excess of two times (and in certain cases, up to three times) its regulatory capital. As of December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC Subsidiaries, which is the maximum allowed for a group of SBICs under common control. During times that we reach the maximum dollar amount of SBA-guaranteed debentures permitted, and if we require additional capital, our cost of capital is likely to increase, and there is no assurance that we will be able to obtain additional financing on acceptable terms. continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding available to SBICs is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by our SBIC subsidiaries. The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. Our SBIC subsidiaries will need to generate sufficient cash flow to make required interest payments on the debentures. If our SBIC subsidiaries are unable to meet their financial obligations under the debentures, the SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under such debentures as the result of a default by us. Our wholly-owned SBIC subsidiaries may be unable to make distributions to us that will enable us to maintain RIC status, which could result in the imposition of an entity-level tax. In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors and lenders to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse. Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of our common stock. Nevertheless, any such changes could materially and adversely affect our business and impair our ability to make distributions to our stockholders. Moreover, the current status of our SBIC subsidiaries as SBICs does not automatically assure that our SBIC subsidiaries will Changes in laws or regulations governing our business could negatively affect the profitability of our operations. Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern business development companies, SBICs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations, in addition to applicable foreign and international laws and regulations, and are subject to judicial and administrative decisions that affect our operations, including our loan originations maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures, and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, then we may have to incur significant expenses in order to comply or we may have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, then we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business results of operations or financial condition. Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results. We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the New York Stock Exchange, or NYSE, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act, and the SEC has adopted, and will continue to adopt, additional rules and regulations that may impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. In addition, our failure to keep pace with such rules, or for our management to appropriately address compliance with such rules fully and in a timely manner, exposes us to an increasing risk of inadvertent non-compliance. While the Company’s management team takes reasonable efforts to ensure that the Company is in full compliance with all laws applicable to its operations, the increasing rate and extent of regulatory change increases the risk of a failure to comply, which may result in our ability to operate our business in the ordinary course or may subject us to potential fines, regulatory findings or other matters that may materially impact our business. 36 37 16323_HER-10K_CS6-r4.indd 37 4/28/15 2:53 PM Results may fluctuate and may not be indicative of future performance. Risks Related to Current Economic and Market Conditions Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our debt investments, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions. We face cyber-security risks. Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition. The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively. The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss. We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends. Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be: sudden electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and cyber-attacks. These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders. floating-rate debt securities. Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, 16323_HER-10K_CS6-r4.indd 38 4/28/15 2:53 PM 38 39 Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations. The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions. While the capital markets have improved, these conditions could deteriorate again in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result of regulatory constraints. Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including the disruption and volatility, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition and results of operations. Various social and political tensions in the United States and around the world, including in the Middle East, Eastern Europe and Russia, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Several European Union (“EU”) countries, including Greece, Ireland, Italy, Spain, and Portugal, continue to face budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is also continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. The recent United States and global economic downturn, or a return to the recessionary period in the United States, could adversely impact our investments. We cannot predict the duration of the effects related to these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so. Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments either through equity offerings or through additional borrowings. As of December 31, 2014, we had unfunded debt commitments of approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. 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 or future earning assets. Closed commitments generally fund 70-80% of the committed amount in aggregate over the life of the commitment. We intend to use cash flow from normal and early principal repayments, SBA debentures, our Credit Facilities and proceeds from the Convertible Senior Notes, 2019 Notes, 2024 Notes, and the Asset-Backed Notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening of current economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing. Results may fluctuate and may not be indicative of future performance. Risks Related to Current Economic and Market Conditions Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our debt investments, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions. We face cyber-security risks. Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition. The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively. The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss. We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends. Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be: sudden electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; cyber-attacks. events arising from local or larger scale political or social matters, including terrorist acts; and These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders. Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations. The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions. While the capital markets have improved, these conditions could deteriorate again in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result of regulatory constraints. Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including the disruption and volatility, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition and results of operations. Various social and political tensions in the United States and around the world, including in the Middle East, Eastern Europe and Russia, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Several European Union (“EU”) countries, including Greece, Ireland, Italy, Spain, and Portugal, continue to face budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is also continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. The recent United States and global economic downturn, or a return to the recessionary period in the United States, could adversely impact our investments. We cannot predict the duration of the effects related to these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so. Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments either through equity offerings or through additional borrowings. As of December 31, 2014, we had unfunded debt commitments of approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. 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 or future earning assets. Closed commitments generally fund 70-80% of the committed amount in aggregate over the life of the commitment. We intend to use cash flow from normal and early principal repayments, SBA debentures, our Credit Facilities and proceeds from the Convertible Senior Notes, 2019 Notes, 2024 Notes, and the Asset-Backed Notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening of current economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all. Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing. 38 39 16323_HER-10K_CS6-r4.indd 39 4/28/15 2:53 PM Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR- indexed, floating-rate debt securities. Risks Related to Our Investments Our investments are concentrated in certain industries and in a number of technology-related companies, which subjects us to the risk of significant loss if any of these companies default on their obligations under any of their debt securities that we hold, or if any of the technology-related industry sectors experience a downturn. companies. Our investments may be in portfolio companies that have limited operating histories and resources. We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. These companies may be particularly vulnerable to U.S. and foreign economic downturns may have more limited access to capital and higher funding costs, may have a weaker financial position and may need more capital to expand or compete. These businesses also may experience substantial variations in operating results. They may face intense competition, including from larger, more established companies with greater financial, technical and marketing resources. Furthermore, some of these companies do business in regulated industries and could be affected by changes in government regulation applicable to their given industry. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us, and may adversely affect the return on, or the recovery of, our investment in these companies. We cannot assure you that any of our investments in our portfolio companies will be successful. We may lose our entire investment in any or all of our portfolio We have invested and intend to continue investing in a limited number of technology-related companies. A consequence of this Investing in publicly traded companies can involve a high degree of risk and can be speculative. limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification requirements to which we will be subject as a RIC, we do not have fixed guidelines for diversification or limitations on the size of our investments in any one portfolio company and our investments could be concentrated in relatively few issuers. In addition, we have invested in and intend to continue investing, under normal circumstances, at least 80% of the value of our total assets (including the amount of any borrowings for investment purposes) in technology-related companies. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical device and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. As a result, a downturn in technology-related industry sectors and particularly those in which we are heavily concentrated could materially adversely affect our financial condition. Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at December 31, 2014 that represent greater than 5% of our net assets: (in thousands) Merrimack Pharmaceuticals, Inc. .......................... IronPlanet, Inc. ...................................................... Alimera Sciences, Inc. .......................................... December 31, 2014 Fair Value Percentage of Net Assets 40,677 37,412 34,085 6.2 % 5.7 % 5.2 % Merrimack Pharmaceuticals, Inc. is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines paired with companion diagnostics for the treatment of serious diseases, with an initial focus on cancer. IronPlanet, Inc. is a consumer and business products company that operates an online marketplace for used heavy equipment. Alimera Sciences, Inc. is a biopharmaceutical company that specializes in the research, development and commercialization of prescription ophthalmic pharmaceuticals. Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected. We have invested, and expect to continue to invest, a portion of our portfolio in publicly traded companies or companies that are in the process of completing their initial public offering, or IPO. As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, which may restrict our ability to sell our positions and may have a material adverse impact on us. Our ability to invest in public companies may be limited in certain circumstances. To maintain our status as a BDC, we are not permitted to acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a market capitalization that is less than $250 million at the time of such investment and meets the other specified requirements. Our investment strategy focuses on technology-related companies, which are subject to many risks, including volatility, intense competition, shortened product life cycles, changes in regulatory and governmental programs and periodic downturns, and you could lose all or part of your investment. We have invested and will continue investing primarily in technology-related companies, many of which may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, technology-related industries are generally characterized by abrupt business cycles and intense competition. Overcapacity in technology-related industries, together with cyclical economic downturns, may result in substantial decreases in the market capitalization of many technology-related companies. Such decreases in market capitalization may occur again, and any future decreases in technology-related company valuations may be substantial and may not be temporary in nature. Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors. Because of rapid technological change, the average selling prices of products and some services provided by technology-related companies have historically decreased over their productive lives. As a result, the average selling prices of products and services offered by technology-related companies may decrease over time, which could adversely affect their operating results, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial condition and results of operations. A natural disaster may also impact the operations of our portfolio companies, including our technology-related portfolio companies. The nature and level of natural disasters cannot be predicted and may be exacerbated by global climate change. A portion of our technology-related portfolio companies rely on items assembled or produced in areas susceptible to natural disasters, and may sell finished goods into markets susceptible to natural disasters. A major disaster, such as an earthquake, tsunami, flood or other catastrophic event could result in disruption to the business and operations of our technology-related portfolio companies. We will invest in technology-related companies that are reliant on U.S. and foreign regulatory and governmental programs. Any material changes or discontinuation, due to change in administration or U.S. Congress or otherwise could have a material adverse effect on the operations of a portfolio company in these industries and, in turn, impair our ability to timely collect principal and interest payments owed to us to the extent applicable. 16323_HER-10K_CS6-r4.indd 40 4/28/15 3:40 PM 40 41 manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR- indexed, floating-rate debt securities. Risks Related to Our Investments Our investments are concentrated in certain industries and in a number of technology-related companies, which subjects us to the risk of significant loss if any of these companies default on their obligations under any of their debt securities that we hold, or if any of the technology-related industry sectors experience a downturn. limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification requirements to which we will be subject as a RIC, we do not have fixed guidelines for diversification or limitations on the size of our investments in any one portfolio company and our investments could be concentrated in relatively few issuers. In addition, we have invested in and intend to continue investing, under normal circumstances, at least 80% of the value of our total assets (including the amount of any borrowings for investment purposes) in technology-related companies. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical device and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. As a result, a downturn in technology-related industry sectors and particularly those in which we are heavily concentrated could materially adversely affect our financial condition. Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at December 31, 2014 that represent greater than 5% of our net assets: (in thousands) Merrimack Pharmaceuticals, Inc. .......................... IronPlanet, Inc. ...................................................... Alimera Sciences, Inc. .......................................... December 31, 2014 Fair Value Percentage of Net Assets 40,677 37,412 34,085 6.2 % 5.7 % 5.2 % Merrimack Pharmaceuticals, Inc. is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines paired with companion diagnostics for the treatment of serious diseases, with an initial focus on cancer. IronPlanet, Inc. is a consumer and business products company that operates an online marketplace for used heavy equipment. Alimera Sciences, Inc. is a biopharmaceutical company that specializes in the research, development and commercialization of prescription ophthalmic pharmaceuticals. Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected. Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the Our investments may be in portfolio companies that have limited operating histories and resources. We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. These companies may be particularly vulnerable to U.S. and foreign economic downturns may have more limited access to capital and higher funding costs, may have a weaker financial position and may need more capital to expand or compete. These businesses also may experience substantial variations in operating results. They may face intense competition, including from larger, more established companies with greater financial, technical and marketing resources. Furthermore, some of these companies do business in regulated industries and could be affected by changes in government regulation applicable to their given industry. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us, and may adversely affect the return on, or the recovery of, our investment in these companies. We cannot assure you that any of our investments in our portfolio companies will be successful. We may lose our entire investment in any or all of our portfolio companies. We have invested and intend to continue investing in a limited number of technology-related companies. A consequence of this Investing in publicly traded companies can involve a high degree of risk and can be speculative. We have invested, and expect to continue to invest, a portion of our portfolio in publicly traded companies or companies that are in the process of completing their initial public offering, or IPO. As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, which may restrict our ability to sell our positions and may have a material adverse impact on us. Our ability to invest in public companies may be limited in certain circumstances. To maintain our status as a BDC, we are not permitted to acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a market capitalization that is less than $250 million at the time of such investment and meets the other specified requirements. Our investment strategy focuses on technology-related companies, which are subject to many risks, including volatility, intense competition, shortened product life cycles, changes in regulatory and governmental programs and periodic downturns, and you could lose all or part of your investment. We have invested and will continue investing primarily in technology-related companies, many of which may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, technology-related industries are generally characterized by abrupt business cycles and intense competition. Overcapacity in technology-related industries, together with cyclical economic downturns, may result in substantial decreases in the market capitalization of many technology-related companies. Such decreases in market capitalization may occur again, and any future decreases in technology-related company valuations may be substantial and may not be temporary in nature. Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors. Because of rapid technological change, the average selling prices of products and some services provided by technology-related companies have historically decreased over their productive lives. As a result, the average selling prices of products and services offered by technology-related companies may decrease over time, which could adversely affect their operating results, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial condition and results of operations. A natural disaster may also impact the operations of our portfolio companies, including our technology-related portfolio companies. The nature and level of natural disasters cannot be predicted and may be exacerbated by global climate change. A portion of our technology-related portfolio companies rely on items assembled or produced in areas susceptible to natural disasters, and may sell finished goods into markets susceptible to natural disasters. A major disaster, such as an earthquake, tsunami, flood or other catastrophic event could result in disruption to the business and operations of our technology-related portfolio companies. We will invest in technology-related companies that are reliant on U.S. and foreign regulatory and governmental programs. Any material changes or discontinuation, due to change in administration or U.S. Congress or otherwise could have a material adverse effect on the operations of a portfolio company in these industries and, in turn, impair our ability to timely collect principal and interest payments owed to us to the extent applicable. 40 41 16323_HER-10K_CS6-r4.indd 41 4/28/15 3:40 PM We have invested in and may continue investing in technology-related companies that do not have venture capital or private equity firms as equity investors, and these companies may entail a higher risk of loss than do companies with institutional equity investors, which could increase the risk of loss of your investment. Our portfolio companies will often require substantial additional equity financing to satisfy their continuing working capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment. Portfolio companies that do not have venture capital or private equity investors may be unable to raise any additional capital to satisfy their obligations or to raise sufficient additional capital to reach the next stage of development. Portfolio companies that do not have venture capital or private equity investors may be less financially sophisticated and may not have access to independent members to serve on their boards, which means that they may be less successful than portfolio companies sponsored by venture capital or private equity firms. Accordingly, financing these types of companies may entail a higher risk of loss than would financing companies that are sponsored by venture capital or private equity firms. Our investments in the energy technology industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns and potential litigation. Our investments in energy technology companies are subject to substantial operational risks, such as underestimated cost projections, unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative energy solutions compared to traditional energy products. In addition, energy technology companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to period, resulting in volatility in production levels and profitability. In addition, our energy technology companies may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses) and valuations of energy technology companies can and often do fluctuate suddenly and dramatically and the markets in which energy technology companies operate are generally characterized by abrupt business cycles and intense competition. Demand for energy technology and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases. A change in prices in these energy products could reduce demand for alternative energy. Our investments in energy technology companies also face potential litigation, including significant warranty and product liability claims, as well as class action and government claims arising from the increased attention to the industry from the failure of Solyndra. Such litigation could adversely affect the business and results of operations of our energy technology portfolio companies. There is also particular uncertainty about whether agreements providing incentives for reductions in greenhouse gas emissions, such as the Kyoto Protocol, will continue and whether countries around the world will enact or maintain legislation that provides incentives for reductions in greenhouse gas emissions, without which such investments in energy technology dependent portfolio companies may not be economical or financing for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the risk that favorable regulatory regimes expire or are adversely modified. This could, in turn, materially adversely affect the value of the energy technology companies in our portfolio. Energy technology companies are subject to extensive government regulation and certain other risks particular to the sectors in which they operate and our business and growth strategy could be adversely affected if government regulations, priorities and resources impacting such sectors change or if our portfolio companies fail to comply with such regulations. As part of our investment strategy, we plan to invest in portfolio companies in energy technology sectors that may be subject to extensive regulation by foreign, U.S. federal, state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns. Furthermore, if any of our portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Our portfolio companies may be subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, there is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or maintain legislation or regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for energy technology companies. Without such regulatory policies, investments in Energy Technology companies may not be economical and financing for energy technology companies may become unavailable, which could materially adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any of these factors could materially and adversely affect the operations and financial condition of a portfolio company and, in turn, the ability of the portfolio company to repay the debt they owe to us. Cyclicality within the energy sector may adversely affect some of our portfolio companies. Industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of commodities driven by a variety of factors. The highly cyclical nature of the industries within the energy sector may lead to volatile changes in commodity prices, which may adversely affect the earnings of energy companies in which we may invest and the performance and valuation of our portfolio. Volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition. Some of our portfolio companies’ businesses are heavily dependent upon the prices of, and demand for, oil and natural gas, which have recently declined significantly and such volatility could continue or increase in the future. A substantial or extended decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flow, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments. A prolonged or continued decline in oil prices could therefore have a material adverse effect on our business, financial condition and results of operations Our investments in the life science industry are subject to extensive government regulation, litigation risk and certain other risks particular to that industry. We have invested and plan to continue investing in companies in the life science industry that are subject to extensive regulation by the Food and Drug Administration, or the FDA, and to a lesser extent, other federal, state and other foreign agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, governmental budgetary constraints effecting the regulatory approval process, new laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us. Our investments in the drug discovery industry are subject to numerous risks, including competition, extensive government regulation, product liability and commercial difficulties. Our investments in the drug discovery industry are subject to numerous risks. The successful and timely implementation of the business model of our drug discovery portfolio companies depends on their ability to adapt to changing technologies and introduce new products. As competitors continue to introduce competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patient’s and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio companies. The success of new product offerings will depend on many factors, including the ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate products from those of competitors. Failure by our portfolio companies to introduce planned products or other new products or to introduce products on schedule could have a material adverse effect on our business, financial condition and results of operations. Further, the development of products by drug discovery companies requires significant research and development, clinical trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the US and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and foreign agencies may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents attained by others can preclude or delay the commercialization of a product. There can be no assurance that any products now in development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development process, including after significant funds have been invested. Products may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. 16323_HER-10K_CS6-r4.indd 42 4/28/15 2:53 PM 42 43 We have invested in and may continue investing in technology-related companies that do not have venture capital or private Cyclicality within the energy sector may adversely affect some of our portfolio companies. equity firms as equity investors, and these companies may entail a higher risk of loss than do companies with institutional equity investors, which could increase the risk of loss of your investment. Our portfolio companies will often require substantial additional equity financing to satisfy their continuing working capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment. Portfolio companies that do not have venture capital or private equity investors may be unable to raise any additional capital to satisfy their obligations or to raise sufficient additional capital to reach the next stage of development. Portfolio companies that do not have venture capital or private equity investors may be less financially sophisticated and may not have access to independent members to serve on their boards, which means that they may be less successful than portfolio companies sponsored by venture capital or private equity firms. Accordingly, financing these types of companies may entail a higher risk of loss than would financing companies that are sponsored by venture capital or private equity firms. Our investments in the energy technology industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns and potential litigation. Our investments in energy technology companies are subject to substantial operational risks, such as underestimated cost projections, unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative energy solutions compared to traditional energy products. In addition, energy technology companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to period, resulting in volatility in production levels and profitability. In addition, our energy technology companies may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses) and valuations of energy technology companies can and often do fluctuate suddenly and dramatically and the markets in which energy technology companies operate are generally characterized by abrupt business cycles and intense competition. Demand for energy technology and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases. A change in prices in these energy products could reduce demand for alternative energy. Our investments in energy technology companies also face potential litigation, including significant warranty and product liability claims, as well as class action and government claims arising from the increased attention to the industry from the failure of Solyndra. Such litigation could adversely affect the business and results of operations of our energy technology portfolio companies. There is also particular uncertainty about whether agreements providing incentives for reductions in greenhouse gas emissions, such as the Kyoto Protocol, will continue and whether countries around the world will enact or maintain legislation that provides incentives for reductions in greenhouse gas emissions, without which such investments in energy technology dependent portfolio companies may not be economical or financing for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the risk that favorable regulatory regimes expire or are adversely modified. This could, in turn, materially adversely affect the value of the energy technology companies in our portfolio. Energy technology companies are subject to extensive government regulation and certain other risks particular to the sectors in which they operate and our business and growth strategy could be adversely affected if government regulations, priorities and resources impacting such sectors change or if our portfolio companies fail to comply with such regulations. As part of our investment strategy, we plan to invest in portfolio companies in energy technology sectors that may be subject to extensive regulation by foreign, U.S. federal, state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns. Furthermore, if any of our portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Our portfolio companies may be subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, there is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or maintain legislation or regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for energy technology companies. Without such regulatory policies, investments in Energy Technology companies may not be economical and financing for energy technology companies may become unavailable, which could materially adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any of these factors could materially and adversely affect the operations and financial condition of a portfolio company and, in turn, the ability of the portfolio company to repay the debt they owe to us. Industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of commodities driven by a variety of factors. The highly cyclical nature of the industries within the energy sector may lead to volatile changes in commodity prices, which may adversely affect the earnings of energy companies in which we may invest and the performance and valuation of our portfolio. Volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition. Some of our portfolio companies’ businesses are heavily dependent upon the prices of, and demand for, oil and natural gas, which have recently declined significantly and such volatility could continue or increase in the future. A substantial or extended decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flow, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments. A prolonged or continued decline in oil prices could therefore have a material adverse effect on our business, financial condition and results of operations Our investments in the life science industry are subject to extensive government regulation, litigation risk and certain other risks particular to that industry. We have invested and plan to continue investing in companies in the life science industry that are subject to extensive regulation by the Food and Drug Administration, or the FDA, and to a lesser extent, other federal, state and other foreign agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, governmental budgetary constraints effecting the regulatory approval process, new laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us. Our investments in the drug discovery industry are subject to numerous risks, including competition, extensive government regulation, product liability and commercial difficulties. Our investments in the drug discovery industry are subject to numerous risks. The successful and timely implementation of the business model of our drug discovery portfolio companies depends on their ability to adapt to changing technologies and introduce new products. As competitors continue to introduce competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patient’s and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio companies. The success of new product offerings will depend on many factors, including the ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate products from those of competitors. Failure by our portfolio companies to introduce planned products or other new products or to introduce products on schedule could have a material adverse effect on our business, financial condition and results of operations. Further, the development of products by drug discovery companies requires significant research and development, clinical trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the US and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and foreign agencies may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents attained by others can preclude or delay the commercialization of a product. There can be no assurance that any products now in development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development process, including after significant funds have been invested. Products may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. 42 43 16323_HER-10K_CS6-r4.indd 43 4/28/15 2:53 PM Future legislation, and/or regulations and policies adopted by the FDA or other U.S. or foreign regulatory authorities may increase the time and cost required by some of our portfolio companies to conduct and complete clinical trials for the product candidates that they develop, and there is no assurance that these companies will obtain regulatory approval to market and commercialize their products in the U.S. and in foreign countries Economic recessions or slowdowns could impair the ability of our portfolio companies to repay loans, which, in turn, could increase our non-performing assets, decrease the value of our portfolio, reduce our volume of new loans and have a material adverse effect on our results of operations. Many of our portfolio companies may be susceptible to economic slowdowns or recessions in both the U.S. and foreign The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have countries, and may be unable to repay our loans during such periods. Therefore, during such periods, our non-performing assets are foreign regulatory authorities, which affect some of our portfolio companies. Any change in regulatory requirements due to the adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require some of our portfolio companies to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing and completion of the clinical trials. likely to increase and the value of our portfolio is likely to decrease. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results. In addition, increased scrutiny by the U.S. Congress of the FDA’s and other authorities approval processes may significantly In particular, intellectual property owned or controlled by our portfolio companies may constitute an important portion of the delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements. Foreign regulatory authorities may also increase their scrutiny of approval processes resulting in similar delays. Increased scrutiny and approvals processes may limit the ability of our portfolio companies to market and commercialize their products in the U.S. and in foreign countries. value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be impaired Life science companies, including drug development companies, device manufacturers, service providers and others, are also A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults subject to material pressures when there are changes in the outlook for healthcare insurance markets. The ability for individuals, along with private and public insurers, to account for the costs of paying for healthcare insurance can place strain on the ability of new technology, devices and services to enter those markets, particularly when they are new or untested. As a result, it is not uncommon for changes in the insurance market place to lead to a slower rate of adoption, price pressure and other forces that may materially limit the success of companies bringing such technologies to market. Changes in the health insurance sector might then have an impact on the value of companies in our portfolio or our ability to invest in the sector generally. Changes in healthcare laws and other regulations, or the enforcement or interpretation of such laws or regulations, applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services. Changes in healthcare or other laws and regulations, or the enforcement or interpretation of such laws or regulations, applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio companies. and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio The health and performance of our portfolio companies could be adversely affected by political and economic conditions in the countries in which they conduct business. Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S. Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, among other things, could harm their business, financial condition and results of operations. In addition, if the government of any country in which their products are developed, manufactured or sold sets technical or regulatory standards for products developed or manufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend imports of their products into that country, require manufacturers or developers in that country to manufacture or develop products with different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in each case, could harm their businesses. by such events. company. Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. Any unrealized losses we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution and could impair our ability to service our borrowings. As a business development company, we are required to carry our investments at market value or, if no market value is As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair market value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer substantial unrealized depreciation in future periods, which could have a material adverse impact on our business, financial condition and results of operations. ascertainable, at fair value as determined in good faith by our Board of Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our investment portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods and could materially adversely affect our ability to service our outstanding borrowings. A lack of initial public offering, or IPO, opportunities may cause companies to stay in our portfolio longer, leading to lower returns, unrealized depreciation, or realized losses. A lack of IPO opportunities for venture capital-backed companies could lead to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available funding for early-stage companies in particular as, in general, venture-capital firms are being forced to provide additional financing to late-stage companies that cannot complete an IPO. In the best case, such stagnation would dampen returns, and in the worst case, could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private fundings or are not able to access additional capital at all. A lack of IPO opportunities for venture capital-backed companies can also cause some venture capital firms to change their strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such companies to access capital and to fulfill their potential, which can result in unrealized depreciation and realized losses in such companies by other companies such as ourselves who are co-investors in such companies. 16323_HER-10K_CS6-r4.indd 44 4/28/15 2:53 PM 44 45 Future legislation, and/or regulations and policies adopted by the FDA or other U.S. or foreign regulatory authorities may increase the time and cost required by some of our portfolio companies to conduct and complete clinical trials for the product candidates that they develop, and there is no assurance that these companies will obtain regulatory approval to market and Economic recessions or slowdowns could impair the ability of our portfolio companies to repay loans, which, in turn, could increase our non-performing assets, decrease the value of our portfolio, reduce our volume of new loans and have a material adverse effect on our results of operations. commercialize their products in the U.S. and in foreign countries The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have foreign regulatory authorities, which affect some of our portfolio companies. Any change in regulatory requirements due to the adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require some of our portfolio companies to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing and completion of the clinical trials. Many of our portfolio companies may be susceptible to economic slowdowns or recessions in both the U.S. and foreign countries, and may be unable to repay our loans during such periods. Therefore, during such periods, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results. In addition, increased scrutiny by the U.S. Congress of the FDA’s and other authorities approval processes may significantly In particular, intellectual property owned or controlled by our portfolio companies may constitute an important portion of the delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements. Foreign regulatory authorities may also increase their scrutiny of approval processes resulting in similar delays. Increased scrutiny and approvals processes may limit the ability of our portfolio companies to market and commercialize their products in the U.S. and in foreign countries. value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be impaired by such events. Life science companies, including drug development companies, device manufacturers, service providers and others, are also A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults subject to material pressures when there are changes in the outlook for healthcare insurance markets. The ability for individuals, along with private and public insurers, to account for the costs of paying for healthcare insurance can place strain on the ability of new technology, devices and services to enter those markets, particularly when they are new or untested. As a result, it is not uncommon for changes in the insurance market place to lead to a slower rate of adoption, price pressure and other forces that may materially limit the success of companies bringing such technologies to market. Changes in the health insurance sector might then have an impact on the value of companies in our portfolio or our ability to invest in the sector generally. Changes in healthcare laws and other regulations, or the enforcement or interpretation of such laws or regulations, applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services. Changes in healthcare or other laws and regulations, or the enforcement or interpretation of such laws or regulations, applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio companies. and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. The health and performance of our portfolio companies could be adversely affected by political and economic conditions in the countries in which they conduct business. Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S. Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, among other things, could harm their business, financial condition and results of operations. In addition, if the government of any country in which their products are developed, manufactured or sold sets technical or regulatory standards for products developed or manufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend imports of their products into that country, require manufacturers or developers in that country to manufacture or develop products with different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in each case, could harm their businesses. Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. Any unrealized losses we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution and could impair our ability to service our borrowings. As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair market value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer substantial unrealized depreciation in future periods, which could have a material adverse impact on our business, financial condition and results of operations. As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our Board of Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our investment portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods and could materially adversely affect our ability to service our outstanding borrowings. A lack of initial public offering, or IPO, opportunities may cause companies to stay in our portfolio longer, leading to lower returns, unrealized depreciation, or realized losses. A lack of IPO opportunities for venture capital-backed companies could lead to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available funding for early-stage companies in particular as, in general, venture-capital firms are being forced to provide additional financing to late-stage companies that cannot complete an IPO. In the best case, such stagnation would dampen returns, and in the worst case, could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private fundings or are not able to access additional capital at all. A lack of IPO opportunities for venture capital-backed companies can also cause some venture capital firms to change their strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such companies to access capital and to fulfill their potential, which can result in unrealized depreciation and realized losses in such companies by other companies such as ourselves who are co-investors in such companies. 44 45 16323_HER-10K_CS6-r4.indd 45 4/28/15 2:53 PM The majority of our portfolio companies will need multiple rounds of additional financing to repay their debts to us and continue operations. Our portfolio companies may not be able to raise additional financing, which could harm our investment returns. The majority of our portfolio companies will often require substantial additional equity financing to satisfy their continuing working capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment. Each round of venture financing is typically intended to provide a company with only enough capital to reach the next stage of development. We cannot predict the circumstances or market conditions under which our portfolio companies will seek additional capital. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms unfavorable to us, either of which would negatively impact our investment returns. Some of these companies may be unable to obtain sufficient financing from private investors, public capital markets or traditional lenders. This may have a significant impact if the companies are unable to obtain certain federal, state or foreign agency approval for their products or the marketing thereof, of if regulatory review processes extend longer than anticipated, and the companies need continued funding for their operations during these times. Accordingly, financing these types of companies may entail a higher risk of loss than would financing companies that are able to utilize traditional credit sources. If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses. could suffer a loss which may adversely impact our financial performance. To attempt to mitigate credit risks, we will typically take a security interest in the available assets of our portfolio companies. There is no assurance that we will obtain or properly perfect our liens. There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of a portfolio company to raise additional capital. In some circumstances, our lien could be subordinated to claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or that we will be able to collect on the loan should we be forced to enforce our remedies. In addition, because we invest in technology-related companies, a substantial portion of the assets securing our investment may be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and accounts receivable. Intellectual property, if any, that is securing our loan could lose value if, among other things, the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires, the technology fails to achieve its intended results or a new technology makes the intellectual property functionally obsolete. Inventory may not be adequate to secure our loan if our valuation of the inventory at the time that we made the loan was not accurate or if there is a reduction in the demand for the inventory. Similarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technology or advances in new equipment that render the particular equipment obsolete or of limited value, or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability to recover earned interest and principal in a foreclosure. At December 31, 2014, approximately 54.2% of the Company’s portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of the debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014 the Company had no equipment only liens on any of the Company’s portfolio companies. We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient. In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to “equitable subordination.” This means that depending on the facts and circumstances, including the extent to which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re- characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses. If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we The inability of our portfolio companies to commercialize their technologies or create or develop commercially viable products or businesses would have a negative impact on our investment returns. The possibility that our portfolio companies will not be able to commercialize their technology, products or business concepts presents significant risks to the value of our investment. Additionally, although some of our portfolio companies may already have a commercially successful product or product line when we invest, technology-related products and services often have a more limited market- or life-span than have products in other industries. Thus, the ultimate success of these companies often depends on their ability to continually innovate, or raise additional capital, in increasingly competitive markets. Their inability to do so could affect our investment return. In addition, the intellectual property held by our portfolio companies often represents a substantial portion of the collateral, if any, securing our investments. We cannot assure you that any of our portfolio companies will successfully acquire or develop any new technologies, or that the intellectual property the companies currently hold will remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful. An investment strategy focused on privately-held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns. We invest primarily in privately-held companies. Generally, very little public information exists about these companies, and we are required to rely on the ability of our management and investment teams to obtain adequate information to evaluate the potential returns from investing in these companies. Such small, privately held companies as we routinely invest in may also lack quality infrastructures, thus leading to poor disclosure standards or control environments. If we are unable to uncover all material information about these companies, then we may not make a fully informed investment decision, and we may not receive the expected return on our investment or lose some or all of the money invested in these companies. Also, privately-held companies frequently have less diverse product lines and a smaller market presence than do larger competitors. Privately-held companies are, thus, generally more vulnerable to economic downturns and may experience more substantial variations in operating results than do larger competitors. These factors could affect our investment returns and our results of operations and financial condition. In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development, and high turnover of personnel is common in technology-related companies. The loss of one or more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively impact our investment returns and our results of operations and financial condition. 16323_HER-10K_CS6-r4.indd 46 4/28/15 2:53 PM 46 47 The majority of our portfolio companies will need multiple rounds of additional financing to repay their debts to us and continue operations. Our portfolio companies may not be able to raise additional financing, which could harm our investment returns. The majority of our portfolio companies will often require substantial additional equity financing to satisfy their continuing working capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment. Each round of venture financing is typically intended to provide a company with only enough capital to reach the next stage of development. We cannot predict the circumstances or market conditions under which our portfolio companies will seek additional capital. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms unfavorable to us, either of which would negatively impact our investment returns. Some of these companies may be unable to obtain sufficient financing from private investors, public capital markets or traditional lenders. This may have a significant impact if the companies are unable to obtain certain federal, state or foreign agency approval for their products or the marketing thereof, of if regulatory review processes extend longer than anticipated, and the companies need continued funding for their operations during these times. Accordingly, financing these types of companies may entail a higher risk of loss than would financing companies that are able to utilize traditional credit sources. If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses. To attempt to mitigate credit risks, we will typically take a security interest in the available assets of our portfolio companies. There is no assurance that we will obtain or properly perfect our liens. There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of a portfolio company to raise additional capital. In some circumstances, our lien could be subordinated to claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or that we will be able to collect on the loan should we be forced to enforce our remedies. In addition, because we invest in technology-related companies, a substantial portion of the assets securing our investment may be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and accounts receivable. Intellectual property, if any, that is securing our loan could lose value if, among other things, the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires, the technology fails to achieve its intended results or a new technology makes the intellectual property functionally obsolete. Inventory may not be adequate to secure our loan if our valuation of the inventory at the time that we made the loan was not accurate or if there is a reduction in the demand for the inventory. Similarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technology or advances in new equipment that render the particular equipment obsolete or of limited value, or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability to recover earned interest and principal in a foreclosure. At December 31, 2014, approximately 54.2% of the Company’s portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of the debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014 the Company had no equipment only liens on any of the Company’s portfolio companies. We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient. In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to “equitable subordination.” This means that depending on the facts and circumstances, including the extent to which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re- characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses. If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance. The inability of our portfolio companies to commercialize their technologies or create or develop commercially viable products or businesses would have a negative impact on our investment returns. The possibility that our portfolio companies will not be able to commercialize their technology, products or business concepts presents significant risks to the value of our investment. Additionally, although some of our portfolio companies may already have a commercially successful product or product line when we invest, technology-related products and services often have a more limited market- or life-span than have products in other industries. Thus, the ultimate success of these companies often depends on their ability to continually innovate, or raise additional capital, in increasingly competitive markets. Their inability to do so could affect our investment return. In addition, the intellectual property held by our portfolio companies often represents a substantial portion of the collateral, if any, securing our investments. We cannot assure you that any of our portfolio companies will successfully acquire or develop any new technologies, or that the intellectual property the companies currently hold will remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful. An investment strategy focused on privately-held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns. We invest primarily in privately-held companies. Generally, very little public information exists about these companies, and we are required to rely on the ability of our management and investment teams to obtain adequate information to evaluate the potential returns from investing in these companies. Such small, privately held companies as we routinely invest in may also lack quality infrastructures, thus leading to poor disclosure standards or control environments. If we are unable to uncover all material information about these companies, then we may not make a fully informed investment decision, and we may not receive the expected return on our investment or lose some or all of the money invested in these companies. Also, privately-held companies frequently have less diverse product lines and a smaller market presence than do larger competitors. Privately-held companies are, thus, generally more vulnerable to economic downturns and may experience more substantial variations in operating results than do larger competitors. These factors could affect our investment returns and our results of operations and financial condition. In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development, and high turnover of personnel is common in technology-related companies. The loss of one or more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively impact our investment returns and our results of operations and financial condition. 46 47 16323_HER-10K_CS6-r4.indd 47 4/28/15 2:53 PM If our portfolio companies are unable to protect their intellectual property rights, or are required to devote significant resources to protecting their intellectual property rights, then our investments could be harmed. Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies. Our total Our future success and competitive position depend in part upon the ability of our portfolio companies to obtain and maintain investments at value in foreign companies were approximately $52.9 million or 5.2% of total investments at December 31, 2014. proprietary technology used in their products and services, which will often represent a significant portion of the collateral, if any, securing our investment. The portfolio companies will rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute litigation in order to enforce their patents, copyrights or other intellectual property rights, to protect their trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe upon or misappropriate a third party’s patent or other proprietary rights, that portfolio company could be required to pay damages to such third party, alter its own products or processes, obtain a license from the third party and/or cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own, as well as any collateral securing our investment. Our financial condition, results of operations and cash flows could be negatively affected if we are unable to recover our principal investment as a result of a negative pledge or lack of a security interest on the intellectual property of our venture growth stage companies. particular level or at all. In some cases, we collateralize our loans with a secured collateral position in a portfolio company's assets, which may include a negative pledge or, to a lesser extent, no security on their intellectual property. In the case of a negative pledge, the portfolio company cannot encumber or pledge their intellectual property without our permission. In the event of a default on a loan, the intellectual property of the portfolio company will most likely be liquidated to provide proceeds to pay the creditors of the company. There can be no assurance that our security interest, if any, in the proceeds of the intellectual property will be enforceable in a court of law or bankruptcy court or that there will not be others with senior or pari passu credit interests. Our relationship with certain portfolio companies may expose us to our portfolio companies' trade secrets and confidential information which may require us to be parties to non-disclosure agreements and restrict us from engaging in certain transactions. Our relationship with some of our portfolio companies may expose us to our portfolio companies' trade secrets and confidential that we will make, or will have sufficient funds to make, follow-on investments and this could adversely affect our success and result information (including transactional data and personal data about their employees and clients) which may require us to be parties to non-disclosure agreements and restrict us from engaging in certain transactions. Unauthorized access or disclosure of such information may occur, resulting in theft, loss or other misappropriation. Any theft, loss, improper use, such as insider trading or other misappropriation of confidential information could have a material adverse impact on our competitive positions, our relationship with our portfolio companies and our reputation and could subject us to regulatory inquiries, enforcement and fines, civil litigation and possible financial liability or costs. Portfolio company litigation could result in additional costs, the diversion of management time and resources and have an adverse impact on the fair value of our investment. To the extent that litigation arises with respect to any of our portfolio companies, we may be named as a defendant, which could result in additional costs and the diversion of management time and resources. Furthermore, if we are providing managerial assistance to the portfolio company or have representatives on the portfolio company’s board of directors, our costs and diversion of our management’s time and resources in assessing the portfolio company could be substantial in light of any such litigation regardless of whether we are named as a defendant. In addition, litigation involving a portfolio company may be costly and affect the operations of the portfolio company’s business, which could in turn have an adverse impact on the fair value of our investment in such company. We may not be able to realize our entire investment on equipment-based loans, if any, in the case of default. We may from time-to-time provide loans that will be collateralized only by equipment of the portfolio company. If the portfolio company defaults on the loan we would take possession of the underlying equipment to satisfy the outstanding debt. The residual value of the equipment at the time we would take possession may not be sufficient to satisfy the outstanding debt and we could experience a loss on the disposition of the equipment. 16323_HER-10K_CS6-r4.indd 48 4/28/15 2:53 PM 48 49 Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility, among other things. If our investments do not meet our performance expectations, you may not receive distributions. We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, restrictions and provisions in any future credit facilities may limit our ability to make distributions. As a RIC, if we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including failure to obtain, or possible loss of, the federal income tax benefits allowable to RICs. We cannot assure you that you will receive distributions at a We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity or need to increase our investment in a successful situation, for example, the exercise of a warrant to purchase common stock, or a negative situation, to protect an existing investment. Any decision we make not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us to increase our participation in a successful operation and may dilute our equity interest or otherwise reduce the expected yield on our investment. Moreover, a follow-on investment may limit the number of companies in which we can make initial investments. In determining whether to make a follow-on investment, our management will exercise its business judgment and apply criteria similar to those used when making the initial investment. There is no assurance in the loss of a substantial portion or all of our investment in a portfolio company. The lack of liquidity in our investments may adversely affect our business and, if we need to sell any of our investments, we may not be able to do so at a favorable price. As a result, we may suffer losses. We generally invest in debt securities with terms of up to seven years and hold such investments until maturity, and we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We invest and expect to continue investing in companies whose securities have no established trading market and whose securities are and will be subject to legal and other restrictions on resale or whose securities are and will be less liquid than are publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our qualification as a business development company and as a RIC, we may have to dispose of investments if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. If our portfolio companies are unable to protect their intellectual property rights, or are required to devote significant resources Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. to protecting their intellectual property rights, then our investments could be harmed. Our future success and competitive position depend in part upon the ability of our portfolio companies to obtain and maintain proprietary technology used in their products and services, which will often represent a significant portion of the collateral, if any, securing our investment. The portfolio companies will rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute litigation in order to enforce their patents, copyrights or other intellectual property rights, to protect their trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe upon or misappropriate a third party’s patent or other proprietary rights, that portfolio company could be required to pay damages to such third party, alter its own products or processes, obtain a license from the third party and/or cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own, as well as any collateral securing our investment. Our financial condition, results of operations and cash flows could be negatively affected if we are unable to recover our principal investment as a result of a negative pledge or lack of a security interest on the intellectual property of our venture growth stage companies. In some cases, we collateralize our loans with a secured collateral position in a portfolio company's assets, which may include a negative pledge or, to a lesser extent, no security on their intellectual property. In the case of a negative pledge, the portfolio company cannot encumber or pledge their intellectual property without our permission. In the event of a default on a loan, the intellectual property of the portfolio company will most likely be liquidated to provide proceeds to pay the creditors of the company. There can be no assurance that our security interest, if any, in the proceeds of the intellectual property will be enforceable in a court of law or bankruptcy court or that there will not be others with senior or pari passu credit interests. Our relationship with certain portfolio companies may expose us to our portfolio companies' trade secrets and confidential information which may require us to be parties to non-disclosure agreements and restrict us from engaging in certain transactions. Our relationship with some of our portfolio companies may expose us to our portfolio companies' trade secrets and confidential information (including transactional data and personal data about their employees and clients) which may require us to be parties to non-disclosure agreements and restrict us from engaging in certain transactions. Unauthorized access or disclosure of such information may occur, resulting in theft, loss or other misappropriation. Any theft, loss, improper use, such as insider trading or other misappropriation of confidential information could have a material adverse impact on our competitive positions, our relationship with our portfolio companies and our reputation and could subject us to regulatory inquiries, enforcement and fines, civil litigation and possible financial liability or costs. Portfolio company litigation could result in additional costs, the diversion of management time and resources and have an adverse impact on the fair value of our investment. To the extent that litigation arises with respect to any of our portfolio companies, we may be named as a defendant, which could result in additional costs and the diversion of management time and resources. Furthermore, if we are providing managerial assistance to the portfolio company or have representatives on the portfolio company’s board of directors, our costs and diversion of our management’s time and resources in assessing the portfolio company could be substantial in light of any such litigation regardless of whether we are named as a defendant. In addition, litigation involving a portfolio company may be costly and affect the operations of the portfolio company’s business, which could in turn have an adverse impact on the fair value of our investment in such company. We may not be able to realize our entire investment on equipment-based loans, if any, in the case of default. We may from time-to-time provide loans that will be collateralized only by equipment of the portfolio company. If the portfolio company defaults on the loan we would take possession of the underlying equipment to satisfy the outstanding debt. The residual value of the equipment at the time we would take possession may not be sufficient to satisfy the outstanding debt and we could experience a loss on the disposition of the equipment. Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies. Our total investments at value in foreign companies were approximately $52.9 million or 5.2% of total investments at December 31, 2014. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility, among other things. If our investments do not meet our performance expectations, you may not receive distributions. We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, restrictions and provisions in any future credit facilities may limit our ability to make distributions. As a RIC, if we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including failure to obtain, or possible loss of, the federal income tax benefits allowable to RICs. We cannot assure you that you will receive distributions at a particular level or at all. We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity or need to increase our investment in a successful situation, for example, the exercise of a warrant to purchase common stock, or a negative situation, to protect an existing investment. Any decision we make not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us to increase our participation in a successful operation and may dilute our equity interest or otherwise reduce the expected yield on our investment. Moreover, a follow-on investment may limit the number of companies in which we can make initial investments. In determining whether to make a follow-on investment, our management will exercise its business judgment and apply criteria similar to those used when making the initial investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments and this could adversely affect our success and result in the loss of a substantial portion or all of our investment in a portfolio company. The lack of liquidity in our investments may adversely affect our business and, if we need to sell any of our investments, we may not be able to do so at a favorable price. As a result, we may suffer losses. We generally invest in debt securities with terms of up to seven years and hold such investments until maturity, and we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We invest and expect to continue investing in companies whose securities have no established trading market and whose securities are and will be subject to legal and other restrictions on resale or whose securities are and will be less liquid than are publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our qualification as a business development company and as a RIC, we may have to dispose of investments if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. 48 49 16323_HER-10K_CS6-r4.indd 49 4/28/15 2:53 PM Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies. We invest primarily in debt securities issued by our portfolio companies. In some cases, portfolio companies will be permitted to incur other debt, or issue other equity securities, that rank equally with, or senior to, our investment. Such instruments may provide that the holders thereof are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company might not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on a pari passu basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected. Our equity related investments are highly speculative, and we may not realize gains from these investments. If our equity investments do not generate gains, then the return on our invested capital will be lower than it would otherwise be, which could result in a decline in the value of shares of our common stock. When we invest in debt securities, we generally expect to acquire warrants or other equity securities as well. Our goal is ultimately to dispose of these equity interests and realize gains upon disposition of such interests. Over time, the gains that we realize on these equity interests may offset, to some extent, losses that we experience on defaults under debt securities that we hold. However, the equity interests that we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses that we experience. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity. During 2014, we received debt investment early repayments and pay down of working capital debt investments of approximately $494.1 million. We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock. We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies. We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. However, from time to time we may elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business. Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans or we could be subject to lender liability claims. Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with loans. These investments represent approximately 9.5% of the outstanding balance of our portfolio as of December 31, 2014. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and preferred securities had been satisfied. In addition to these risks, in the event we elect to convert our debt position to equity, or otherwise take control of a portfolio company (such as through placing a member of our management team on its board of directors), as part of a restructuring, we face additional risks acting in that capacity. It is not uncommon for unsecured, or otherwise unsatisfied creditors, to sue parties that elect to use their debt positions to later control a company following a restructuring or bankruptcy. Apart from lawsuits, key customers and suppliers might act in a fashion contrary to the interests of a portfolio company if they were left unsatisfied in a restructuring or bankruptcy. Any combination of these factors might lead to the loss in value of a company subject to such activity and may divert the time and attention of our management team and investment team to help to address such issues in a portfolio company. Risks Related to Our Securities Investing in shares of our common stock involves an above average degree of risk. The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance. Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital. If our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If our common stock trades below net asset value, the higher cost of equity capital may result in it being unattractive to raise new equity, which may limit our ability to grow. The risk of trading below net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. stock. takeover. Provisions of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common Our charter and bylaws contain provisions that may have the effect of discouraging, delaying, or making difficult a change in control of our company or the removal of our incumbent directors. Under our charter, our Board of Directors is divided into three classes serving staggered terms, which will make it more difficult for a hostile bidder to acquire control of us. In addition, our Board of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. Subject to compliance with the 1940 Act, our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. The existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third party bids for ownership of our company. These provisions may prevent any premiums being offered to you for shares of our common stock in connection with a 16323_HER-10K_CS6-r4.indd 50 4/28/15 2:53 PM 50 51 Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances companies. We invest primarily in debt securities issued by our portfolio companies. In some cases, portfolio companies will be permitted to incur other debt, or issue other equity securities, that rank equally with, or senior to, our investment. Such instruments may provide that the holders thereof are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company might not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on a pari passu basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected. Our equity related investments are highly speculative, and we may not realize gains from these investments. If our equity investments do not generate gains, then the return on our invested capital will be lower than it would otherwise be, which could result in a decline in the value of shares of our common stock. When we invest in debt securities, we generally expect to acquire warrants or other equity securities as well. Our goal is ultimately to dispose of these equity interests and realize gains upon disposition of such interests. Over time, the gains that we realize on these equity interests may offset, to some extent, losses that we experience on defaults under debt securities that we hold. However, the equity interests that we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses that we experience. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity. During 2014, we received debt investment early repayments and pay down of working capital debt investments of approximately $494.1 million. We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock. We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies. We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. However, from time to time we may elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment. where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business. Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans or we could be subject to lender liability claims. Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with loans. These investments represent approximately 9.5% of the outstanding balance of our portfolio as of December 31, 2014. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and preferred securities had been satisfied. In addition to these risks, in the event we elect to convert our debt position to equity, or otherwise take control of a portfolio company (such as through placing a member of our management team on its board of directors), as part of a restructuring, we face additional risks acting in that capacity. It is not uncommon for unsecured, or otherwise unsatisfied creditors, to sue parties that elect to use their debt positions to later control a company following a restructuring or bankruptcy. Apart from lawsuits, key customers and suppliers might act in a fashion contrary to the interests of a portfolio company if they were left unsatisfied in a restructuring or bankruptcy. Any combination of these factors might lead to the loss in value of a company subject to such activity and may divert the time and attention of our management team and investment team to help to address such issues in a portfolio company. Risks Related to Our Securities Investing in shares of our common stock involves an above average degree of risk. The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance. Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital. If our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If our common stock trades below net asset value, the higher cost of equity capital may result in it being unattractive to raise new equity, which may limit our ability to grow. The risk of trading below net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. Provisions of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock. Our charter and bylaws contain provisions that may have the effect of discouraging, delaying, or making difficult a change in control of our company or the removal of our incumbent directors. Under our charter, our Board of Directors is divided into three classes serving staggered terms, which will make it more difficult for a hostile bidder to acquire control of us. In addition, our Board of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. Subject to compliance with the 1940 Act, our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. The existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third party bids for ownership of our company. These provisions may prevent any premiums being offered to you for shares of our common stock in connection with a takeover. 50 51 16323_HER-10K_CS6-r4.indd 51 4/28/15 2:53 PM We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. If we receive such approval from the stockholders, we may again issue shares of our common stock at a price below the then current net asset value per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce our net asset value per share. Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of our debt securities of any changes in our credit ratings. There can be no assurance that a credit rating will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely if future circumstances relating to the basis of the credit rating, such as adverse changes in our company, so warrant. The conditions of the financial markets and prevailing interest rates have We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. Such approval has allowed and may again allow us to access the capital markets in a way that we typically are unable to do as a result of restrictions that, absent stockholder approval, apply to business development companies under the 1940 Act. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock is subject to the determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests. Any sale or other issuance of shares of our common stock at a price below net asset value per share has resulted and will continue to result in an immediate dilution to your interest in our common stock and a reduction of our net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our net asset value per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our net asset value per share of any such issuance at this time. We caution you that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offering that we make at a price below our then current net asset value in the future in a prospectus supplement issued in connection with any such offering. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. If we conduct an offering of our common stock at a price below net asset value, investors are likely to incur immediate dilution upon the closing of the offering. We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders and our stockholders have approved the practice of making such sales. Although we are not currently authorized to issue shares of our common stock at a price below our net asset value per share, we may seek stockholder approval of this proposal again at a special meeting of stockholders or our next annual meeting of shareholders. Our Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the discount, and as a result, the discount could be up to 100% of net asset value per share. If we were to issue shares at a price below net asset value, such sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. fluctuated in the past and are likely to fluctuate in the future. Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan. All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over time. Our stockholders may experience dilution upon the conversion of the Convertible Notes. The Convertible Senior Notes became convertible into shares of our common stock on July 1, 2014 and continue to be convertible as of December 31, 2014. Upon conversion of the Convertible Senior Notes, we have the choice to pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Since the Convertible Senior Notes became convertible, we have made the election to deliver the combination of cash and stock. If we continue to elect to deliver shares of common stock upon a conversion at the time our tangible book value per share exceeds the conversion price in effect at such time, our stockholders will incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of common stock upon our issuance of common stock in connection with the conversion of the Convertible Senior Notes and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. Our common stock price has been and continues to be volatile and may decrease substantially. As with any company, the price of our common stock will fluctuate with market conditions and other factors, which include, but are not limited to, the following: price and volume fluctuations in the overall stock market from time to time; significant volatility in the market price and trading volume of securities of RICs, business development companies or other financial services companies; any inability to deploy or invest our capital; fluctuations in interest rates; any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; In addition, if we determined to conduct additional offerings in the future there may be even greater discounts if we determine to the financial performance of specific industries in which we invest in on a recurring basis; conduct such offerings at prices below net asset value. As a result, investors will experience further dilution and additional discounts to the price of our common stock. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our securities at a price below net asset value during the year ended December 31, 2014. announcement of strategic developments, acquisitions, and other material events by us or our competitors, or operating performance of companies comparable to us; changes in regulatory policies or tax guidelines with respect to RICs, SBICs or business development companies; Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term. Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. Our shares have traded above and below our NAV. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term is separate and distinct from the risk that our net asset value may decrease. It is not possible to predict whether our shares will trade at, above or below net asset value in the future. A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or change in the debt markets could cause the liquidity or market value of our debt securities to decline significantly. Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our outstanding debt securities. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of such debt securities. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. losing RIC status; securities analysts; changes in the value of our portfolio of investments; realized losses in investments in our portfolio companies; general economic conditions and trends; inability to access the capital markets; loss of a major funded source; or departures of key personnel. 52 53 16323_HER-10K_CS6-r4.indd 52 4/28/15 2:53 PM actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. If we receive such approval from the stockholders, we may again issue shares of our common stock at a price below the then current net asset value per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce our net asset value per share. We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. Such approval has allowed and may again allow us to access the capital markets in a way that we typically are unable to do as a result of restrictions that, absent stockholder approval, apply to business development companies under the 1940 Act. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock is subject to the determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests. Any sale or other issuance of shares of our common stock at a price below net asset value per share has resulted and will continue to result in an immediate dilution to your interest in our common stock and a reduction of our net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our net asset value per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our net asset value per share of any such issuance at this time. We caution you that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offering that we make at a price below our then current net asset value in the future in a prospectus supplement issued in connection with any such offering. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. If we conduct an offering of our common stock at a price below net asset value, investors are likely to incur immediate dilution upon the closing of the offering. We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders and our stockholders have approved the practice of making such sales. Although we are not currently authorized to issue shares of our common stock at a price below our net asset value per share, we may seek stockholder approval of this proposal again at a special meeting of stockholders or our next annual meeting of shareholders. Our Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the discount, and as a result, the discount could be up to 100% of net asset value per share. If we were to issue shares at a price below net asset value, such sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we determined to conduct additional offerings in the future there may be even greater discounts if we determine to conduct such offerings at prices below net asset value. As a result, investors will experience further dilution and additional discounts to the price of our common stock. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our securities at a price below net asset value during the year ended December 31, 2014. Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term. Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. Our shares have traded above and below our NAV. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term is separate and distinct from the risk that our net asset value may decrease. It is not possible to predict whether our shares will trade at, above or below net asset value in the future. A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or change in the debt markets could cause the liquidity or market value of our debt securities to decline significantly. Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our outstanding debt securities. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of such debt securities. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of our debt securities of any changes in our credit ratings. There can be no assurance that a credit rating will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely if future circumstances relating to the basis of the credit rating, such as adverse changes in our company, so warrant. The conditions of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan. All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over time. Our stockholders may experience dilution upon the conversion of the Convertible Notes. The Convertible Senior Notes became convertible into shares of our common stock on July 1, 2014 and continue to be convertible as of December 31, 2014. Upon conversion of the Convertible Senior Notes, we have the choice to pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Since the Convertible Senior Notes became convertible, we have made the election to deliver the combination of cash and stock. If we continue to elect to deliver shares of common stock upon a conversion at the time our tangible book value per share exceeds the conversion price in effect at such time, our stockholders will incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of common stock upon our issuance of common stock in connection with the conversion of the Convertible Senior Notes and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. Our common stock price has been and continues to be volatile and may decrease substantially. As with any company, the price of our common stock will fluctuate with market conditions and other factors, which include, but are not limited to, the following: price and volume fluctuations in the overall stock market from time to time; significant volatility in the market price and trading volume of securities of RICs, business development companies or other financial services companies; any inability to deploy or invest our capital; fluctuations in interest rates; any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; the financial performance of specific industries in which we invest in on a recurring basis; announcement of strategic developments, acquisitions, and other material events by us or our competitors, or operating performance of companies comparable to us; changes in regulatory policies or tax guidelines with respect to RICs, SBICs or business development companies; losing RIC status; actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of securities analysts; changes in the value of our portfolio of investments; realized losses in investments in our portfolio companies; general economic conditions and trends; inability to access the capital markets; loss of a major funded source; or departures of key personnel. 52 53 16323_HER-10K_CS6-r4.indd 53 4/28/15 2:53 PM In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and could divert management’s attention and resources from our business. Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares. In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering. In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial. The trading market or market value of our publicly issued debt securities may fluctuate. Our publicly issued debt securities may or may not have an established trading market. We cannot assure you that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following: the time remaining to the maturity of these debt securities; the outstanding principal amount of debt securities with terms identical to these debt securities; the ratings assigned by national statistical ratings agencies; the general economic environment; the supply of debt securities trading in the secondary market, if any; the redemption or repayment features, if any, of these debt securities; the level, direction and volatility of market interest rates generally; and Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including holders of preferred stock, if any, of our subsidiaries) will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the 2019 Notes and 2024 Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the 2019 Notes and 2014 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the 2019 Notes and 2024 Notes. The indenture under which the 2019 Notes and 2024 Notes were issued contains limited protection for their respective holders. The indenture under which the 2019 Notes and 2024 Notes were issued offers limited protection to their respective holders. The terms of the indenture and the 2019 Notes and 2024 Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on an investment in the 2019 Notes and 2024 Notes. In particular, the terms of the indentures and the 2019 Notes and 2024 Notes do not place any restrictions on our or our subsidiaries’ ability to: issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2019 Notes and 2024 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2019 Notes and 2024 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank structurally senior to the 2019 Notes and 2024 Notes and (4) securities, indebtedness or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in our subsidiaries and therefore would rank structurally senior in right of payment to the 2019 Notes and 2024 Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions; pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the 2019 Notes and 2024 Notes, in each case other than dividends, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions giving effect to any exemptive relief granted to us by the SEC (these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase; sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); enter into transactions with affiliates; market rates of interest higher or lower than rates borne by the debt securities. You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities. make investments; or create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; The 2019 Notes and 2024 Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future. The 2019 Notes and 2024 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2019 Notes and 2024 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2019 Notes and 2024 Notes. The 2019 Notes and 2024 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries. The 2019 Notes and 2025 Notes are obligations exclusively of Hercules Technology Growth Capital, Inc. and not of any of our subsidiaries. None of our subsidiaries are or act as guarantors of the 2019 Notes and 2024 Notes and neither the 2019 Notes nor the 2024 Notes is required to be guaranteed by any subsidiaries we may acquire or create in the future. Our secured indebtedness with respect to the SBA debentures is held through our SBIC subsidiaries. The assets of any such subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2019 Notes and 2024 Notes. 16323_HER-10K_CS6-r4.indd 54 4/28/15 2:53 PM 54 55 create restrictions on the payment of distributions or other amounts to us from our subsidiaries. In the indenture and the 2019 and 2024 notes do not require us to offer to purchase the Notes in connection with a change of control or any other event. Furthermore, the terms of the indenture and the 2019 Notes and 2024 Notes do not protect their respective holders in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity, except as required under the 1940 Act. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2019 Notes and 2024 Notes may have important consequences for their holders, including making it more difficult for us to satisfy our obligations with respect to the 2019 Notes and 2024 Notes or negatively affecting their trading value. Certain of our current debt instruments include more protections for their respective holders than the indenture and the 2019 Notes and 2024 Notes. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2019 Notes and 2024 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the 2019 Notes and 2024 Notes. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including holders of often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and could divert management’s attention and resources from our business. Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares. In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering. In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial. The trading market or market value of our publicly issued debt securities may fluctuate. Our publicly issued debt securities may or may not have an established trading market. We cannot assure you that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following: the time remaining to the maturity of these debt securities; the outstanding principal amount of debt securities with terms identical to these debt securities; the ratings assigned by national statistical ratings agencies; the general economic environment; the supply of debt securities trading in the secondary market, if any; the redemption or repayment features, if any, of these debt securities; the level, direction and volatility of market interest rates generally; and market rates of interest higher or lower than rates borne by the debt securities. You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities. The 2019 Notes and 2024 Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future. The 2019 Notes and 2024 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2019 Notes and 2024 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2019 Notes and 2024 Notes. The 2019 Notes and 2024 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries. The 2019 Notes and 2025 Notes are obligations exclusively of Hercules Technology Growth Capital, Inc. and not of any of our subsidiaries. None of our subsidiaries are or act as guarantors of the 2019 Notes and 2024 Notes and neither the 2019 Notes nor the 2024 Notes is required to be guaranteed by any subsidiaries we may acquire or create in the future. Our secured indebtedness with respect to the SBA debentures is held through our SBIC subsidiaries. The assets of any such subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2019 Notes and 2024 Notes. preferred stock, if any, of our subsidiaries) will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the 2019 Notes and 2024 Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the 2019 Notes and 2014 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the 2019 Notes and 2024 Notes. The indenture under which the 2019 Notes and 2024 Notes were issued contains limited protection for their respective holders. The indenture under which the 2019 Notes and 2024 Notes were issued offers limited protection to their respective holders. The terms of the indenture and the 2019 Notes and 2024 Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on an investment in the 2019 Notes and 2024 Notes. In particular, the terms of the indentures and the 2019 Notes and 2024 Notes do not place any restrictions on our or our subsidiaries’ ability to: issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2019 Notes and 2024 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2019 Notes and 2024 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank structurally senior to the 2019 Notes and 2024 Notes and (4) securities, indebtedness or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in our subsidiaries and therefore would rank structurally senior in right of payment to the 2019 Notes and 2024 Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions; pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the 2019 Notes and 2024 Notes, in each case other than dividends, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions giving effect to any exemptive relief granted to us by the SEC (these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase; sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); enter into transactions with affiliates; create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; make investments; or create restrictions on the payment of distributions or other amounts to us from our subsidiaries. In the indenture and the 2019 and 2024 notes do not require us to offer to purchase the Notes in connection with a change of control or any other event. Furthermore, the terms of the indenture and the 2019 Notes and 2024 Notes do not protect their respective holders in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity, except as required under the 1940 Act. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2019 Notes and 2024 Notes may have important consequences for their holders, including making it more difficult for us to satisfy our obligations with respect to the 2019 Notes and 2024 Notes or negatively affecting their trading value. Certain of our current debt instruments include more protections for their respective holders than the indenture and the 2019 Notes and 2024 Notes. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2019 Notes and 2024 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the 2019 Notes and 2024 Notes. 54 55 16323_HER-10K_CS6-r4.indd 55 4/28/15 2:53 PM An active trading market for the Notes may not develop or be sustained, which could limit the market price of the Notes or your ability to sell them. Although the 2019 Notes are listed on the NYSE under the symbol “HTGZ,” in the case of the April 2019 Notes, “HTGY” in the case of the September 2019 Notes and “HTGX,” in the case of the 2024 Notes, we cannot provide any assurances that an active trading market will develop or be sustained for the April 2019 Notes, the September 2019 Notes, or the 2024 Notes or that any of the notes will be able to be sold. At various times, the 2019 Notes and 2024 Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market is not sustained, the liquidity and trading price for the 2019 Notes and 2024 Notes may be harmed. If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2019 Notes and 2024 Notes. Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank Facility and the Convertible Senior Notes or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2019 Notes and 2024 Notes and substantially decrease the market value of the 2014 Notes and 2024 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Wells Facility and the Union Bank Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the Wells Facility or Union Bank Facility or the required holders of our Convertible Senior Notes or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Wells Facility or Union Bank Facility or the Convertible Senior Notes or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default under the Wells Facility or Union Bank Facility or the Convertible Senior Notes or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Wells Facility and the Union Bank Facility, could proceed against the collateral securing the debt. Because the Wells Facility, the Union Bank Facility and the Convertible Senior Notes have, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Wells Facility, Union Bank Facility, the Convertible Senior Notes or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due. Item 1B. Unresolved Staff Comments None. Item 2. Properties Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our operation or any of our subsidiaries. Currently, we lease approximately 14,500 square feet of office space in Palo Alto, CA for our corporate headquarters. We also lease office space in Boston, MA, New York, NY and McLean, VA. Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period. Item 4. Mine Safety Disclosures Not applicable. 16323_HER-10K_CS6-r4.indd 56 4/28/15 2:53 PM 56 57 An active trading market for the Notes may not develop or be sustained, which could limit the market price of the Notes or your Item 1B. Unresolved Staff Comments ability to sell them. Although the 2019 Notes are listed on the NYSE under the symbol “HTGZ,” in the case of the April 2019 Notes, “HTGY” in the case of the September 2019 Notes and “HTGX,” in the case of the 2024 Notes, we cannot provide any assurances that an active trading market will develop or be sustained for the April 2019 Notes, the September 2019 Notes, or the 2024 Notes or that any of the notes will be able to be sold. At various times, the 2019 Notes and 2024 Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market is not sustained, the liquidity and trading price for the 2019 Notes and 2024 Notes may be harmed. If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2019 Notes and 2024 Notes. Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank Facility and the Convertible Senior Notes or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2019 Notes and 2024 Notes and substantially decrease the market value of the 2014 Notes and 2024 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Wells Facility and the Union Bank Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the Wells Facility or Union Bank Facility or the required holders of our Convertible Senior Notes or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Wells Facility or Union Bank Facility or the Convertible Senior Notes or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default under the Wells Facility or Union Bank Facility or the Convertible Senior Notes or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Wells Facility and the Union Bank Facility, could proceed against the collateral securing the debt. Because the Wells Facility, the Union Bank Facility and the Convertible Senior Notes have, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Wells Facility, Union Bank Facility, the Convertible Senior Notes or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due. None. Item 2. Properties Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our operation or any of our subsidiaries. Currently, we lease approximately 14,500 square feet of office space in Palo Alto, CA for our corporate headquarters. We also lease office space in Boston, MA, New York, NY and McLean, VA. Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period. Item 4. Mine Safety Disclosures Not applicable. 56 57 16323_HER-10K_CS6-r4.indd 57 4/28/15 2:53 PM Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities In February 2015, the Board of Directors approved a $50.0 million open market share repurchase program. Pursuant to the share PART II ISSUER PURCHASES OF EQUITY SECURITIES repurchase program, we may repurchase common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in its then most recently published financial statements. We anticipate that the manner, timing, and amount of any share purchases will be determined by company management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, we are required to notify shareholders of the existence of a repurchase program when such a program is initiated or implemented. The repurchase program does not require us to acquire any specific number of shares and may be extended, modified, or discontinued at any time. The share repurchase program is set to expire on August 24, 2015 unless the Board of Directors approves an During the year ended December 31, 2014, the Company did not repurchase any shares of common stock. DIVIDEND POLICY As a RIC, we intend to distribute quarterly dividends to our stockholders. To the extent we do not distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year, and (3) any ordinary income and net capital gains for the preceding year that were not distributed during such years we are required to pay a 4% excise tax on our To the extent that we earn annual taxable income in excess of dividends paid from such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will be available for distribution in the next year as permitted by the Code. We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable to RICs, we will be required to distribute to our stockholders with respect to each taxable year at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses. We may, in the future, make actual distributions to our stockholders of some or all realized net long-term capital gains in excess of realized net short-term capital losses. We can offer no assurance that we will achieve results that will permit the payment of any distributions and, if we issue senior securities, we may 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 borrowings. See “Item 1. Business—Regulation.” Our common stock is traded on the NYSE under the symbol “HTGC.” The following table sets forth the range of high and low sales prices of our common stock for each fiscal quarter during the two most recently completed fiscal years as reported on the NYSE. PRICE RANGE OF COMMON STOCK Quarter Ended March 31, 2013 ........................................... $ June 30, 2013 .............................................. $ September 30, 2013 .................................... $ December 31, 2013 ..................................... $ March 31, 2014 ........................................... $ June 30, 2014 .............................................. $ September 30, 2014 .................................... $ December 31, 2014 ..................................... $ Price Range High Low extension. 11.88 $ 13.61 $ 15.18 $ 17.09 $ 15.27 $ 15.54 $ 16.24 $ 15.82 $ 11.58 11.05 13.20 14.62 13.24 12.75 14.16 13.16 The last reported price for our common stock on February 26, 2015 was $15.51 per share. undistributed income. As of February 19, 2015, we had approximately 45,400 stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders. We believe that there are currently approximately 80 additional beneficial holders of our common stock. Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. At times, our shares of common stock have traded at a premium to net asset value or at a significant discount to the net assets attributable to those shares. SALES OF UNREGISTERED SECURITIES During 2014, the Board of Directors did not elect to receive compensation in the form of common stock. During 2013 and 2012, the Board of Directors elected to receive approximately $106,000 and $150,000, respectively, of their compensation in the form of common stock and the Company issued 10,335 and 13,584 shares, respectively, to the directors based on the closing prices of the common stock on the specified election dates. During 2014, 2013 and 2012, we issued approximately 96,976, 159,000 and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended, or the Securities Act. The aggregate value of the shares of our common stock issued under our dividend reinvestment plan during the years ended December 31, 2014, 2013 and 2012 were approximately $1.5 million, $2.2 million and $2.3 million, respectively. EQUITY COMPENSATION PLAN INFORMATION Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under the heading “Executive Compensation—Equity Compensation Plan Information” in our definitive proxy statement for our 2015 Annual Meeting of Stockholders. 16323_HER-10K_CS6-r4.indd 58 4/28/15 2:53 PM 58 59 PART II ISSUER PURCHASES OF EQUITY SECURITIES In February 2015, the Board of Directors approved a $50.0 million open market share repurchase program. Pursuant to the share repurchase program, we may repurchase common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in its then most recently published financial statements. We anticipate that the manner, timing, and amount of any share purchases will be determined by company management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, we are required to notify shareholders of the existence of a repurchase program when such a program is initiated or implemented. The repurchase program does not require us to acquire any specific number of shares and may be extended, modified, or discontinued at any time. The share repurchase program is set to expire on August 24, 2015 unless the Board of Directors approves an extension. During the year ended December 31, 2014, the Company did not repurchase any shares of common stock. DIVIDEND POLICY As a RIC, we intend to distribute quarterly dividends to our stockholders. To the extent we do not distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year, and (3) any ordinary income and net capital gains for the preceding year that were not distributed during such years we are required to pay a 4% excise tax on our undistributed income. To the extent that we earn annual taxable income in excess of dividends paid from such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will be available for distribution in the next year as permitted by the Code. We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable to RICs, we will be required to distribute to our stockholders with respect to each taxable year at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses. We may, in the future, make actual distributions to our stockholders of some or all realized net long-term capital gains in excess of realized net short-term capital losses. We can offer no assurance that we will achieve results that will permit the payment of any distributions and, if we issue senior securities, we may 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 borrowings. See “Item 1. Business—Regulation.” Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NYSE under the symbol “HTGC.” The following table sets forth the range of high and low sales prices of our common stock for each fiscal quarter during the two most recently completed fiscal years as reported on the NYSE. PRICE RANGE OF COMMON STOCK Quarter Ended March 31, 2013 ........................................... $ June 30, 2013 .............................................. $ September 30, 2013 .................................... $ December 31, 2013 ..................................... $ March 31, 2014 ........................................... $ June 30, 2014 .............................................. $ September 30, 2014 .................................... $ December 31, 2014 ..................................... $ Price Range High Low 11.88 $ 13.61 $ 15.18 $ 17.09 $ 15.27 $ 15.54 $ 16.24 $ 15.82 $ 11.58 11.05 13.20 14.62 13.24 12.75 14.16 13.16 The last reported price for our common stock on February 26, 2015 was $15.51 per share. As of February 19, 2015, we had approximately 45,400 stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders. We believe that there are currently approximately 80 additional beneficial holders of our common stock. Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. At times, our shares of common stock have traded at a premium to net asset value or at a significant discount to the net assets attributable to those shares. SALES OF UNREGISTERED SECURITIES During 2014, the Board of Directors did not elect to receive compensation in the form of common stock. During 2013 and 2012, the Board of Directors elected to receive approximately $106,000 and $150,000, respectively, of their compensation in the form of common stock and the Company issued 10,335 and 13,584 shares, respectively, to the directors based on the closing prices of the common stock on the specified election dates. During 2014, 2013 and 2012, we issued approximately 96,976, 159,000 and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended, or the Securities Act. The aggregate value of the shares of our common stock issued under our dividend reinvestment plan during the years ended December 31, 2014, 2013 and 2012 were approximately $1.5 million, $2.2 million and $2.3 million, respectively. EQUITY COMPENSATION PLAN INFORMATION Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under the heading “Executive Compensation—Equity Compensation Plan Information” in our definitive proxy statement for our 2015 Annual Meeting of Stockholders. 58 59 16323_HER-10K_CS6-r4.indd 59 4/28/15 2:53 PM to the extent of the stockholder’s tax basis, 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 fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2014, 2013, and 2012, 100% were distributions of ordinary income and spillover earnings. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2015 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 of Directors authorizes, and we declare a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. During 2014, 2013, and 2012, the Company issued approximately 96,976, 159,000 and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. PERFORMANCE GRAPH The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2009, a person invested $100 in each of our common stock, the NYSE Composite Index and the NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities. The following table summarizes dividends declared and paid, to be paid or reinvested on all shares, including restricted stock, to Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital date: Amount Per Share Record Date Payment Date Date Declared November 17, 2005 $ October 27, 2005 ............................................................................ November 1, 2005 January 27, 2006 December 9, 2005 .......................................................................... January 6, 2006 May 5, 2006 April 3, 2006 .................................................................................. April 10, 2006 August 28, 2006 July 19, 2006 .................................................................................. July 31, 2006 December 1, 2006 October 16, 2006 ............................................................................ November 6, 2006 March 19, 2007 February 7, 2007 ............................................................................ February 19, 2007 June 18, 2007 May 3, 2007 ................................................................................... May 16, 2007 August 2, 2007 ............................................................................... August 16, 2007 September 17, 2007 November 1, 2007 .......................................................................... November 16, 2007 December 17, 2007 March 17, 2008 February 7, 2008 ............................................................................ February 15, 2008 June 16, 2008 May 8, 2008 ................................................................................... May 16, 2008 August 7, 2008 ............................................................................... August 15, 2008 September 19, 2008 November 6, 2008 .......................................................................... November 14, 2008 December 15, 2008 March 30, 2009 February 12, 2009 .......................................................................... February 23, 2009 June 15, 2009 May 7, 2009 ................................................................................... May 15, 2009 September 14, 2009 August 6, 2009 ............................................................................... August 14, 2009 October 15, 2009 ............................................................................ October 20, 2009 November 23, 2009 December 16, 2009 ........................................................................ December 24, 2009 December 30, 2009 March 19, 2010 February 11, 2010 .......................................................................... February 19, 2010 June 18, 2010 May 3, 2010 ................................................................................... May 12, 2010 August 2, 2010 ............................................................................... August 12, 2010 September 17, 2010 November 4, 2010 .......................................................................... November 10, 2010 December 17, 2010 March 24, 2011 March 1, 2011 ................................................................................ March 10, 2011 June 23, 2011 May 5, 2011 ................................................................................... May 11, 2011 August 4, 2011 ............................................................................... August 15, 2011 September 15, 2011 November 3, 2011 .......................................................................... November 14, 2011 November 29, 2011 February 27, 2012 .......................................................................... March 12, 2012 April 30, 2012 ................................................................................ May 18, 2012 July 30, 2012 .................................................................................. August 17, 2012 October 26, 2012 ............................................................................ November 14, 2012 November 21, 2012 February 26, 2013 .......................................................................... March 11, 2013 April 29, 2013 ................................................................................ May 14, 2013 July 29, 2013 .................................................................................. August 13, 2013 November 4, 2013 .......................................................................... November 18, 2013 November 25, 2013 February 24, 2014 .......................................................................... March 10, 2014 April 28, 2014 ................................................................................ May 12, 2014 July 28, 2014 .................................................................................. August 18, 2014 October 29, 2014 ............................................................................ November 17, 2014 November 24, 2014 February 24, 2015 .......................................................................... March 12, 2015 March 15, 2012 May 25, 2012 August 24, 2012 March 19, 2013 May 21, 2013 August 20, 2013 March 17, 2014 May 19, 2014 August 25, 2014 March 19, 2015 $ 0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.32 * 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 0.31 0.31 0.31 0.31 10.30 * Dividend paid in cash and stock. On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend 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 year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance. 16323_HER-10K_CS6-r4.indd 60 4/28/15 2:53 PM 60 61 date: Date Declared Record Date Payment Date Amount Per Share February 12, 2009 .......................................................................... February 23, 2009 March 30, 2009 0.32 * October 27, 2005 ............................................................................ November 1, 2005 November 17, 2005 $ December 9, 2005 .......................................................................... January 6, 2006 January 27, 2006 April 3, 2006 .................................................................................. April 10, 2006 May 5, 2006 July 19, 2006 .................................................................................. July 31, 2006 August 28, 2006 October 16, 2006 ............................................................................ November 6, 2006 December 1, 2006 February 7, 2007 ............................................................................ February 19, 2007 March 19, 2007 May 3, 2007 ................................................................................... May 16, 2007 June 18, 2007 August 2, 2007 ............................................................................... August 16, 2007 September 17, 2007 November 1, 2007 .......................................................................... November 16, 2007 December 17, 2007 February 7, 2008 ............................................................................ February 15, 2008 March 17, 2008 May 8, 2008 ................................................................................... May 16, 2008 June 16, 2008 August 7, 2008 ............................................................................... August 15, 2008 September 19, 2008 November 6, 2008 .......................................................................... November 14, 2008 December 15, 2008 May 7, 2009 ................................................................................... May 15, 2009 June 15, 2009 August 6, 2009 ............................................................................... August 14, 2009 September 14, 2009 October 15, 2009 ............................................................................ October 20, 2009 November 23, 2009 December 16, 2009 ........................................................................ December 24, 2009 December 30, 2009 February 11, 2010 .......................................................................... February 19, 2010 March 19, 2010 May 3, 2010 ................................................................................... May 12, 2010 June 18, 2010 August 2, 2010 ............................................................................... August 12, 2010 September 17, 2010 November 4, 2010 .......................................................................... November 10, 2010 December 17, 2010 March 1, 2011 ................................................................................ March 10, 2011 March 24, 2011 May 5, 2011 ................................................................................... May 11, 2011 June 23, 2011 August 4, 2011 ............................................................................... August 15, 2011 September 15, 2011 November 3, 2011 .......................................................................... November 14, 2011 November 29, 2011 February 27, 2012 .......................................................................... March 12, 2012 March 15, 2012 April 30, 2012 ................................................................................ May 18, 2012 May 25, 2012 July 30, 2012 .................................................................................. August 17, 2012 August 24, 2012 October 26, 2012 ............................................................................ November 14, 2012 November 21, 2012 February 26, 2013 .......................................................................... March 11, 2013 March 19, 2013 April 29, 2013 ................................................................................ May 14, 2013 May 21, 2013 July 29, 2013 .................................................................................. August 13, 2013 August 20, 2013 November 4, 2013 .......................................................................... November 18, 2013 November 25, 2013 February 24, 2014 .......................................................................... March 10, 2014 March 17, 2014 April 28, 2014 ................................................................................ May 12, 2014 May 19, 2014 July 28, 2014 .................................................................................. August 18, 2014 August 25, 2014 October 29, 2014 ............................................................................ November 17, 2014 November 24, 2014 February 24, 2015 .......................................................................... March 12, 2015 March 19, 2015 0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 0.31 0.31 0.31 0.31 $ 10.30 * Dividend paid in cash and stock. On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend 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 year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. The following table summarizes dividends declared and paid, to be paid or reinvested on all shares, including restricted stock, to 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 the stockholder’s tax basis, 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 fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2014, 2013, and 2012, 100% were distributions of ordinary income and spillover earnings. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2015 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 of Directors authorizes, and we declare a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. During 2014, 2013, and 2012, the Company issued approximately 96,976, 159,000 and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. PERFORMANCE GRAPH The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2009, a person invested $100 in each of our common stock, the NYSE Composite Index and the NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities. Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance. 60 61 16323_HER-10K_CS6-r4.indd 61 4/28/15 2:53 PM Item 6. Selected Consolidated Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Selected Consolidated Financial Data FORWARD-LOOKING STATEMENTS The following consolidated financial data is derived from our audited consolidated financial statements. The selected The matters discussed in this report, as well as in future oral and written statements by management of Hercules Technology consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere herein. Historical data is not necessarily indicative of results to be expected for any future period. (in thousands, except per share amounts) Balance sheet data: Investments, at value ............................................................................. $ Cash and cash equivalents ..................................................................... Total assets ............................................................................................ Total liabilities ...................................................................................... Total net assets ...................................................................................... Other Data: Total debt investments, at value ............................................................ Total warrant investments, at value ....................................................... Total equity investments, at value ......................................................... Unfunded Commitments ....................................................................... Net asset value per share(1) .................................................................... $ (1) Based on common shares outstanding at period end For the Years Ended December 31, 2014 2013 2012 2011 2010 1,020,737 227,116 1,299,223 640,359 658,864 923,906 25,098 71,733 339,014 10.18 $ $ 910,295 $ 268,368 1,221,715 571,708 650,007 906,300 $ 182,994 1,123,643 607,675 515,968 821,988 35,637 52,670 150,986 10.51 $ 827,540 29,550 49,210 61,851 9.75 $ 652,870 $ 64,474 747,394 316,353 431,041 585,767 30,045 37,058 168,196 9.83 $ 472,032 107,014 591,247 178,716 412,531 401,618 23,690 46,724 117,200 9.50 (in thousands, except per share amounts) 2014 2013 2012 2011 2010 For the Years Ended December 31, Investment income: Interest ............................................................................................ $ 126,618 $ 123,671 $ 87,603 $ 70,346 $ Fees ................................................................................................ Total investment income ..................................................................... 17,047 143,665 16,042 139,713 Operating expenses: Interest ............................................................................................ Loan fees ........................................................................................ General and administrative ............................................................. Employee Compensation: Compensation and benefits ...................................................... Stock-based compensation ....................................................... Total employee compensation ........................................... Total operating expenses .................................................................... Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ..................................................................................... Net investment income ........................................................................ Net realized gain (loss) on investments ................................................. Net increase (decrease) in unrealized appreciation (depreciation) on investments ........................................................................................ Total net realized and unrealized gain (loss) ..................................... Net increase in net assets resulting from operations ......................... $ Change in net assets per common share (basic)..................................... $ Cash dividends declared per common share .......................................... $ 30,334 4,807 9,354 16,179 5,974 22,153 66,648 — 73,065 14,836 11,545 26,381 99,446 1.67 1.11 $ $ $ 28,041 5,919 10,209 16,604 9,561 26,165 70,334 (1,581) 71,750 20,112 (20,674) (562) 71,188 1.12 1.24 $ $ $ 62 9,917 97,520 19,835 3,917 8,108 13,326 4,227 17,553 49,413 — 48,107 3,168 (4,516 ) (1,348 ) 46,759 0.93 0.95 $ $ $ 9,509 79,855 13,252 2,635 7,992 13,260 3,128 16,388 40,267 — 39,588 2,741 4,607 7,348 46,936 1.08 0.88 $ $ $ 54,700 4,774 59,474 8,572 1,259 7,086 10,474 2,709 13,183 30,100 — 29,374 (26,382) 1,990 (24,392) 4,982 0.12 0.80 Growth 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: the dependence of our future success on the general economy and its impact on the industries in which we invest; our future operating results; our business prospects and the prospects of our prospective portfolio companies; the impact of investments that we expect to make; our informal relationships with third parties including in the venture capital industry; the expected market for venture capital investments and our addressable market; our ability to access debt markets and equity markets; the ability of our portfolio companies to achieve their objectives; our expected financings and investments; our regulatory structure and tax status; our ability to operate as a business development company, a SBIC and a RIC; the adequacy of our cash resources and working capital; the timing of cash flows, if any, from the operations of our portfolio companies; the timing, form and amount of any dividend distributions; the impact of fluctuations in interest rates on our business; the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and our ability to recover unrealized losses. 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 involve 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. Overview We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. 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 and McLean, VA. 63 16323_HER-10K_CS6-r4.indd 62 4/28/15 2:53 PM Item 6. Selected Consolidated Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Selected Consolidated Financial Data FORWARD-LOOKING STATEMENTS The following consolidated financial data is derived from our audited consolidated financial statements. The selected The matters discussed in this report, as well as in future oral and written statements by management of Hercules Technology consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere herein. Historical data is not necessarily indicative of results to be expected for any future period. For the Years Ended December 31, (in thousands, except per share amounts) 2014 2013 2012 2011 2010 Balance sheet data: Investments, at value ............................................................................. $ Cash and cash equivalents ..................................................................... Total assets ............................................................................................ Total liabilities ...................................................................................... Total net assets ...................................................................................... 1,020,737 $ 227,116 1,299,223 640,359 658,864 910,295 $ 268,368 906,300 $ 182,994 1,221,715 1,123,643 571,708 650,007 607,675 515,968 Other Data: Total debt investments, at value ............................................................ Total warrant investments, at value ....................................................... Total equity investments, at value ......................................................... Unfunded Commitments ....................................................................... Net asset value per share(1) .................................................................... $ 923,906 25,098 71,733 339,014 10.18 $ 821,988 35,637 52,670 150,986 10.51 $ 827,540 29,550 49,210 61,851 9.75 $ 652,870 $ 64,474 747,394 316,353 431,041 585,767 30,045 37,058 168,196 9.83 $ 472,032 107,014 591,247 178,716 412,531 401,618 23,690 46,724 117,200 9.50 (1) Based on common shares outstanding at period end (in thousands, except per share amounts) 2014 2013 2012 2011 2010 Investment income: Interest ............................................................................................ $ 126,618 $ 123,671 $ 87,603 $ 70,346 $ Fees ................................................................................................ Total investment income ..................................................................... 17,047 143,665 16,042 139,713 For the Years Ended December 31, Operating expenses: Interest ............................................................................................ Loan fees ........................................................................................ General and administrative ............................................................. Employee Compensation: Compensation and benefits ...................................................... Stock-based compensation ....................................................... Total employee compensation ........................................... Total operating expenses .................................................................... Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ..................................................................................... Net investment income ........................................................................ Net realized gain (loss) on investments ................................................. Net increase (decrease) in unrealized appreciation (depreciation) on investments ........................................................................................ Total net realized and unrealized gain (loss) ..................................... Net increase in net assets resulting from operations ......................... $ Change in net assets per common share (basic)..................................... $ Cash dividends declared per common share .......................................... $ 9,917 97,520 19,835 3,917 8,108 13,326 4,227 17,553 49,413 — 48,107 3,168 (4,516 ) (1,348 ) 46,759 0.93 0.95 9,509 79,855 13,252 2,635 7,992 13,260 3,128 16,388 40,267 — 39,588 2,741 4,607 7,348 46,936 1.08 0.88 54,700 4,774 59,474 8,572 1,259 7,086 10,474 2,709 13,183 30,100 — 29,374 (26,382) 1,990 (24,392) 4,982 0.12 0.80 $ $ $ $ $ $ $ $ $ 30,334 4,807 9,354 16,179 5,974 22,153 66,648 — 73,065 14,836 11,545 26,381 99,446 1.67 1.11 28,041 5,919 10,209 16,604 9,561 26,165 70,334 (1,581) 71,750 20,112 (20,674) (562) 71,188 1.12 1.24 $ $ $ 62 Growth 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 future operating results; our business prospects and the prospects of our prospective portfolio companies; the impact of investments that we expect to make; our informal relationships with third parties including in the venture capital industry; the expected market for venture capital investments and our addressable 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 markets and equity markets; the ability of our portfolio companies to achieve their objectives; our expected financings and investments; our regulatory structure and tax status; our ability to operate as a business development company, a SBIC and a RIC; the adequacy of our cash resources and working capital; the timing of cash flows, if any, from the operations of our portfolio companies; the timing, form and amount of any dividend distributions; the impact of fluctuations in interest rates on our business; the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and our ability to recover unrealized losses. 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 involve 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. Overview We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. 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 and McLean, VA. 63 16323_HER-10K_CS6-r4.indd 63 4/28/15 2:53 PM Our goal is to be the leading structured debt financing provider for venture capital-backed companies in technology-related Portfolio and Investment Activity industries requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related industries including technology, biotechnology, life science, and energy and renewables 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. We invest primarily in private companies but also have investments in public companies. 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 rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. 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 directly to venture capital-backed companies in technology-related industries is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We also make investments in qualifying small businesses through our two wholly-owned SBICs. Our SBIC subsidiaries, HT II and HT III, hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with our net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, we repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. We have qualified as and have elected to be treated for tax purposes as a RIC under the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, 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. 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. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion 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 including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, 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. The total fair value of our investment portfolio was $1.0 billion at December 31, 2014 as compared to $910.3 million at December 31, 2013. The fair value of the debt investment portfolio at December 31, 2014 was approximately $923.9 million, compared to a fair value of approximately $822.0 million at December 31, 2013. The fair value of the equity portfolio at December 31, 2014 was approximately $71.7 million, compared to a fair value of approximately $52.7 million at December 31, 2013. The fair value of the warrant portfolio at December 31, 2014 was approximately $25.1 million, compared to a fair value of approximately $35.6 million at December 31, 2013. Portfolio Activity Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. From time to time, 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 will be 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. Not all debt commitments represent our future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and do not represent our 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. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements. Our portfolio activity for the years ended December 31, 2014 and 2013 was comprised of the following: (in millions) Debt Commitments (1) New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Funded Debt Investments New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Funded Equity Investments New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Unfunded Contractual Commitments (2) Non-Binding Term Sheets New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ December 31, 2014 December 31, 2013 776.9 $ 118.0 894.9 $ 434.0 $ 177.0 611.0 $ 7.2 $ 3.1 10.3 $ 104.0 $ 4.2 108.2 $ 535.0 165.1 700.1 373.1 118.0 491.1 — 3.9 3.9 28.0 10.0 38.0 Total ................................................................................ $ 339.0 $ 151.0 Includes restructured loans and renewals in addition to new commitments. As of December 31, 2014, includes unfunded contractual commitments in 35 new and existing portfolio companies. Approximately $191.3 million of these unfunded contractual commitments as of December 31, 2014 are dependent upon the portfolio company reaching certain milestones before the debt commitment (1) (2) becomes available. 16323_HER-10K_CS6-r4.indd 64 4/28/15 2:54 PM 64 65 Our goal is to be the leading structured debt financing provider for venture capital-backed companies in technology-related Portfolio and Investment Activity industries requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related industries including technology, biotechnology, life science, and energy and renewables 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. We invest primarily in private companies but also have investments in public companies. 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 rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. The total fair value of our investment portfolio was $1.0 billion at December 31, 2014 as compared to $910.3 million at December 31, 2013. The fair value of the debt investment portfolio at December 31, 2014 was approximately $923.9 million, compared to a fair value of approximately $822.0 million at December 31, 2013. The fair value of the equity portfolio at December 31, 2014 was approximately $71.7 million, compared to a fair value of approximately $52.7 million at December 31, 2013. The fair value of the warrant portfolio at December 31, 2014 was approximately $25.1 million, compared to a fair value of approximately $35.6 million at December 31, 2013. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating Portfolio Activity income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. 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 directly to venture capital-backed companies in technology-related industries is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We also make investments in qualifying small businesses through our two wholly-owned SBICs. Our SBIC subsidiaries, HT II and HT III, hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of our total assets, respectively, prior to consolidation at December 31, 2014. As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with our net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, we repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. We have qualified as and have elected to be treated for tax purposes as a RIC under the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, 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. 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. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion 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 including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, 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. Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. From time to time, 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 will be 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. Not all debt commitments represent our future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and do not represent our 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. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements. Our portfolio activity for the years ended December 31, 2014 and 2013 was comprised of the following: (in millions) Debt Commitments (1) December 31, 2014 December 31, 2013 New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Funded Debt Investments New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Funded Equity Investments New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ Unfunded Contractual Commitments (2) 776.9 $ 118.0 894.9 $ 434.0 $ 177.0 611.0 $ 7.2 $ 3.1 10.3 $ 535.0 165.1 700.1 373.1 118.0 491.1 — 3.9 3.9 Total ................................................................................ $ 339.0 $ 151.0 Non-Binding Term Sheets New portfolio company ................................................... $ Existing portfolio company ............................................. Total ................................................................................ $ 104.0 $ 4.2 108.2 $ 28.0 10.0 38.0 (1) (2) Includes restructured loans and renewals in addition to new commitments. As of December 31, 2014, includes unfunded contractual commitments in 35 new and existing portfolio companies. Approximately $191.3 million of these unfunded contractual commitments as of December 31, 2014 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. 64 65 16323_HER-10K_CS6-r4.indd 65 4/28/15 2:54 PM We receive payments in our debt investment portfolio based on scheduled amortization of the outstanding balances. In addition, As of December 31, 2014, we held warrants or equity positions in seven companies that had filed registration statements on 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, 2014, we received approximately $494.1 million in aggregate principal repayments. Of the approximately $494.1 million of aggregate principal repayments, approximately $135.8 million were scheduled principal payments, and approximately $358.3 million were early principal repayments related to 39 portfolio companies. Of the approximately $358.3 million early principal repayments, approximately $69.0 million were early repayments due to M&A transactions and initial public offerings related to seven portfolio companies. Although we have experienced significant principal repayments during the year, we believe that future early repayments will not be significant based on our current portfolio. However, the yield on our loan portfolio may be lower. Total portfolio investment activity (inclusive of unearned income) as of and for each of the years ended December 31, 2014 and 2013 was as follows: (in millions) Beginning portfolio ........................................................................ $ New fundings ................................................................................. Restructure fundings ...................................................................... Warrants not related to current period fundings ............................. Principal payments received on investments .................................. Early payoffs .................................................................................. Restructure payoffs ........................................................................ Accretion of loan discounts and paid-in-kind principal ................. Acceleration of loan discounts and loan fees due to early payoff or restructure ............................................................................... New loan fees ................................................................................. Warrants converted to equity ......................................................... Sale of investments......................................................................... Loss on investments due to write offs ............................................ Net change in unrealized appreciation (depreciation) .................... Ending portfolio............................................................................ $ December 31, 2014 December 31, 2013 906.3 473.6 23.6 3.5 (176.2) (300.6) (9.8) 31.9 910.3 $ 566.6 54.7 0.8 (135.8 ) (358.3 ) — 24.5 (3.3 ) (9.2 ) 2.0 (9.1 ) (3.9 ) (18.6 ) 1,020.7 $ (0.7) (14.3) 0.2 (22.5) (16.7) 12.0 910.3 The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2014 and December 31, 2013. December 31, 2014 December 31, 2013 (in thousands) Senior secured debt with warrants .............................. $ Senior secured debt .................................................... Preferred stock............................................................ Common Stock ........................................................... Total ........................................................................... $ 740,659 208,345 57,548 14,185 1,020,737 72.6% $ 20.4% 5.6% 1.4% 100.0% $ Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio 69.7% 24.5% 3.9% 1.9% 100.0% 634,820 222,805 35,554 17,116 910,295 A summary of our investment portfolio at value by geographic location is as follows: December 31, 2014 December 31, 2013 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value (in thousands) United States .............................................................. $ India............................................................................ Netherlands ................................................................ Israel ........................................................................... Canada ........................................................................ England ...................................................................... Total ........................................................................... $ 967,803 24,175 19,913 6,498 2,314 34 1,020,737 94.8% $ 2.4% 2.0% 0.6% 0.2% 0.0% 100.0% $ Percentage of Total Portfolio 94.9% — 1.1% 1.1% 2.8% 0.1% 100.0% 864,003 — 10,131 9,863 25,798 500 910,295 16323_HER-10K_CS6-r4.indd 66 4/28/15 2:54 PM 66 67 Form S-1 with the SEC in contemplation of potential initial public offerings, including Box, Inc., Good Technology Corp., Inotek Pharmaceuticals, Inc., Zosano Pharma, Inc. and three companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. Subsequent to December 31, 2014 the following portfolio companies in which we held investments as of December 31, 2014 completed initial public offerings: 1. In January 2015, Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares we hold in Box, Inc. are subject to certain restrictions that govern the timing of our divestment and may thus impact our ultimate gain or (loss). In the case of Box, Inc., we are subject to a customary IPO lockup period and are obligated not to sell the shares of common stock that we own for six months from the date of the initial public offering. The potential gain depends on the price of the shares when we exit the investment. 2. In January 2015, Zosano Pharma, Inc. completed its initial public offering of 4,500,000 shares of its common stock at $11.00 per share. 3. In February 2015, Inotek Pharmaceuticals Corporation, completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. Changes in Portfolio We generate revenue in the form of interest income, primarily from our investments in debt securities and related fees. 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-related securities that we acquire from our portfolio companies. Our investments generally range from $1.0 million to $40.0 million. As of December 31, 2014, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from the prevailing U.S. prime rate, or Prime, or the London Interbank Offered Rate, or LIBOR, to approximately 14%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any of the following: end-of-term payments, 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. 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. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. We had approximately $4.5 million and $4.0 million of unamortized fees at December 31, 2014 and December 31, 2013, respectively, and approximately $19.3 million and $14.4 million in exit fees receivable at December 31, 2014 and December 31, 2013, respectively. We have debt investments in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $3.3 million and $3.5 million in PIK income in the years ended December 31, 2014 and December 31, 2013, respectively. In the majority of cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, we obtain a negative pledge covering a company’s intellectual property. At December 31, 2014, approximately 54.2% of our portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of the debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014 we had no equipment only liens on any of our portfolio companies. 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. We receive payments in 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, 2014, we received approximately $494.1 million in aggregate principal repayments. Of the approximately $494.1 million of aggregate principal repayments, approximately $135.8 million were scheduled principal payments, and approximately $358.3 million were early principal repayments related to 39 portfolio companies. Of the approximately $358.3 million early principal repayments, approximately $69.0 have experienced significant principal repayments during the year, we believe that future early repayments will not be significant based on our current portfolio. However, the yield on our loan portfolio may be lower. Total portfolio investment activity (inclusive of unearned income) as of and for each of the years ended December 31, 2014 and 2013 was as follows: (in millions) December 31, 2014 December 31, 2013 Beginning portfolio ........................................................................ $ New fundings ................................................................................. Restructure fundings ...................................................................... Warrants not related to current period fundings ............................. Principal payments received on investments .................................. Early payoffs .................................................................................. Restructure payoffs ........................................................................ Accretion of loan discounts and paid-in-kind principal ................. Acceleration of loan discounts and loan fees due to early payoff or restructure ............................................................................... New loan fees ................................................................................. Warrants converted to equity ......................................................... Sale of investments......................................................................... Loss on investments due to write offs ............................................ Net change in unrealized appreciation (depreciation) .................... Ending portfolio............................................................................ $ 910.3 $ 566.6 54.7 0.8 (135.8 ) (358.3 ) — 24.5 (3.3 ) (9.2 ) 2.0 (9.1 ) (3.9 ) (18.6 ) 1,020.7 $ 906.3 473.6 23.6 3.5 (176.2) (300.6) (9.8) 31.9 (0.7) (14.3) 0.2 (22.5) (16.7) 12.0 910.3 December 31, 2013. (in thousands) The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2014 and December 31, 2014 December 31, 2013 Investments at Percentage of Investments at Percentage of Fair Value Total Portfolio Fair Value Total Portfolio Senior secured debt with warrants .............................. $ Senior secured debt .................................................... Preferred stock............................................................ Common Stock ........................................................... 740,659 208,345 57,548 14,185 72.6% $ 20.4% 5.6% 1.4% 634,820 222,805 35,554 17,116 69.7% 24.5% 3.9% 1.9% Total ........................................................................... $ 1,020,737 100.0% $ 910,295 100.0% A summary of our investment portfolio at value by geographic location is as follows: December 31, 2014 December 31, 2013 Investments at Percentage of Fair Value Total Portfolio Investments at Fair Value Percentage of Total Portfolio (in thousands) United States .............................................................. $ 967,803 94.8% $ 864,003 94.9% India............................................................................ Netherlands ................................................................ Israel ........................................................................... Canada ........................................................................ England ...................................................................... 24,175 19,913 6,498 2,314 34 2.4% 2.0% 0.6% 0.2% 0.0% — 10,131 9,863 25,798 500 — 1.1% 1.1% 2.8% 0.1% Total ........................................................................... $ 1,020,737 100.0% $ 910,295 100.0% million were early repayments due to M&A transactions and initial public offerings related to seven portfolio companies. Although we completed initial public offerings: As of December 31, 2014, we held warrants or equity positions in seven companies that had filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Box, Inc., Good Technology Corp., Inotek Pharmaceuticals, Inc., Zosano Pharma, Inc. and three companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. Subsequent to December 31, 2014 the following portfolio companies in which we held investments as of December 31, 2014 1. 2. 3. In January 2015, Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares we hold in Box, Inc. are subject to certain restrictions that govern the timing of our divestment and may thus impact our ultimate gain or (loss). In the case of Box, Inc., we are subject to a customary IPO lockup period and are obligated not to sell the shares of common stock that we own for six months from the date of the initial public offering. The potential gain depends on the price of the shares when we exit the investment. In January 2015, Zosano Pharma, Inc. completed its initial public offering of 4,500,000 shares of its common stock at $11.00 per share. In February 2015, Inotek Pharmaceuticals Corporation, completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. Changes in Portfolio We generate revenue in the form of interest income, primarily from our investments in debt securities and related fees. 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-related securities that we acquire from our portfolio companies. Our investments generally range from $1.0 million to $40.0 million. As of December 31, 2014, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from the prevailing U.S. prime rate, or Prime, or the London Interbank Offered Rate, or LIBOR, to approximately 14%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any of the following: end-of-term payments, 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. 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. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. We had approximately $4.5 million and $4.0 million of unamortized fees at December 31, 2014 and December 31, 2013, respectively, and approximately $19.3 million and $14.4 million in exit fees receivable at December 31, 2014 and December 31, 2013, respectively. We have debt investments in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $3.3 million and $3.5 million in PIK income in the years ended December 31, 2014 and December 31, 2013, respectively. In the majority of cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, we obtain a negative pledge covering a company’s intellectual property. At December 31, 2014, approximately 54.2% of our portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of the debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014 we had no equipment only liens on any of our portfolio companies. 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. 66 67 16323_HER-10K_CS6-r4.indd 67 4/28/15 2:54 PM The core yield on our debt investments, which excludes any benefits from the accretion of fees and income related to early loan repayments attributed to the acceleration of unamortized fees and income as well as prepayment of fees, was 13.6% and 14.4% during the years ended December 31, 2014 and 2013, respectively. The effective yield on our debt investments, which includes the effects of fee and income accelerations attributed to early payoffs, restructuring, loan modifications and other one-time event fees, was 16.8% and 15.9% for the years ended December 31, 2014 and 2013, respectively. The effective yield is derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the year, which exclude non-interest earning assets such as warrants and equity investments. Portfolio Composition Our portfolio companies are primarily privately held companies and public companies that are active in the drug discovery and development, medical devices and equipment, software, drug delivery, internet consumer and business services, energy technology, consumer and business products, communications and networking, specialty pharmaceuticals, media/content/info, information services, healthcare services, surgical devices, semiconductors, biotechnology tools, diagnostic and electronics and computer hardware sectors. These sectors are characterized by high margins, high growth rates, competition, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical devices and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. The following table shows the fair value of our portfolio by industry sector at December 31, 2014 and December 31, 2013: December 31, 2014 December 31, 2013 (in thousands) Drug Discovery & Development ................ $ Medical Devices & Equipment ................... Software ..................................................... Drug Delivery ............................................. Internet Consumer & Business Services..... Energy Technology .................................... Consumer & Business Products ................. Communications & Networking ................. Specialty Pharmaceuticals .......................... Media/Content/Info .................................... Information Services .................................. Healthcare Services, Other ......................... Surgical Devices ......................................... Semiconductors .......................................... Biotechnology Tools .................................. Diagnostic ................................................... Electronics & Computer Hardware ............ Total ........................................................... $ Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio 26.2% $ 13.5% 12.3% 8.7% 6.8% 6.7% 6.2% 6.0% 5.0% 2.9% 2.6% 1.0% 1.0% 0.5% 0.4% 0.1% 0.1% 100.1% $ 219,169 103,614 65,218 62,022 122,073 164,466 2,995 35,979 20,055 8,679 46,565 29,080 10,307 4,685 5,275 902 9,211 910,295 24.1% 11.4% 7.2% 6.8% 13.4% 18.1% 0.3% 4.0% 2.2% 1.0% 5.1% 3.2% 1.0% 0.5% 0.6% 0.1% 1.0% 100.0% 267,618 138,046 125,412 88,491 69,655 68,280 63,225 61,433 51,536 29,219 27,016 10,527 9,915 5,126 3,721 825 692 1,020,737 Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. (in thousands) For the years ended December 31, 2014 and 2013, our ten largest portfolio companies represented approximately 28.6% and 29.3% of the total fair value of our investments in portfolio companies, respectively. At December 31, 2014 and December 31, 2013, we had three and one investments, respectively, that represented 5% or more of our net assets. At December 31, 2014 and December 31, 2013, we had three and six equity investments representing approximately 61.5% and 75.7%, 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. Portfolio Company E-Band Communiations, Corp. ................................... Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Total ........................................................................... Type Affiliate Affiliate Affiliate — $ 1,665 10,207 11,872 $ 4 $ 712 1,649 2,365 $ (18 ) $ 672 (2,722 ) (2,068 ) $ Fair Value at December 31, 2012 Investment Income (Depreciation) /Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) 16323_HER-10K_CS6-r4.indd 68 4/28/15 2:54 PM 68 69 As of December 31, 2014, 100.0% of our debt investments were in a senior secured first lien position, and more than 98.2% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime or LIBOR based interest rate floor. As a result, we believe we are well positioned to benefit should market interest rates rise. Our investments in senior secured debt with warrants have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. 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, 2014, we held warrants in 124 portfolio companies, with a fair value of approximately $25.1 million. The fair value of our warrant portfolio decreased by approximately 29.5%, as compared to a fair value of $35.6 million at December 31, 2013 primarily related to the reversal of unrealized appreciation related to the exercise of our warrant positions in Box, Inc. ($8.3 million) and Neuralstem, Inc. ($751,000) to preferred stock and unrealized depreciation related to collateral based impairments of approximately $3.3 million on 11 of our warrant positions due to poor company performance. Our existing warrant holdings currently would require us to invest approximately $86.0 million to exercise such warrants as of December 31, 2014. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. Of the warrants that we have monetized since inception, we have realized warrant gain multiples in the range of approximately 1.02x to 14.93x based on the historical rate of return on our investments. However, our warrants may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrant portfolio. As required by the 1940 Act, we classify our investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that we are deemed to “control”, which, in general, includes a company in which we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of ours, as defined in the 1940 Act, which are not control investments. We are deemed to be an “affiliate” of a company in which we have invested if we own 5% or more, but less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on affiliate investments for the years ended December 31, 2014, 2013, and 2012. We did not hold any control investments at December 31, 2014, 2013 or 2012. investments. (in thousands) (in thousands) Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2014 Investment Income 327 $ 6,072 1,600 7,999 $ — $ — 1,876 1,876 $ (146 ) $ (24 ) (3,112 ) (3,282 ) $ Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2013 Investment Income 473 $ 4,784 5,724 10,981 $ — $ 1,933 462 2,395 $ (1,193 ) $ (225 ) 593 (825 ) $ Year ended December 31, 2014 Reversal of Unrealized Unrealized (Depreciation)/ Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) Year ended December 31, 2013 Reversal of Unrealized Unrealized (Depreciation)/ Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) — $ — — — $ — $ — — — $ — $ — — — $ — — — — — — — — — — — — Year ended December 31, 2012 Unrealized Reversal of Unrealized $ $ $ $ $ $ The core yield on our debt investments, which excludes any benefits from the accretion of fees and income related to early loan repayments attributed to the acceleration of unamortized fees and income as well as prepayment of fees, was 13.6% and 14.4% during the years ended December 31, 2014 and 2013, respectively. The effective yield on our debt investments, which includes the effects of fee and income accelerations attributed to early payoffs, restructuring, loan modifications and other one-time event fees, was 16.8% and 15.9% for the years ended December 31, 2014 and 2013, respectively. The effective yield is derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the year, which exclude non-interest earning assets such as warrants and equity investments. Portfolio Composition Our portfolio companies are primarily privately held companies and public companies that are active in the drug discovery and development, medical devices and equipment, software, drug delivery, internet consumer and business services, energy technology, consumer and business products, communications and networking, specialty pharmaceuticals, media/content/info, information services, healthcare services, surgical devices, semiconductors, biotechnology tools, diagnostic and electronics and computer hardware sectors. These sectors are characterized by high margins, high growth rates, competition, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. As of December 31, 2014, approximately 60.7% of the fair value of our portfolio was composed of investments in four industries: 26.2% was composed of investments in the drug discovery and development industry, 13.5% was composed of investments in the medical devices and equipment industry, 12.3% was composed of investments in the software industry and 8.7% was composed of investments in the drug delivery industry. The following table shows the fair value of our portfolio by industry sector at December 31, 2014 and December 31, 2013: December 31, 2014 December 31, 2013 Investments at Fair Percentage of Total Investments at Fair Percentage of Total Value Portfolio Value Portfolio (in thousands) Drug Discovery & Development ................ $ Medical Devices & Equipment ................... Software ..................................................... Drug Delivery ............................................. Internet Consumer & Business Services..... Energy Technology .................................... Consumer & Business Products ................. Communications & Networking ................. Specialty Pharmaceuticals .......................... Media/Content/Info .................................... Information Services .................................. Healthcare Services, Other ......................... Surgical Devices ......................................... Semiconductors .......................................... Biotechnology Tools .................................. Diagnostic ................................................... Electronics & Computer Hardware ............ 267,618 138,046 125,412 88,491 69,655 68,280 63,225 61,433 51,536 29,219 27,016 10,527 9,915 5,126 3,721 825 692 26.2% $ 13.5% 12.3% 8.7% 6.8% 6.7% 6.2% 6.0% 5.0% 2.9% 2.6% 1.0% 1.0% 0.5% 0.4% 0.1% 0.1% 219,169 103,614 65,218 62,022 122,073 164,466 2,995 35,979 20,055 8,679 46,565 29,080 10,307 4,685 5,275 902 9,211 24.1% 11.4% 7.2% 6.8% 13.4% 18.1% 0.3% 4.0% 2.2% 1.0% 5.1% 3.2% 1.0% 0.5% 0.6% 0.1% 1.0% Total ........................................................... $ 1,020,737 100.1% $ 910,295 100.0% Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or As of December 31, 2014, 100.0% of our debt investments were in a senior secured first lien position, and more than 98.2% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime or LIBOR based interest rate floor. As a result, we believe we are well positioned to benefit should market interest rates rise. Our investments in senior secured debt with warrants have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. 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, 2014, we held warrants in 124 portfolio companies, with a fair value of approximately $25.1 million. The fair value of our warrant portfolio decreased by approximately 29.5%, as compared to a fair value of $35.6 million at December 31, 2013 primarily related to the reversal of unrealized appreciation related to the exercise of our warrant positions in Box, Inc. ($8.3 million) and Neuralstem, Inc. ($751,000) to preferred stock and unrealized depreciation related to collateral based impairments of approximately $3.3 million on 11 of our warrant positions due to poor company performance. Our existing warrant holdings currently would require us to invest approximately $86.0 million to exercise such warrants as of December 31, 2014. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. Of the warrants that we have monetized since inception, we have realized warrant gain multiples in the range of approximately 1.02x to 14.93x based on the historical rate of return on our investments. However, our warrants may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrant portfolio. As required by the 1940 Act, we classify our investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that we are deemed to “control”, which, in general, includes a company in which we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of ours, as defined in the 1940 Act, which are not control investments. We are deemed to be an “affiliate” of a company in which we have invested if we own 5% or more, but less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on affiliate investments for the years ended December 31, 2014, 2013, and 2012. We did not hold any control investments at December 31, 2014, 2013 or 2012. (in thousands) Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2014 327 $ $ 6,072 1,600 7,999 $ $ (in thousands) Investment Income Year ended December 31, 2014 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation)/ Appreciation (146 ) $ (24 ) (3,112 ) (3,282 ) $ Realized Gain/(Loss) — — — — — $ — — — $ — $ — 1,876 1,876 $ Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate $ 473 $ 4,784 5,724 $ 10,981 Fair Value at December 31, 2013 $ Investment Income Year ended December 31, 2013 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation)/ Appreciation (1,193 ) $ (225 ) 593 (825 ) $ — $ — — — $ Realized Gain/(Loss) — — — — — $ 1,933 462 2,395 $ equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. (in thousands) For the years ended December 31, 2014 and 2013, our ten largest portfolio companies represented approximately 28.6% and 29.3% of the total fair value of our investments in portfolio companies, respectively. At December 31, 2014 and December 31, 2013, we had three and one investments, respectively, that represented 5% or more of our net assets. At December 31, 2014 and December 31, 2013, we had three and six equity investments representing approximately 61.5% and 75.7%, 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. Portfolio Company E-Band Communiations, Corp. ................................... Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2012 — $ $ 1,665 10,207 11,872 $ $ Investment Income Year ended December 31, 2012 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation) /Appreciation (18 ) $ 672 (2,722 ) (2,068 ) $ Realized Gain/(Loss) — — — — — $ — — — $ 4 $ 712 1,649 2,365 $ 68 69 16323_HER-10K_CS6-r4.indd 69 4/28/15 2:54 PM During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. Our investment in E-Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. The increase in payments received from PIK loans and the decrease in PIK interest capitalized during the year ended December 31, 2014 is due to the payoff of seven PIK loans offset by additions of eight PIK loans which have incurred PIK capitalizations during the period ended December 31, 2014. Portfolio Grading Fee Income Income from commitment, facility and loan related fees for the year ended December 31, 2014 totaled approximately $17.0 We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our million as compared to approximately $16.0 million for the year ended December 31, 2013. The increase in fee income is primarily 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, 2014 and 2013, respectively: attributable to additional fee accelerations and one time fees due to early pay-offs and restructures during the year ended December 31, 2014, as compared to the same period in 2013. (in thousands) Investment Grading 1 2 3 4 5 Number of Companies 19 45 16 6 8 December 31, 2014 Debt Investments at Fair Value Percentage of Total Portfolio $ $ 195,819 479,037 183,522 39,852 25,676 923,906 21.2% 51.8% 19.9% 4.3% 2.8% 100.0% Number of Companies 15 42 18 4 5 December 31, 2013 Debt Investments at Fair Value Percentage of Total Portfolio $ $ 162,586 429,804 184,692 30,687 14,219 821,988 19.8% 52.3% 22.5% 3.7% 1.7% 100.0% As of December 31, 2014, our debt investments had a weighted average investment grading of 2.24, as compared to 2.20 at December 31, 2013. 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 our debt investments in these portfolio companies have been downgraded until their funding is complete or their operations improve. At December 31, 2014, we had four debt investments on non-accrual with cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively. Comparatively, at December 31, 2013, we had two debt investments on non-accrual with a cumulative investment cost and fair value of $23.3 million and $12.6 million, respectively. Results of Operations Comparison of periods ended December 31, 2014 and 2013 Investment Income Interest Income 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, 2014 and 2013, respectively. Operating Expenses Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Operating expenses totaled approximately $70.3 million and $66.6 million during the years ended December 31, 2014 and 2013, respectively. Interest and Fees on our Borrowings Interest and fees on our borrowings totaled approximately $34.0 million and $35.1 million for the years ended December 31, 2014 and 2013, respectively. The decrease was primarily attributable to the lower weighted average balances outstanding on our SBA debentures, Convertible Senior Notes, and 2017 Asset-Backed Notes. During the year ended December 31, 2014, we paid off $34.8 million of SBA debentures in the first quarter of 2014, settled of $57.3 million of our Convertible Senior Notes, and had amortization of our 2017 Asset-Backed Notes from a balance of $89.6 million as of December 31, 2013 to $16.0 million as of December 31, 2014. In addition, interest expense decreased by approximately $1.7 million related to Convertible Senior Notes settled in the period. These decreases were partially offset by additional interest and fees of approximately $3.8 million on our 2024 Notes issued in the third quarter of 2014 and our 2017 Asset-Backed Notes issued in November 2014. During the year ended December 31, 2014, we recorded a net loss on extinguishment of our convertible senior notes of approximately $1.6 million. The net loss was classified as a component of net investment income in our Consolidated Statements of Operations. We did not incur a loss on extinguishment of debt during the twelve months ended December 31, 2013. We had a weighted average cost of debt, comprised of interest and fees and loss on debt extinguishment (long-term liabilities – convertible senior notes), of approximately 6.6% and 6.1% for the years ended December 31, 2014 and 2013, respectively. The increase was primarily driven by the acceleration of fees related to the early payoffs of SBA obligations and our Asset-Backed Notes as well as the loss on debt extinguishment (long-term liabilities – convertible senior notes) as described above. Total investment income for the year ended December 31, 2014 was approximately $143.7 million as compared to approximately $139.7 million for the year ended December 31, 2013. General and Administrative Expenses Interest income for the year ended December 31, 2014 totaled approximately $126.6 million as compared to approximately $123.7 million for the year ended December 31, 2013. The increase in interest income is primarily attributable to an increase in new loan originations during the year and an increase in accelerations of original issue discounts related to early loan pay-offs and restructures in 2014. The following table shows the lending activity involving PIK interest arrangements, including PIK receivables, for the years ended December 31, 2014 and 2013, at cost: a decrease in accounting expenses. Employee Compensation General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $10.2 million from $9.3 million for the years ended December 31, 2014 and 2013, respectively. These increases were primarily due to increases in facility rent, marketing, corporate legal expenses and outside consulting services partially offset by (in thousands) Beginning PIK loan balance ............................. $ PIK interest capitalized during the period ......... Payments received from PIK loans ................... Realized loss ..................................................... Ending PIK loan balance ................................ $ Years Ended December 31, 2014 2013 5,603 $ 3,346 (2,699) — 6,250 $ 3,548 3,515 (1,153 ) (307 ) 5,603 Employee compensation and benefits totaled approximately $16.6 million for the year ended December 31, 2014 as compared to approximately $16.2 million for the year ended December 31, 2013. The increase was primarily due to changes in variable compensation accrued during the periods. Stock-based compensation totaled approximately $9.6 million for the year ended December 31, 2014 as compared to approximately $6.0 million for the year ended December 31, 2013. The increase was primarily due to an increase in the number of restricted stock units granted in April 2014 as compared March 2013. 16323_HER-10K_CS6-r4.indd 70 4/28/15 2:54 PM 70 71 During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. Our investment in E-Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. The increase in payments received from PIK loans and the decrease in PIK interest capitalized during the year ended December 31, 2014 is due to the payoff of seven PIK loans offset by additions of eight PIK loans which have incurred PIK capitalizations during the period ended December 31, 2014. Portfolio Grading We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality. 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, 2014 and 2013, respectively: (in thousands) December 31, 2014 December 31, 2013 Investment Grading Number of Companies Debt Investments at Percentage of Total Fair Value Portfolio Number of Companies Debt Investments at Percentage of Total Fair Value Portfolio 1 2 3 4 5 19 45 16 6 8 $ $ 195,819 479,037 183,522 39,852 25,676 923,906 21.2% 51.8% 19.9% 4.3% 2.8% 100.0% 15 42 18 4 5 $ $ 162,586 429,804 184,692 30,687 14,219 821,988 19.8% 52.3% 22.5% 3.7% 1.7% 100.0% As of December 31, 2014, our debt investments had a weighted average investment grading of 2.24, as compared to 2.20 at December 31, 2013. 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 our debt investments in these portfolio companies have been downgraded until their funding is complete or their operations improve. At December 31, 2014, we had four debt investments on non-accrual with cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively. Comparatively, at December 31, 2013, we had two debt investments on non-accrual with a cumulative investment cost and fair value of $23.3 million and $12.6 million, respectively. Comparison of periods ended December 31, 2014 and 2013 Results of Operations Investment Income Interest Income Fee Income Income from commitment, facility and loan related fees for the year ended December 31, 2014 totaled approximately $17.0 million as compared to approximately $16.0 million for the year ended December 31, 2013. The increase in fee income is primarily attributable to additional fee accelerations and one time fees due to early pay-offs and restructures during the year ended December 31, 2014, as compared to the same period in 2013. 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, 2014 and 2013, respectively. Operating Expenses Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Operating expenses totaled approximately $70.3 million and $66.6 million during the years ended December 31, 2014 and 2013, respectively. Interest and Fees on our Borrowings Interest and fees on our borrowings totaled approximately $34.0 million and $35.1 million for the years ended December 31, 2014 and 2013, respectively. The decrease was primarily attributable to the lower weighted average balances outstanding on our SBA debentures, Convertible Senior Notes, and 2017 Asset-Backed Notes. During the year ended December 31, 2014, we paid off $34.8 million of SBA debentures in the first quarter of 2014, settled of $57.3 million of our Convertible Senior Notes, and had amortization of our 2017 Asset-Backed Notes from a balance of $89.6 million as of December 31, 2013 to $16.0 million as of December 31, 2014. In addition, interest expense decreased by approximately $1.7 million related to Convertible Senior Notes settled in the period. These decreases were partially offset by additional interest and fees of approximately $3.8 million on our 2024 Notes issued in the third quarter of 2014 and our 2017 Asset-Backed Notes issued in November 2014. During the year ended December 31, 2014, we recorded a net loss on extinguishment of our convertible senior notes of approximately $1.6 million. The net loss was classified as a component of net investment income in our Consolidated Statements of Operations. We did not incur a loss on extinguishment of debt during the twelve months ended December 31, 2013. We had a weighted average cost of debt, comprised of interest and fees and loss on debt extinguishment (long-term liabilities – convertible senior notes), of approximately 6.6% and 6.1% for the years ended December 31, 2014 and 2013, respectively. The increase was primarily driven by the acceleration of fees related to the early payoffs of SBA obligations and our Asset-Backed Notes as well as the loss on debt extinguishment (long-term liabilities – convertible senior notes) as described above. Total investment income for the year ended December 31, 2014 was approximately $143.7 million as compared to approximately $139.7 million for the year ended December 31, 2013. General and Administrative Expenses Interest income for the year ended December 31, 2014 totaled approximately $126.6 million as compared to approximately $123.7 million for the year ended December 31, 2013. The increase in interest income is primarily attributable to an increase in new loan originations during the year and an increase in accelerations of original issue discounts related to early loan pay-offs and restructures in 2014. General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $10.2 million from $9.3 million for the years ended December 31, 2014 and 2013, respectively. These increases were primarily due to increases in facility rent, marketing, corporate legal expenses and outside consulting services partially offset by a decrease in accounting expenses. The following table shows the lending activity involving PIK interest arrangements, including PIK receivables, for the years Employee Compensation ended December 31, 2014 and 2013, at cost: (in thousands) Beginning PIK loan balance ............................. $ PIK interest capitalized during the period ......... Payments received from PIK loans ................... Realized loss ..................................................... Ending PIK loan balance ................................ $ Years Ended December 31, 2014 2013 5,603 $ 3,346 (2,699) — 6,250 $ 3,548 3,515 (1,153 ) (307 ) 5,603 Employee compensation and benefits totaled approximately $16.6 million for the year ended December 31, 2014 as compared to approximately $16.2 million for the year ended December 31, 2013. The increase was primarily due to changes in variable compensation accrued during the periods. Stock-based compensation totaled approximately $9.6 million for the year ended December 31, 2014 as compared to approximately $6.0 million for the year ended December 31, 2013. The increase was primarily due to an increase in the number of restricted stock units granted in April 2014 as compared March 2013. 70 71 16323_HER-10K_CS6-r4.indd 71 4/28/15 2:54 PM Loss on Extinguishment of Convertible Senior Notes Upon meeting the stock trading price conversion requirement as set forth in the Indenture, dated April 15, 2011, between us and U.S. Bank National Association, during the three months ended June 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, holders of approximately $57.3 million of our Convertible Senior Notes exercised their conversion rights and these Convertible Senior Notes were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the Company’s common stock, or $24.3 million. We recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt we recorded for the year ended December 31, 2014 was approximately $1.6 million and was classified as a component of net investment income in our Consolidated Statements of Operations. Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation Realized gains or losses 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. Net change in unrealized appreciation or depreciation 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 realized gains and losses for the years ended December 31, 2014 and 2013 is as follows: (in thousands) Realized gains ................................................................................ $ Realized losses ............................................................................... Net realized gains ......................................................................... $ 2014 24,027 $ (3,915 ) 20,112 $ 2013 32,577 (17,741 ) 14,836 Years Ended December 31, During the year ended December 31, 2014, we recognized net realized gains of approximately $20.1 million on the portfolio. These net realized gains included gross realized gains of approximately $24.0 million primarily from the sale of investments in seven portfolio companies including Acceleron Pharma, Inc., ($7.9 million), Merrimack Pharmaceuticals, Inc., ($4.3 million), Neuralstem, Inc., ($2.7 million), IPA Holdings, LLC., ($1.5 million), Cell Therapeutics, Inc., ($1.3 million), Trulia, Inc. ($1.0 million), and Portola Pharmaceuticals, Inc. ($700,000). These gains were partially offset by gross realized losses of approximately $3.9 million primarily from the liquidation of our investments in fifteen portfolio companies. During the year ended December 31, 2013, we recognized net realized gains of approximately $14.8 million. These net realized gains include gross realized gains of approximately $32.6 million primarily from the sale of equity and warrant investments in nine portfolio companies, including Virident Systems, Inc. ($7.5 million), Anacor Pharmaceuticals, Inc. ($5.0 million), iWatt, Inc. ($4.7 million), Althea Technologies, Inc. ($4.3 million), WageWorks, Inc. ($2.0 million), Lanx, Inc. ($1.9 million), InsMed, Inc. ($1.4 million), Pacira Pharmaceuticals, Inc. ($1.3 million) and AcelRx, Inc. ($1.1 million). These gains were partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of our debt and equity investments in five portfolio companies, including Bridgewave Communications ($4.4 million), E-Band Communications Corp ($3.3 million), Tethys Bioscience, Inc. ($2.5 million), Just.Me, Inc. ($1.3 million), and PointOne, Inc. ($1.1 million). The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2014 and 2013: Year Ended December 31, 2014 2013 (in thousands) Gross unrealized appreciation on portfolio investments ....................................... $ 72,968 $ 80,616 Gross unrealized depreciation on portfolio investments ....................................... Reversal of prior period net unrealized appreciation upon a realization event ........ Reversal of prior period net unrealized depreciation upon a realization event ........ Net unrealized (depreciation) on taxes payable .................................................... Net unrealized appreciation (depreciation) on escrow receivables ....................... Citigroup Warrant Participation ........................................................................... (79,412 ) (15,335 ) 3,182 (1,882 ) (465 ) 270 (63,855) (26,489) 21,763 (898) 465 (57) Net unrealized appreciation (depreciation) on portfolio investments ............ $ (20,674 ) $ 11,545 During the year ended December 31, 2014, we recorded approximately $20.7 million of net unrealized depreciation, of which $18.6 million is net unrealized depreciation from our debt, equity and warrant investments. Of the $18.6 million, approximately $14.2 million is attributed to net unrealized depreciation on our debt investments which primarily related to $23.2 million unrealized depreciation for collateral based impairments on 12 portfolio companies offset by the reversal of collateral based impairments of $4.1 on two portfolio companies. Approximately $15.8 million is attributed to net unrealized depreciation on our warrant investments which primarily related to $8.3 million of net unrealized depreciation due to the exercise of our warrants in Box, Inc. to equity and $2.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized depreciation was offset by approximately $11.4 million attributed to net unrealized appreciation on our equity investments, including approximately $13.0 million of net unrealized appreciation on Box, Inc., including the exercise of our remaining warrants in Box, Inc. to equity and approximately $7.7 million of net unrealized appreciation on our public equity portfolio. This was offset by approximately $12.7 million unrealized depreciation due to reversal of prior period net unrealized appreciation upon being realized as a gain. December 31, 2014. Net unrealized appreciation decreased by approximately $1.9 million as a result of estimated taxes payable for the year ended Net unrealized appreciation further decreased by approximately $465,000 as a result of reducing escrow receivables for the year ended December 31, 2014 related to merger and acquisition transactions closed on former portfolio companies. During the year ended December 31, 2014, net unrealized depreciation was offset by approximately $270,000 due to net depreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. During the year ended December 31, 2013, we recorded approximately $11.5 million of net unrealized appreciation, of which $12.0 million is net unrealized appreciation from our debt, equity and warrant investments. Of the $12.0 million, approximately $15.7 million is attributed to net unrealized appreciation on equity, including approximately $5.6 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. Approximately $4.5 million is attributed to net unrealized appreciation on our warrant investments, including approximately $9.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized appreciation was partially offset by approximately $8.2 million of net unrealized depreciation on our debt investments, which primarily related to $21.2 million of unrealized depreciation for collateral based impairments, offset by the reversal of approximately $13.0 million of prior period net unrealized depreciation upon being realized as a loss due to the write-off or early payoff of debt investments. Net unrealized appreciation decreased by approximately $898,000 as a result of estimated taxes payable for the year ended December 31, 2013. Net unrealized appreciation further increased by approximately $465,000 as a result of escrow receivables related to merger and acquisition transactions closed during the year ended December 31, 2013. For the year ended December 31, 2013, net unrealized appreciation decreased by approximately $57,000 as a result of net appreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement. 16323_HER-10K_CS6-r4.indd 72 4/28/15 2:54 PM 72 73 Loss on Extinguishment of Convertible Senior Notes Upon meeting the stock trading price conversion requirement as set forth in the Indenture, dated April 15, 2011, between us and U.S. Bank National Association, during the three months ended June 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, holders of approximately $57.3 million of our Convertible Senior Notes exercised their conversion rights and these Convertible Senior Notes were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the Company’s common stock, or $24.3 million. We recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt we recorded for the year ended December 31, 2014 was approximately $1.6 million and was classified as a component of net investment income in our Consolidated Statements of Operations. Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation Realized gains or losses 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. Net change in unrealized appreciation or depreciation 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 realized gains and losses for the years ended December 31, 2014 and 2013 is as follows: (in thousands) Realized gains ................................................................................ $ Realized losses ............................................................................... Net realized gains ......................................................................... $ Years Ended December 31, 2014 24,027 $ (3,915 ) 20,112 $ 2013 32,577 (17,741 ) 14,836 During the year ended December 31, 2014, we recognized net realized gains of approximately $20.1 million on the portfolio. These net realized gains included gross realized gains of approximately $24.0 million primarily from the sale of investments in seven portfolio companies including Acceleron Pharma, Inc., ($7.9 million), Merrimack Pharmaceuticals, Inc., ($4.3 million), Neuralstem, Inc., ($2.7 million), IPA Holdings, LLC., ($1.5 million), Cell Therapeutics, Inc., ($1.3 million), Trulia, Inc. ($1.0 million), and Portola Pharmaceuticals, Inc. ($700,000). These gains were partially offset by gross realized losses of approximately $3.9 million primarily from the liquidation of our investments in fifteen portfolio companies. During the year ended December 31, 2013, we recognized net realized gains of approximately $14.8 million. These net realized gains include gross realized gains of approximately $32.6 million primarily from the sale of equity and warrant investments in nine portfolio companies, including Virident Systems, Inc. ($7.5 million), Anacor Pharmaceuticals, Inc. ($5.0 million), iWatt, Inc. ($4.7 million), Althea Technologies, Inc. ($4.3 million), WageWorks, Inc. ($2.0 million), Lanx, Inc. ($1.9 million), InsMed, Inc. ($1.4 million), Pacira Pharmaceuticals, Inc. ($1.3 million) and AcelRx, Inc. ($1.1 million). These gains were partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of our debt and equity investments in five portfolio companies, including Bridgewave Communications ($4.4 million), E-Band Communications Corp ($3.3 million), Tethys Bioscience, Inc. ($2.5 million), Just.Me, Inc. ($1.3 million), and PointOne, Inc. ($1.1 million). The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2014 and 2013: Year Ended December 31, 2014 (in thousands) 72,968 $ Gross unrealized appreciation on portfolio investments ....................................... $ (79,412 ) Gross unrealized depreciation on portfolio investments ....................................... (15,335 ) Reversal of prior period net unrealized appreciation upon a realization event ........ 3,182 Reversal of prior period net unrealized depreciation upon a realization event ........ (1,882 ) Net unrealized (depreciation) on taxes payable .................................................... (465 ) Net unrealized appreciation (depreciation) on escrow receivables ....................... Citigroup Warrant Participation ........................................................................... 270 Net unrealized appreciation (depreciation) on portfolio investments ............ $ (20,674 ) $ 2013 80,616 (63,855) (26,489) 21,763 (898) 465 (57) 11,545 During the year ended December 31, 2014, we recorded approximately $20.7 million of net unrealized depreciation, of which $18.6 million is net unrealized depreciation from our debt, equity and warrant investments. Of the $18.6 million, approximately $14.2 million is attributed to net unrealized depreciation on our debt investments which primarily related to $23.2 million unrealized depreciation for collateral based impairments on 12 portfolio companies offset by the reversal of collateral based impairments of $4.1 on two portfolio companies. Approximately $15.8 million is attributed to net unrealized depreciation on our warrant investments which primarily related to $8.3 million of net unrealized depreciation due to the exercise of our warrants in Box, Inc. to equity and $2.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized depreciation was offset by approximately $11.4 million attributed to net unrealized appreciation on our equity investments, including approximately $13.0 million of net unrealized appreciation on Box, Inc., including the exercise of our remaining warrants in Box, Inc. to equity and approximately $7.7 million of net unrealized appreciation on our public equity portfolio. This was offset by approximately $12.7 million unrealized depreciation due to reversal of prior period net unrealized appreciation upon being realized as a gain. Net unrealized appreciation decreased by approximately $1.9 million as a result of estimated taxes payable for the year ended December 31, 2014. Net unrealized appreciation further decreased by approximately $465,000 as a result of reducing escrow receivables for the year ended December 31, 2014 related to merger and acquisition transactions closed on former portfolio companies. During the year ended December 31, 2014, net unrealized depreciation was offset by approximately $270,000 due to net depreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. During the year ended December 31, 2013, we recorded approximately $11.5 million of net unrealized appreciation, of which $12.0 million is net unrealized appreciation from our debt, equity and warrant investments. Of the $12.0 million, approximately $15.7 million is attributed to net unrealized appreciation on equity, including approximately $5.6 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. Approximately $4.5 million is attributed to net unrealized appreciation on our warrant investments, including approximately $9.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized appreciation was partially offset by approximately $8.2 million of net unrealized depreciation on our debt investments, which primarily related to $21.2 million of unrealized depreciation for collateral based impairments, offset by the reversal of approximately $13.0 million of prior period net unrealized depreciation upon being realized as a loss due to the write-off or early payoff of debt investments. Net unrealized appreciation decreased by approximately $898,000 as a result of estimated taxes payable for the year ended December 31, 2013. Net unrealized appreciation further increased by approximately $465,000 as a result of escrow receivables related to merger and acquisition transactions closed during the year ended December 31, 2013. For the year ended December 31, 2013, net unrealized appreciation decreased by approximately $57,000 as a result of net appreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement. 72 73 16323_HER-10K_CS6-r4.indd 73 4/28/15 2:54 PM Investment Income Interest Income Total investment income for the year ended December 31, 2013 was approximately $139.7 million as compared to approximately $97.5 million for the year ended December 31, 2012. Interest income for the year ended December 31, 2013 totaled approximately $123.7 million as compared to approximately $87.6 million for the year ended December 31, 2012. The increase in interest income is primarily attributable to an increase of loan interest income of approximately $25.0 million for the year ended December 31, 2013, related to both new loans originated during 2013 and an overall increase in amortization during 2013 on loans originated during 2012. This increase in interest income was partially offset by pay-offs during the year ended December 31, 2013. The following table shows the lending activity involving PIK interest arrangements for the years ended December 31, 2013 and 2012, at cost: (in thousands) Beginning PIK loan balance ..................................................... $ PIK interest capitalized during the period ................................ Payments received from PIK loans .......................................... Realized loss ............................................................................. Ending PIK loan balance ....................................................... $ Year Ended December 31, 2013 2012 3,309 $ 3,103 (1,123) (307) 4,982 $ 2,041 1,400 (132) — 3,309 The increase in payments received from PIK loans and PIK interest capitalized during the year ended December 31, 2013 is due to the addition of nine PIK loans which have incurred PIK capitalizations during the period offset by the payoff of four PIK loans during the period ended December 31, 2013. The following table summarizes the change in net unrealized appreciation/ (depreciation) in the investment portfolio by Comparison of periods ended December 31, 2013 and 2012 investment type for the years ended December 31, 2014 and December 31, 2013. (in millions) Debt Year Ended December 31, 2014 Warrants Equity Total Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ (23.2) $ 4.1 — — 4.9 4.9 (14.2) $ (1.2 ) $ 0.6 (11.1 ) 7.6 15.5 23.1 11.4 $ (3.3) $ — (9.7) (2.9) 0.1 (2.8) (15.8) $ (27.7) 4.7 (20.8) 4.7 20.5 25.2 (18.6) (in millions) Debt Year Ended December 31, 2013 Warrants Equity Total Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ (21.2) $ — 13.0 — — — (8.2) $ — $ — (5.8 ) 7.6 13.9 21.5 15.7 $ (0.1) — (10.6) 3.5 11.7 15.2 4.5 $ (21.3) — (3.4) 11.1 25.6 36.7 12.0 * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. Fee Income Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. Income from commitment, facility and loan related fees for the year ended December 31, 2013 totaled approximately $16.0 million as compared to approximately $9.9 million for the year ended December 31, 2012. The increase in fee income is primarily attributable to additional fee accelerations and one time fees due to early pay-offs during the year ended December 31, 2013 as compared to the same period in 2012. 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, 2013 and 2012, respectively. Net Increase in Net Assets Resulting from Operations and Earnings Per Share Operating Expenses For the years ended December 31, 2014 and 2013, the net increase in net assets resulting from operations totaled approximately $71.2 million and approximately $99.4 million, respectively. These changes are made up of the items previously described. Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Operating expenses totaled approximately $66.6 million and $49.4 million during the years The basic and fully diluted net change in net assets per common share for the year ended December 31, 2014 were $1.12 and $1.10, respectively, whereas the basic and fully diluted net change in net assets per common share for the year ended December 31, 2013 was $1.67 and $1.63, respectively. For the purpose of calculating diluted earnings per share for years ended December 31, 2014 and 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation as our share price was greater than the conversion price of $11.36 in effect as of December 31, 2014 and $11.63 as of December 31, 2013 for the Convertible Senior Notes for such periods. ended December 31, 2013 and 2012, respectively. Interest and Fees on our Borrowings Interest and fees on our borrowings totaled approximately $35.1 million for the year ended December 31, 2013 as compared to approximately $23.8 million for the year ended December 31, 2012. This increase was primarily attributable to interest and fee expenses of approximately $12.9 million for the year ended December 31, 2013 related to the 2019 Notes issued in April and September 2012, which is $7.3 million greater than $5.6 million of interest and fees incurred during the year ended December 31, 2012, and approximately $5.1 million of interest and fee expense incurred due to the Asset-Backed Notes issued in December 2012. These expenses were partially offset by a decrease in interest and fees of approximately $749,000 for the year ended December 31, 2013 associated with our SBA debentures due to the pay down in August 2012 of debentures that had a weighted average cost of debt of 6.40% and borrowings of $24.75 million of debentures in November 2012 that had a weighted average cost of debt of 3.05%. 16323_HER-10K_CS6-r4.indd 74 4/28/15 2:54 PM 74 75 The following table summarizes the change in net unrealized appreciation/ (depreciation) in the investment portfolio by Comparison of periods ended December 31, 2013 and 2012 investment type for the years ended December 31, 2014 and December 31, 2013. (in millions) Year Ended December 31, 2014 Debt Equity Warrants Total Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ (14.2) $ (in millions) Year Ended December 31, 2013 Debt Equity Warrants Total (23.2) $ 4.1 — — 4.9 4.9 (21.2) $ — 13.0 — — — (8.2) $ (1.2 ) $ 0.6 (11.1 ) 7.6 15.5 23.1 11.4 $ — $ — (5.8 ) 7.6 13.9 21.5 15.7 $ (3.3) $ — (9.7) (2.9) 0.1 (2.8) (15.8) $ (0.1) — (10.6) 3.5 11.7 15.2 4.5 $ (27.7) 4.7 (20.8) 4.7 20.5 25.2 (18.6) (21.3) — (3.4) 11.1 25.6 36.7 12.0 Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. Investment Income Interest Income Total investment income for the year ended December 31, 2013 was approximately $139.7 million as compared to approximately $97.5 million for the year ended December 31, 2012. Interest income for the year ended December 31, 2013 totaled approximately $123.7 million as compared to approximately $87.6 million for the year ended December 31, 2012. The increase in interest income is primarily attributable to an increase of loan interest income of approximately $25.0 million for the year ended December 31, 2013, related to both new loans originated during 2013 and an overall increase in amortization during 2013 on loans originated during 2012. This increase in interest income was partially offset by pay-offs during the year ended December 31, 2013. The following table shows the lending activity involving PIK interest arrangements for the years ended December 31, 2013 and 2012, at cost: (in thousands) Beginning PIK loan balance ..................................................... $ PIK interest capitalized during the period ................................ Payments received from PIK loans .......................................... Realized loss ............................................................................. Ending PIK loan balance ....................................................... $ Year Ended December 31, 2012 2013 3,309 $ 3,103 (1,123) (307) 4,982 $ 2,041 1,400 (132) — 3,309 The increase in payments received from PIK loans and PIK interest capitalized during the year ended December 31, 2013 is due to the addition of nine PIK loans which have incurred PIK capitalizations during the period offset by the payoff of four PIK loans during the period ended December 31, 2013. Fee Income Income from commitment, facility and loan related fees for the year ended December 31, 2013 totaled approximately $16.0 million as compared to approximately $9.9 million for the year ended December 31, 2012. The increase in fee income is primarily attributable to additional fee accelerations and one time fees due to early pay-offs during the year ended December 31, 2013 as compared to the same period in 2012. 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, 2013 and 2012, respectively. Net Increase in Net Assets Resulting from Operations and Earnings Per Share Operating Expenses For the years ended December 31, 2014 and 2013, the net increase in net assets resulting from operations totaled approximately $71.2 million and approximately $99.4 million, respectively. These changes are made up of the items previously described. Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Operating expenses totaled approximately $66.6 million and $49.4 million during the years ended December 31, 2013 and 2012, respectively. The basic and fully diluted net change in net assets per common share for the year ended December 31, 2014 were $1.12 and $1.10, respectively, whereas the basic and fully diluted net change in net assets per common share for the year ended December 31, 2013 was $1.67 and $1.63, respectively. Interest and Fees on our Borrowings For the purpose of calculating diluted earnings per share for years ended December 31, 2014 and 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation as our share price was greater than the conversion price of $11.36 in effect as of December 31, 2014 and $11.63 as of December 31, 2013 for the Convertible Senior Notes for such periods. Interest and fees on our borrowings totaled approximately $35.1 million for the year ended December 31, 2013 as compared to approximately $23.8 million for the year ended December 31, 2012. This increase was primarily attributable to interest and fee expenses of approximately $12.9 million for the year ended December 31, 2013 related to the 2019 Notes issued in April and September 2012, which is $7.3 million greater than $5.6 million of interest and fees incurred during the year ended December 31, 2012, and approximately $5.1 million of interest and fee expense incurred due to the Asset-Backed Notes issued in December 2012. These expenses were partially offset by a decrease in interest and fees of approximately $749,000 for the year ended December 31, 2013 associated with our SBA debentures due to the pay down in August 2012 of debentures that had a weighted average cost of debt of 6.40% and borrowings of $24.75 million of debentures in November 2012 that had a weighted average cost of debt of 3.05%. 74 75 16323_HER-10K_CS6-r4.indd 75 4/28/15 2:54 PM Additionally, we incurred approximately $1.1 million of non-cash interest expense during the period ended December 31, 2013 attributed to the accretion of the fair value of the conversion feature on the Convertible Senior Notes. We had a weighted average cost of debt, comprised of interest and fees, of approximately 6.1% for the year ended December 31, 2013, as compared to 6.6% during the year ended December 31, 2012. The decrease was primarily driven by the Asset-Backed Notes issued in December 2012, which account for approximately 18.9% of our outstanding debt and accrue interest at 3.3%. As of December 31, 2013 the weighted average debt outstanding was approximately $580.1 million. General and Administrative Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $9.3 million from $8.1 million for the years ended December 31, 2013 and 2012, respectively. These increases were primarily due to increases of approximately $689,000 and $442,000 related to corporate legal expenses and outside consulting services, partially offset by a reduction of approximately $249,000 for accounting fees. Employee Compensation Employee compensation and benefits totaled approximately $16.2 million for the year ended December 31, 2013 as compared to approximately $13.3 million for the year ended December 31, 2012. This increase was due to increasing our staff to 62 active employees at December 31, 2013 from 52 active employees at December 31, 2012 and increasing our variable compensation (bonus) accrual based on performance improvements. Stock-based compensation totaled approximately $6.0 million for the year ended December 31, 2013 as compared to approximately $4.2 million for the year ended December 31, 2012. These increases were due primarily to the expense on restricted stock grants for 607,001 shares granted during the year ended December 31, 2013. Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation Realized gains or losses 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. Net change in unrealized appreciation or depreciation 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 realized gains and losses for the years ended December 31, 2013 and 2012 is as follows: (in thousands) Realized gains ................................................................................ $ Realized losses ............................................................................... Net realized gains ......................................................................... $ 2013 32,577 $ (17,741 ) 14,836 $ 2012 17,481 (14,313 ) 3,168 Year Ended December 31, During the year ended December 31, 2013, we recognized net realized gains of approximately $14.8 million. These net realized gains include gross realized gains of approximately $32.6 million primarily from the sale of equity and warrant investments in nine portfolio companies, including Virident Systems, Inc. ($7.5 million), Anacor Pharmaceuticals, Inc. ($5.0 million), iWatt, Inc. ($4.7 million), Althea Technologies, Inc. ($4.3 million), WageWorks, Inc. ($2.0 million), Lanx, Inc. ($1.9 million), InsMed, Inc. ($1.4 million), Pacira Pharmaceuticals, Inc. ($1.3 million) and AcelRx, Inc. ($1.1 million). These gains were partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of our debt and equity investments in five portfolio companies, including Bridgewave Communications ($4.4 million), E-Band Communications Corp ($3.3 million), Tethys Bioscience, Inc. ($2.5 million), Just.Me, Inc. ($1.3 million), and PointOne, Inc. ($1.1 million). During the year ended December 31, 2012, we recognized net realized gains of $3.2 million. These net realized gains include gross realized gains of approximately $17.5 million primarily from the sale of equity and warrant investments in NEXX Systems, Inc., ($5.1 million), BARRX Medical ($3.1 million), DeCode Genetics ($2.6 million), Aegerion Pharmaceuticals ($2.4 million) and Annie’s ($2.4 million). These gains were partially offset by gross realized losses of approximately $14.3 million from the liquidation of our equity and warrant investments in MaxVision Holding, L.L.C ($8.7 million), Razorgator Interactive Group ($2.2 million), Zeta Interactive Corporation ($672,000) and Magi.com ($463,000) pka Hi5 Networks, Inc. The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2013 and 2012: (in thousands) Gross unrealized appreciation on portfolio investments ....................................... $ Gross unrealized depreciation on portfolio investments ....................................... Reversal of prior period net unrealized appreciation upon a realization event ..... Reversal of prior period net unrealized depreciation upon a realization event ..... Net unrealized appreciation (depreciation) on taxes payable ................................ Net unrealized appreciation (depreciation) on escrow receivables ....................... Citigroup Warrant Participation ............................................................................ 80,616 $ (63,855 ) (26,489 ) 21,763 (898 ) 465 (57 ) 65,871 (73,158) (12,575) 14,944 — — 402 Net unrealized appreciation (depreciation) on portfolio investments ............ $ 11,545 $ (4,516) Year Ended December 31, 2013 2012 During the year ended December 31, 2013, we recorded approximately $11.5 million of net unrealized appreciation, of which $12.0 million is net unrealized appreciation from our debt, equity and warrant investments. Of the $12.0 million, approximately $15.7 million is attributed to net unrealized appreciation on equity, including approximately $5.6 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. Approximately $4.5 million is attributed to net unrealized appreciation on our warrant investments, including approximately $9.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized appreciation was partially offset by approximately $8.2 million of net unrealized depreciation on our debt investments, which primarily related to $21.2 million of unrealized depreciation for collateral based impairments, offset by the reversal of approximately $13.0 million of prior period net unrealized depreciation upon being realized as a loss due to the write-off or early payoff of debt investments. Net unrealized appreciation decreased by approximately $898,000 as a result of estimated taxes payable for the year ended December 31, 2013. Net unrealized appreciation further increased by approximately $465,000 as a result of escrow receivables related to merger and acquisition transactions closed during the year ended December 31, 2013. For the year ended December 31, 2013, net unrealized appreciation decreased by approximately $57,000 as a result of net appreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement. During the year ended December 31, 2012, we recorded approximately $4.5 million of net unrealized depreciation from our debt, equity and warrant investments. Approximately $3.4 million and $2.3 million is attributed to net unrealized depreciation on warrant investments and debt investments, respectively, of which approximately $6.6 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $9.2 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The remainder is related to fluctuations in current market interest rates during the year ended December 31, 2012. This unrealized depreciation was partially offset by approximately $1.3 million of net unrealized appreciation on our equity investments, of which approximately $6.0 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $5.7 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The following table summarizes the change in net unrealized appreciation/ (depreciation) in the investment portfolio by investment type for the years ended December 31, 2013 and December 31, 2012. (in millions) Year Ended December 31, 2013 Debt Equity Warrants Total Collateral based impairments ........................................................... $ Reversals due to Debt Payoffs & Warrant/Equity sales ................... (21.2) $ 13.0 Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ — — — (8.2) $ — $ (5.8 ) 7.6 13.9 21.5 15.7 $ (0.1) $ (10.6) 3.5 11.7 15.2 4.5 $ (21.3) (3.4) 11.1 25.6 36.7 12.0 16323_HER-10K_CS6-r4.indd 76 4/28/15 2:54 PM 76 77 attributed to the accretion of the fair value of the conversion feature on the Convertible Senior Notes. We had a weighted average cost of debt, comprised of interest and fees, of approximately 6.1% for the year ended December 31, 2013, as compared to 6.6% during the year ended December 31, 2012. The decrease was primarily driven by the Asset-Backed Notes issued in December 2012, which account for approximately 18.9% of our outstanding debt and accrue interest at 3.3%. As of December 31, 2013 the weighted average debt outstanding was approximately $580.1 million. General and Administrative Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $9.3 million from $8.1 million for the years ended December 31, 2013 and 2012, respectively. These increases were primarily due to increases of approximately $689,000 and $442,000 related to corporate legal expenses and outside consulting services, partially offset by a reduction of approximately $249,000 for accounting fees. Employee Compensation Employee compensation and benefits totaled approximately $16.2 million for the year ended December 31, 2013 as compared to approximately $13.3 million for the year ended December 31, 2012. This increase was due to increasing our staff to 62 active employees at December 31, 2013 from 52 active employees at December 31, 2012 and increasing our variable compensation (bonus) accrual based on performance improvements. Stock-based compensation totaled approximately $6.0 million for the year ended December 31, 2013 as compared to approximately $4.2 million for the year ended December 31, 2012. These increases were due primarily to the expense on restricted stock grants for 607,001 shares granted during the year ended December 31, 2013. Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation Realized gains or losses 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. Net change in unrealized appreciation or depreciation 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 realized gains and losses for the years ended December 31, 2013 and 2012 is as follows: (in thousands) Realized gains ................................................................................ $ Realized losses ............................................................................... Net realized gains ......................................................................... $ Year Ended December 31, 2013 32,577 $ (17,741 ) 14,836 $ 2012 17,481 (14,313 ) 3,168 During the year ended December 31, 2013, we recognized net realized gains of approximately $14.8 million. These net realized gains include gross realized gains of approximately $32.6 million primarily from the sale of equity and warrant investments in nine portfolio companies, including Virident Systems, Inc. ($7.5 million), Anacor Pharmaceuticals, Inc. ($5.0 million), iWatt, Inc. ($4.7 million), Althea Technologies, Inc. ($4.3 million), WageWorks, Inc. ($2.0 million), Lanx, Inc. ($1.9 million), InsMed, Inc. ($1.4 million), Pacira Pharmaceuticals, Inc. ($1.3 million) and AcelRx, Inc. ($1.1 million). These gains were partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of our debt and equity investments in five portfolio companies, including Bridgewave Communications ($4.4 million), E-Band Communications Corp ($3.3 million), Tethys Bioscience, Inc. ($2.5 million), Just.Me, Inc. ($1.3 million), and PointOne, Inc. ($1.1 million). During the year ended December 31, 2012, we recognized net realized gains of $3.2 million. These net realized gains include gross realized gains of approximately $17.5 million primarily from the sale of equity and warrant investments in NEXX Systems, Inc., ($5.1 million), BARRX Medical ($3.1 million), DeCode Genetics ($2.6 million), Aegerion Pharmaceuticals ($2.4 million) and Annie’s ($2.4 million). These gains were partially offset by gross realized losses of approximately $14.3 million from the liquidation of our equity and warrant investments in MaxVision Holding, L.L.C ($8.7 million), Razorgator Interactive Group ($2.2 million), Zeta Interactive Corporation ($672,000) and Magi.com ($463,000) pka Hi5 Networks, Inc. Additionally, we incurred approximately $1.1 million of non-cash interest expense during the period ended December 31, 2013 The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2013 and 2012: (in thousands) Gross unrealized appreciation on portfolio investments ....................................... $ Gross unrealized depreciation on portfolio investments ....................................... Reversal of prior period net unrealized appreciation upon a realization event ..... Reversal of prior period net unrealized depreciation upon a realization event ..... Net unrealized appreciation (depreciation) on taxes payable ................................ Net unrealized appreciation (depreciation) on escrow receivables ....................... Citigroup Warrant Participation ............................................................................ Net unrealized appreciation (depreciation) on portfolio investments ............ $ Year Ended December 31, 2012 2013 80,616 $ (63,855 ) (26,489 ) 21,763 (898 ) 465 (57 ) 11,545 $ 65,871 (73,158) (12,575) 14,944 — — 402 (4,516) During the year ended December 31, 2013, we recorded approximately $11.5 million of net unrealized appreciation, of which $12.0 million is net unrealized appreciation from our debt, equity and warrant investments. Of the $12.0 million, approximately $15.7 million is attributed to net unrealized appreciation on equity, including approximately $5.6 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. Approximately $4.5 million is attributed to net unrealized appreciation on our warrant investments, including approximately $9.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized appreciation was partially offset by approximately $8.2 million of net unrealized depreciation on our debt investments, which primarily related to $21.2 million of unrealized depreciation for collateral based impairments, offset by the reversal of approximately $13.0 million of prior period net unrealized depreciation upon being realized as a loss due to the write-off or early payoff of debt investments. Net unrealized appreciation decreased by approximately $898,000 as a result of estimated taxes payable for the year ended December 31, 2013. Net unrealized appreciation further increased by approximately $465,000 as a result of escrow receivables related to merger and acquisition transactions closed during the year ended December 31, 2013. For the year ended December 31, 2013, net unrealized appreciation decreased by approximately $57,000 as a result of net appreciation of fair value on the pool of warrants collateralized under the Citigroup Warrant Participation Agreement. During the year ended December 31, 2012, we recorded approximately $4.5 million of net unrealized depreciation from our debt, equity and warrant investments. Approximately $3.4 million and $2.3 million is attributed to net unrealized depreciation on warrant investments and debt investments, respectively, of which approximately $6.6 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $9.2 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The remainder is related to fluctuations in current market interest rates during the year ended December 31, 2012. This unrealized depreciation was partially offset by approximately $1.3 million of net unrealized appreciation on our equity investments, of which approximately $6.0 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $5.7 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The following table summarizes the change in net unrealized appreciation/ (depreciation) in the investment portfolio by investment type for the years ended December 31, 2013 and December 31, 2012. (in millions) Collateral based impairments ........................................................... $ Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ Debt (21.2) $ 13.0 — — — (8.2) $ Year Ended December 31, 2013 Warrants Equity Total — $ (5.8 ) 7.6 13.9 21.5 15.7 $ (0.1) $ (10.6) 3.5 11.7 15.2 4.5 $ (21.3) (3.4) 11.1 25.6 36.7 12.0 76 77 16323_HER-10K_CS6-r4.indd 77 4/28/15 2:54 PM (in millions) Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ Debt Year Ended December 31, 2012 Warrants Equity Total (11.4) $ 10.0 7.0 — (7.9) (7.9) (2.3) $ (2.1 ) $ 0.5 (0.3 ) (6.5 ) 9.7 3.2 1.3 $ (1.2) 0.7 (5.0) 1.9 0.2 2.1 (3.4) $ (14.7) 11.2 1.7 (4.6) 2.0 (2.6) (4.4) * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. deposit accounts. Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized. We distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. Net Increase in Net Assets Resulting from Operations and Earnings Per Share For the years ended December 31, 2013 and December 31, 2012, the net increase in net assets resulting from operations totaled approximately $99.4 million and $46.8 million, respectively. These changes are made up of the items previously described. The basic and fully diluted net change in net assets per common share for the year ended December 31, 2013 were $1.67 and $1.63, respectively, whereas both the basic and fully diluted net change in net assets per common share for the year ended December 31, 2012 were $0.93. For the purpose of calculating diluted earnings per share for the year ended December 31, 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because our share price was greater than the conversion price in effect ($11.63) for the Convertible Senior Notes for such period. For the year ended December 31, 2012, the dilutive effect of the Convertible Senior Notes under the treasury stock method is anti-dilutive because our share price was less than the conversion price in effect ($11.81) for the Convertible Senior Notes for such period, and not included in this calculation. year. Financial Condition, Liquidity and Capital Resources Our liquidity and capital resources are derived from our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes, 2021 Asset-Backed Notes 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 borrowings and the proceeds from the turnover of our portfolio and from public and private offerings of securities to finance our investment objectives. We may raise additional equity or debt capital through both registered offerings off a shelf registration, “At-The-Market”, or ATM, and private offerings of securities, by securitizing a portion of our investments or borrowing, including from the SBA through our SBIC subsidiaries. On August 16, 2013, we entered into an ATM equity distribution agreement with JMP Securities LLC, or JMP. The equity distribution agreement provides that we may offer and sell up to 8.0 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, 2014, we sold 650,000 shares of common stock for total accumulated net proceeds of approximately $9.5 million, all of which is accretive to net asset value. We generally use the net proceeds from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of December 31, 2014, approximately 7.35 million shares remained available for issuance and sale under the equity distribution agreement. As of December 31, 2014, approximately $57.3 million of our Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million of our common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “—Subsequent Events”. At December 31, 2014, we had $17.7 million of Convertible Senior Notes, $170.4 million of 2019 Notes, $103.0 million of 2024 Notes, $16.0 million of 2017 Asset-Backed Notes, $129.3 million of 2021 Asset-Backed Notes and $190.2 million of SBA debentures payable. We had no borrowings outstanding under either the Wells Facility or the Union Bank Facility. At December 31, 2014, we had $377.1 million in available liquidity, including $227.1 million in cash and cash equivalents. We had available borrowing capacity of approximately $75.0 million under the Wells Facility and $75.0 million under the Union Bank Facility, subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing At December 31, 2014, we had $112.5 million of cash in restricted accounts related to our SBIC that we may use to fund new investments in the SBIC. With our net investments of $38.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At December 31, 2014, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries. At December 31, 2014, we had approximately $12.7 million of restricted cash, which consists of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized 2017Asset-Backed Notes and 2021 Asset-Backed Notes, based on current characteristics of the securitized debt investment portfolios, the restricted funds may be used to pay monthly interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the year ended December 31, 2014, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments. During the year ended December 31, 2014, our operating activities used $26.5 million of cash and cash equivalents, compared to $103.6 million provided during the year ended December 31, 2013. This $130.1 million decrease in cash provided by operating activities resulted primarily from the increase in purchase of investments of approximately $135.7 million and the decrease in net assets resulting from operations of approximately $28.3 million. During the year ended December 31, 2014, our investing activities used $6.6 million of cash, compared to approximately $6.6 million used during the year ended December 31, 2013. Our cash flows from investing remained flat as compared to the prior fiscal During the year ended December 31, 2014, our financing activities used $8.2 million of cash, compared to $11.6 million used during the year ended December 31, 2013. This $3.5 million decrease in cash used by financing activities was primarily due to the net issuance of our 2024 Notes and 2021 Asset-Backed Notes for $99.7 million and $126.0 million, respectively. These increases were offset by a decrease in proceeds from issuance of common stock of $86.4 million and an increase in repayments of 2017 Asset-Backed Notes and SBA debentures of $33.8 million and $34.8 million, respectively, during the year ended December 31, 2014. In addition, during the year ended December 31, 2014, we paid $57.3 million in cash to settle our Convertible Senior Notes, of which $53.1 million is included in cash flows from financing activities and $4.2 million is in included in cash flows from operating activities, which represents the proportional interest paid of the original issue discount. As of December 31, 2014, net assets totaled $658.9 million, with a net asset value per share of $10.18. We intend to generate additional cash primarily from cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in other high-quality debt investments that mature in one year or less as well as from future borrowings as required to meet our lending activities. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of December 31, 2014 our asset coverage ratio under our regulatory requirements as a business development company was 250.8%, excluding our SBA debentures as a result of our exemptive order from the SEC that 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 200%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total leverage when including our SBA debentures was 205.0% at December 31, 2014. 16323_HER-10K_CS6-r4.indd 78 4/28/15 2:54 PM 78 79 (in millions) Collateral based impairments ........................................................... $ Reversals of Prior Period Collateral based impairments .................. Reversals due to Debt Payoffs & Warrant/Equity sales ................... Fair Value Market/Yield Adjustments* Level 1 & 2 Assets...................................................................... Level 3 Assets ............................................................................. Total Fair Value Market/Yield Adjustments ......................... Total Unrealized Appreciation/(Depreciation) ............................ $ Year Ended December 31, 2012 Debt Equity Warrants Total (11.4) $ 10.0 7.0 — (7.9) (7.9) (2.3) $ (2.1 ) $ 0.5 (0.3 ) (6.5 ) 9.7 3.2 1.3 $ (1.2) 0.7 (5.0) 1.9 0.2 2.1 (3.4) $ (14.7) 11.2 1.7 (4.6) 2.0 (2.6) (4.4) * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized. We distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. Net Increase in Net Assets Resulting from Operations and Earnings Per Share For the years ended December 31, 2013 and December 31, 2012, the net increase in net assets resulting from operations totaled approximately $99.4 million and $46.8 million, respectively. These changes are made up of the items previously described. The basic and fully diluted net change in net assets per common share for the year ended December 31, 2013 were $1.67 and $1.63, respectively, whereas both the basic and fully diluted net change in net assets per common share for the year ended December 31, 2012 were $0.93. For the purpose of calculating diluted earnings per share for the year ended December 31, 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because our share price was greater than the conversion price in effect ($11.63) for the Convertible Senior Notes for such period. For the year ended December 31, 2012, the dilutive effect of the Convertible Senior Notes under the treasury stock method is anti-dilutive because our share price was less than the conversion price in effect ($11.81) for the Convertible Senior Notes for such period, and not included in this calculation. Financial Condition, Liquidity and Capital Resources Our liquidity and capital resources are derived from our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes, 2021 Asset-Backed Notes 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 borrowings and the proceeds from the turnover of our portfolio and from public and private offerings of securities to finance our investment objectives. We may raise additional equity or debt capital through both registered offerings off a shelf registration, “At-The-Market”, or ATM, and private offerings of securities, by securitizing a portion of our investments or borrowing, including from the SBA through our SBIC subsidiaries. On August 16, 2013, we entered into an ATM equity distribution agreement with JMP Securities LLC, or JMP. The equity distribution agreement provides that we may offer and sell up to 8.0 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, 2014, we sold 650,000 shares of common stock for total accumulated net proceeds of approximately $9.5 million, all of which is accretive to net asset value. We generally use the net proceeds from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of December 31, 2014, approximately 7.35 million shares remained available for issuance and sale under the equity distribution agreement. As of December 31, 2014, approximately $57.3 million of our Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million of our common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “—Subsequent Events”. At December 31, 2014, we had $17.7 million of Convertible Senior Notes, $170.4 million of 2019 Notes, $103.0 million of 2024 Notes, $16.0 million of 2017 Asset-Backed Notes, $129.3 million of 2021 Asset-Backed Notes and $190.2 million of SBA debentures payable. We had no borrowings outstanding under either the Wells Facility or the Union Bank Facility. At December 31, 2014, we had $377.1 million in available liquidity, including $227.1 million in cash and cash equivalents. We had available borrowing capacity of approximately $75.0 million under the Wells Facility and $75.0 million under the Union Bank Facility, subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts. At December 31, 2014, we had $112.5 million of cash in restricted accounts related to our SBIC that we may use to fund new investments in the SBIC. With our net investments of $38.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At December 31, 2014, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries. At December 31, 2014, we had approximately $12.7 million of restricted cash, which consists of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized 2017Asset-Backed Notes and 2021 Asset-Backed Notes, based on current characteristics of the securitized debt investment portfolios, the restricted funds may be used to pay monthly interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the year ended December 31, 2014, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments. During the year ended December 31, 2014, our operating activities used $26.5 million of cash and cash equivalents, compared to $103.6 million provided during the year ended December 31, 2013. This $130.1 million decrease in cash provided by operating activities resulted primarily from the increase in purchase of investments of approximately $135.7 million and the decrease in net assets resulting from operations of approximately $28.3 million. During the year ended December 31, 2014, our investing activities used $6.6 million of cash, compared to approximately $6.6 million used during the year ended December 31, 2013. Our cash flows from investing remained flat as compared to the prior fiscal year. During the year ended December 31, 2014, our financing activities used $8.2 million of cash, compared to $11.6 million used during the year ended December 31, 2013. This $3.5 million decrease in cash used by financing activities was primarily due to the net issuance of our 2024 Notes and 2021 Asset-Backed Notes for $99.7 million and $126.0 million, respectively. These increases were offset by a decrease in proceeds from issuance of common stock of $86.4 million and an increase in repayments of 2017 Asset-Backed Notes and SBA debentures of $33.8 million and $34.8 million, respectively, during the year ended December 31, 2014. In addition, during the year ended December 31, 2014, we paid $57.3 million in cash to settle our Convertible Senior Notes, of which $53.1 million is included in cash flows from financing activities and $4.2 million is in included in cash flows from operating activities, which represents the proportional interest paid of the original issue discount. As of December 31, 2014, net assets totaled $658.9 million, with a net asset value per share of $10.18. We intend to generate additional cash primarily from cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in other high-quality debt investments that mature in one year or less as well as from future borrowings as required to meet our lending activities. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of December 31, 2014 our asset coverage ratio under our regulatory requirements as a business development company was 250.8%, excluding our SBA debentures as a result of our exemptive order from the SEC that 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 200%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total leverage when including our SBA debentures was 205.0% at December 31, 2014. 78 79 16323_HER-10K_CS6-r4.indd 79 4/28/15 2:54 PM Outstanding Borrowings At December 31, 2014 and December 31, 2013, we had the following available borrowings and outstanding amounts: In addition, as of December 31, 2014, we had approximately $108.2 million of non-binding term sheets outstanding to eight new and existing 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 December 31, 2014 December 31, 2013 close and do not necessarily represent future cash requirements. Total Available Carrying Value (1) Total Available 225,000 $ 170,364 — 89,557 — 75,000 75,000 30,000 664,921 $ Carrying Value (1) 225,000 170,364 — 89,557 — 72,519 — — 557,440 (in thousands) SBA Debentures (2) ..................................... $ 2019 Notes ................................................. 2024 Notes ................................................. 2017 Asset-Backed Notes .......................... 2021 Asset-Backed Notes .......................... Convertible Senior Notes (3) ....................... Wells Facility ............................................. Union Bank Facility ................................... Total ........................................................... $ 190,200 $ 170,364 103,000 16,049 129,300 17,674 75,000 75,000 776,587 $ 190,200 $ 170,364 103,000 16,049 129,300 17,345 — — 626,258 $ (1) (2) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0 million was available in HT III. At December 31, 2013, the total available borrowings under the SBA debentures were $225.0 million, of which $76.0 million was available in HT II and $149.0 million was available in HT III. (3) During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. The balance at December 31, 2014 represents the remaining aggregate principal amount outstanding of the Convertible Senior Notes less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was approximately $329,000 at December 31, 2014 and $2.5 million at December 31, 2013. (1) Excludes commitments to extend credit to our portfolio companies. (2) We also have a Warrant Participation Agreement with Citigroup. See Note 4 to our consolidated financial statements. (3) Includes $190.2 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $103.0 million of the 2024 Notes, $16.0 million in aggregate principal amount of the 2017 Asset-Backed Notes, $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes and $17.3 million of the Convertible Senior Notes. (5) Long-Term facility leases. (4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $17.7 million less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was $329,000 at December 31, 2014. Our net asset value may decline as a result of economic conditions in the United States. Our continued compliance with the covenants under the Credit Facilities, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes, 2021 Asset- Backed Notes and SBA debentures depend on many factors, some of which are beyond our control. Material net asset devaluation could have a material adverse effect on our operations and could require us to reduce our borrowings in order to comply with certain covenants, including the ratio of total assets to total indebtedness. We believe that our current cash and cash equivalents, cash generated from operations, and funds available from our Credit Facilities will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months. Debt financing costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid expenses and amortized into the consolidated statement of operations as loan fees over the term of the related debt instrument. Prepaid financing costs, net of accumulated amortization, as of December 31, 2014 and December 31, 2013 were as follows: (in thousands) SBA Debentures ................................................................ $ 2019 Notes ......................................................................... 2024 Notes ......................................................................... 2017 Asset-Backed Notes .................................................. 2021 Asset-Backed Notes .................................................. Convertible Senior Notes ................................................... Wells Facility ..................................................................... Union Bank Facility ........................................................... Total .................................................................................. $ December 31, 2014 December 31, 2013 5,074 5,319 — 2,686 — 1,323 398 — 14,800 4,038 $ 4,352 3,205 506 3,207 175 794 156 16,433 $ Commitments In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded 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. As of December 31, 2014, we had unfunded contractual commitments of approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. 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 our future cash requirements. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. 16323_HER-10K_CS6-r4.indd 80 4/28/15 2:54 PM 80 81 Contractual Obligations The following table shows our contractual obligations as of December 31, 2014: Contractual Obligations(1)(2) Borrowings (3) (4) ................................................................... $ Operating Lease Obligations (5) ............................................ Total .................................................................................... $ 626,258 $ 6,258 632,516 $ 16,081 $ 1,554 17,635 $ 17,313 $ 321,464 $ 271,400 3,055 1,590 59 20,368 $ 323,054 $ 271,459 Payments due by period (in thousands) Total Less than 1 year 1 - 3 years 3 - 5 years After 5 years Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $1.6 million, $1.1 million and $1.2 million during the years ended December 31, 2014, 2013, and 2012, respectively. 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. Borrowings Long-Term SBA Debentures On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With our net investment of $38.0 million in HT II as of December 31, 2014, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was available at December 31, 2014. As of December 31, 2014, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014 we held investments in HT II in 38 companies with a fair value of approximately $109.5 million, accounting for approximately 10.7% of our total portfolio at December 31, 2014. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With our net investment of $74.5 million in HT III as of December 31, 2014, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, of which $149.0 million was outstanding as of December 31, 2014. As of December 31, 2014, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, we held investments in HT III in 39 companies with a fair value of approximately $229.9 million accounting for approximately 22.5% of our total portfolio at December 31, 2014. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. 1,590 1 - 3 years Excludes commitments to extend credit to our portfolio companies. 3 - 5 years After 5 years 17,313 $ 321,464 $ 271,400 3,055 59 20,368 $ 323,054 $ 271,459 (1) (2) We also have a Warrant Participation Agreement with Citigroup. See Note 4 to our consolidated financial statements. (3) Contractual Obligations(1)(2) Borrowings (3) (4) ................................................................... $ Operating Lease Obligations (5) ............................................ Total .................................................................................... $ Total Less than 1 year 626,258 $ 6,258 632,516 $ 16,081 $ 1,554 17,635 $ $149.0 million was available in HT III. (3) During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. The balance at December 31, 2014 represents the remaining aggregate principal amount outstanding of the Convertible Senior Notes less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was approximately $329,000 at December 31, 2014 and $2.5 million at December 31, 2013. (4) (5) Includes $190.2 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $103.0 million of the 2024 Notes, $16.0 million in aggregate principal amount of the 2017 Asset-Backed Notes, $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes and $17.3 million of the Convertible Senior Notes. Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $17.7 million less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was $329,000 at December 31, 2014. Long-Term facility leases. In addition, as of December 31, 2014, we had approximately $108.2 million of non-binding term sheets outstanding to eight new and existing 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. Contractual Obligations The following table shows our contractual obligations as of December 31, 2014: Payments due by period (in thousands) Outstanding Borrowings At December 31, 2014 and December 31, 2013, we had the following available borrowings and outstanding amounts: (in thousands) SBA Debentures (2) ..................................... $ 2019 Notes ................................................. 2024 Notes ................................................. 2017 Asset-Backed Notes .......................... 2021 Asset-Backed Notes .......................... Convertible Senior Notes (3) ....................... Wells Facility ............................................. Union Bank Facility ................................... December 31, 2014 December 31, 2013 Total Available Carrying Value (1) Total Available Carrying Value (1) 190,200 $ 170,364 103,000 16,049 129,300 17,674 75,000 75,000 190,200 $ 170,364 103,000 16,049 129,300 17,345 — — 225,000 $ 170,364 — 89,557 — 75,000 75,000 30,000 225,000 170,364 89,557 72,519 — — — — Total ........................................................... $ 776,587 $ 626,258 $ 664,921 $ 557,440 (1) (2) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0 million was available in HT III. At December 31, 2013, the total available borrowings under the SBA debentures were $225.0 million, of which $76.0 million was available in HT II and Our net asset value may decline as a result of economic conditions in the United States. Our continued compliance with the covenants under the Credit Facilities, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes, 2021 Asset- Backed Notes and SBA debentures depend on many factors, some of which are beyond our control. Material net asset devaluation could have a material adverse effect on our operations and could require us to reduce our borrowings in order to comply with certain covenants, including the ratio of total assets to total indebtedness. We believe that our current cash and cash equivalents, cash generated from operations, and funds available from our Credit Facilities will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months. expenses and amortized into the consolidated statement of operations as loan fees over the term of the related debt instrument. Prepaid financing costs, net of accumulated amortization, as of December 31, 2014 and December 31, 2013 were as follows: (in thousands) December 31, 2014 December 31, 2013 SBA Debentures ................................................................ $ 2019 Notes ......................................................................... 2024 Notes ......................................................................... 2017 Asset-Backed Notes .................................................. 2021 Asset-Backed Notes .................................................. Convertible Senior Notes ................................................... Wells Facility ..................................................................... Union Bank Facility ........................................................... 4,038 $ 4,352 3,205 506 3,207 175 794 156 5,074 5,319 — 2,686 — 1,323 398 — Total .................................................................................. $ 16,433 $ 14,800 Commitments In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded 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. As of December 31, 2014, we had unfunded contractual commitments of approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. 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 our future cash requirements. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. Debt financing costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid Long-Term SBA Debentures Borrowings Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $1.6 million, $1.1 million and $1.2 million during the years ended December 31, 2014, 2013, and 2012, respectively. 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. On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With our net investment of $38.0 million in HT II as of December 31, 2014, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was available at December 31, 2014. As of December 31, 2014, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014 we held investments in HT II in 38 companies with a fair value of approximately $109.5 million, accounting for approximately 10.7% of our total portfolio at December 31, 2014. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With our net investment of $74.5 million in HT III as of December 31, 2014, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, of which $149.0 million was outstanding as of December 31, 2014. As of December 31, 2014, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, we held investments in HT III in 39 companies with a fair value of approximately $229.9 million accounting for approximately 22.5% of our total portfolio at December 31, 2014. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. 80 81 16323_HER-10K_CS6-r4.indd 81 4/28/15 2:54 PM HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in March 2009 are set semiannually in March and September and range from 2.25% to 4.62%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of March 2009, the initial maturity of SBA debentures will occur in March 2019. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. The annual fees related to HT III debentures that pooled on March 27, 2013 were 0.804%. The annual fees on other debentures have been set at 0.515%. In July 2012, we reopened our April 2019 Notes and issued an additional $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. On September 24, 2012, we and the 2019 Trustee, entered into the Second Supplemental Indenture to the Base Indenture (the “Second Supplemental Indenture”), dated as of September 24, 2012, relating to our issuance, offer and sale of $75.0 million aggregate principal amount of the September 2019 Notes. The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. As of December 31, 2014 and December 31, 2013, the 2019 Notes payable is comprised of: (in thousands) December 31, 2014 December 31, 2013 April 2019 Notes ................................................................ $ September 2019 Notes ....................................................... Carrying Value of 2019 Notes .................................... $ 84,490 $ 85,874 170,364 $ 84,490 85,874 170,364 The average amount of debentures outstanding for the year ended December 31, 2014 for HT II was approximately $46.7 million with an average interest rate of approximately 4.75%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT III was approximately $149.0 million with an average interest rate of approximately 3.43%. April 2019 Notes As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with our net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, we repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. We reported the following SBA debentures outstanding on our Consolidated Statement of Assets and Liabilities as of December 31, 2014 and December 31, 2013: Maturity Date (in thousands) Issuance/Pooling Date SBA Debentures: March 26, 2008 ................................................. March 1, 2018 March 25, 2009 ................................................. March 1, 2019 September 23, 2009........................................... September 1, 2019 September 22, 2010........................................... September 1, 2020 September 22, 2010........................................... September 1, 2020 March 29, 2011 ................................................. March 1, 2021 September 21, 2011........................................... September 1, 2021 March 21, 2012 ................................................. March 1, 2022 March 21, 2012 ................................................. March 1, 2022 September 19, 2012........................................... September 1, 2022 March 27, 2013 ................................................. March 1, 2023 Total SBA Debentures .................................... Interest Rate (1) December 31, 2014 December 31, 2013 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ $ — $ 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 190,200 $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 225,000 (1) Interest rate includes annual charge 2019 Notes On March 6, 2012, we and U.S. Bank National Association (the “2019 Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, we and the 2019 Trustee entered into the First Supplemental Indenture to the Base Indenture (the “First Supplemental Indenture”), dated April 17, 2012, relating to our issuance, offer and sale of $43.0 million aggregate principal amount of the April 2019 Notes. The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. 16323_HER-10K_CS6-r4.indd 82 4/28/15 2:54 PM 82 83 The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the NYSE under the trading symbol “HTGZ.” See “—Subsequent Events.” The April 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring our compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the First Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among us and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the NYSE under the trading symbol “HTGY.” December 31, 2013 December 31, 2014 84,490 $ 85,874 170,364 $ 84,490 85,874 170,364 (in thousands) April 2019 Notes ................................................................ $ September 2019 Notes ....................................................... Carrying Value of 2019 Notes .................................... $ HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA In July 2012, we reopened our April 2019 Notes and issued an additional $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. On September 24, 2012, we and the 2019 Trustee, entered into the Second Supplemental Indenture to the Base Indenture (the “Second Supplemental Indenture”), dated as of September 24, 2012, relating to our issuance, offer and sale of $75.0 million aggregate principal amount of the September 2019 Notes. The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. As of December 31, 2014 and December 31, 2013, the 2019 Notes payable is comprised of: regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in March 2009 are set semiannually in March and September and range from 2.25% to 4.62%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of March 2009, the initial maturity of SBA debentures will occur in March 2019. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. The annual fees related to HT III debentures that pooled on March 27, 2013 were 0.804%. The annual fees on other debentures have been set at 0.515%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT II was approximately $46.7 million with an average interest rate of approximately 4.75%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT III was approximately $149.0 million with an average interest rate of approximately 3.43%. As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with our net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, we repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. We reported the following SBA debentures outstanding on our Consolidated Statement of Assets and Liabilities as of December 31, 2014 and December 31, 2013: Maturity Date Interest Rate (1) December 31, 2014 December 31, 2013 (in thousands) Issuance/Pooling Date SBA Debentures: March 26, 2008 ................................................. March 1, 2018 March 25, 2009 ................................................. March 1, 2019 September 23, 2009........................................... September 1, 2019 September 22, 2010........................................... September 1, 2020 September 22, 2010........................................... September 1, 2020 March 29, 2011 ................................................. March 1, 2021 September 21, 2011........................................... September 1, 2021 March 21, 2012 ................................................. March 1, 2022 March 21, 2012 ................................................. March 1, 2022 September 19, 2012........................................... September 1, 2022 March 27, 2013 ................................................. March 1, 2023 Total SBA Debentures .................................... (1) Interest rate includes annual charge 2019 Notes 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ — $ 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 April 2019 Notes The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the NYSE under the trading symbol “HTGZ.” See “—Subsequent Events.” The April 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring our compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the First Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. $ 190,200 $ 225,000 Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among us and Stifel, Nicolaus & On March 6, 2012, we and U.S. Bank National Association (the “2019 Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, we and the 2019 Trustee entered into the First Supplemental Indenture to the Base Indenture (the “First Supplemental Indenture”), dated April 17, 2012, relating to our issuance, offer and sale of $43.0 million aggregate principal amount of the April 2019 Notes. The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the NYSE under the trading symbol “HTGY.” 82 83 16323_HER-10K_CS6-r4.indd 83 4/28/15 2:54 PM The September 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Second Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Third Supplemental Indenture. The Base Indenture, as supplemented by the Third Supplemental Indenture, also contains certain reporting requirements, including a requirement that we provide financial information to the holders of the 2024 Notes and the 2024 Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. The Base Indenture provides for customary events of default and further provides that the 2024 Trustee or the holders of 25% in aggregate principal amount of the outstanding 2024 Notes in a series may declare such 2024 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. As of December 31, 2014, we were in compliance with the terms of the Base Indenture, as supplemented by the Third Supplemental Indenture. At December 31, 2014, the 2024 Notes had an outstanding principal balance of $103.0 million. For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows: The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among us and Stifel, (in thousands) Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 Notes and September 2019 Notes are as follows: Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ 2,955 $ 153 3,108 $ 1,887 $ — — — — December 31, 2014 2013 (in thousands) Stated interest expense .............................................................. $ Amortization of debt issuance cost ........................................... Total interest expense and fees ......................................... $ Cash paid for interest expense and fees .................................... $ Year Ended December 31, 2014 2013 11,926 $ 967 12,893 $ 11,926 $ 11,926 967 12,893 11,926 As of December 31, 2014, we are in compliance with the terms of the Base Indenture, and respective supplemental indentures thereto, governing the April 2019 Notes and September 2019 Notes. See Note 4 to our consolidated financial statements for more detail on the 2019 Notes. 2024 Notes On July 14, 2014, we and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the Base Indenture between us and the 2024 Trustee, dated July 14, 2014, relating to our issuance, offer and sale of $100.0 million aggregate principal amount of 2024 Notes. On August 6, 2014, the underwriters issued notification to exercise their over-allotment option for an additional $3.0 million in aggregate principal amount of the 2024 Notes. The sale of the 2024 Notes generated net proceeds of approximately $99.9 million. The 2024 Notes will mature on July 30, 2024 and may be redeemed in whole or in part at our option at any time or from time to time on or after July 30, 2017, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2014, and trade on the NYSE under the trading symbol “HTGX.” The 2024 Notes will be our direct unsecured obligations and will rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. 2017 Asset-Backed Notes On December 19, 2012, we completed a $230.7 million term debt securitization in connection with which an affiliate of ours made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes. The 2017 Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. and were sold by the 2012 Securitization Issuer pursuant to a note purchase agreement, dated as of December 12, 2012, by and among us, the 2012 Trust Depositor, the 2012 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2017 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The 2017 Asset-Backed Notes have a stated maturity of December 16, 2017. See “—Subsequent Events.” As part of this transaction, we entered into a sale and contribution agreement with the 2012 Trust Depositor under which we have agreed to sell or have contributed to the 2012 Trust Depositor certain senior loans made to certain of our portfolio companies. We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2012 Loans as of the date of their transfer to the 2012 Trust Depositor. In connection with the sale of the 2017 Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The 2017 Asset-Backed Notes are secured obligations of the 2012 Securitization Issuer and are non- recourse to us. The 2012 Securitization Issuer also entered into an indenture governing the 2017 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2017 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2017 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2012 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c)(7) thereof. In addition, the 2012 Trust Depositor entered into an amended and restated trust agreement in respect of the 2012 Securitization Issuer, which includes customary representation, warranties and covenants. The 2012 Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the 2012 Loans. We are entitled to receive a monthly fee from the 2012 Securitization Issuer for servicing the 2012 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the 2012 Loans plus the amount of collections on deposit in the 2012 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). 16323_HER-10K_CS6-r4.indd 84 4/28/15 2:54 PM 84 85 The September 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Second Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Third Supplemental Indenture. The Base Indenture, as supplemented by the Third Supplemental Indenture, also contains certain reporting requirements, including a requirement that we provide financial information to the holders of the 2024 Notes and the 2024 Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. The Base Indenture provides for customary events of default and further provides that the 2024 Trustee or the holders of 25% in aggregate principal amount of the outstanding 2024 Notes in a series may declare such 2024 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. As of December 31, 2014, we were in compliance with the terms of the Base Indenture, as supplemented by the Third Supplemental Indenture. At December 31, 2014, the 2024 Notes had an outstanding principal balance of $103.0 million. For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of expense for the 2024 Notes are as follows: any applicable grace period. The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among us and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 Notes and September 2019 Notes are as follows: (in thousands) Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ December 31, 2014 2013 2,955 $ 153 3,108 $ 1,887 $ — — — — (in thousands) Stated interest expense .............................................................. $ 11,926 $ Amortization of debt issuance cost ........................................... Total interest expense and fees ......................................... $ Cash paid for interest expense and fees .................................... $ 967 12,893 $ 11,926 $ 11,926 967 12,893 11,926 Year Ended December 31, 2014 2013 As of December 31, 2014, we are in compliance with the terms of the Base Indenture, and respective supplemental indentures thereto, governing the April 2019 Notes and September 2019 Notes. See Note 4 to our consolidated financial statements for more detail on the 2019 Notes. 2024 Notes On July 14, 2014, we and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the Base Indenture between us and the 2024 Trustee, dated July 14, 2014, relating to our issuance, offer and sale of $100.0 million aggregate principal amount of 2024 Notes. On August 6, 2014, the underwriters issued notification to exercise their over-allotment option for an additional $3.0 million in aggregate principal amount of the 2024 Notes. The sale of the 2024 Notes generated net proceeds of approximately $99.9 million. The 2024 Notes will mature on July 30, 2024 and may be redeemed in whole or in part at our option at any time or from time to time on or after July 30, 2017, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2014, and trade on the NYSE under the trading symbol “HTGX.” The 2024 Notes will be our direct unsecured obligations and will rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. 2017 Asset-Backed Notes On December 19, 2012, we completed a $230.7 million term debt securitization in connection with which an affiliate of ours made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes. The 2017 Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. and were sold by the 2012 Securitization Issuer pursuant to a note purchase agreement, dated as of December 12, 2012, by and among us, the 2012 Trust Depositor, the 2012 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2017 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The 2017 Asset-Backed Notes have a stated maturity of December 16, 2017. See “—Subsequent Events.” As part of this transaction, we entered into a sale and contribution agreement with the 2012 Trust Depositor under which we have agreed to sell or have contributed to the 2012 Trust Depositor certain senior loans made to certain of our portfolio companies. We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2012 Loans as of the date of their transfer to the 2012 Trust Depositor. In connection with the sale of the 2017 Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The 2017 Asset-Backed Notes are secured obligations of the 2012 Securitization Issuer and are non- recourse to us. The 2012 Securitization Issuer also entered into an indenture governing the 2017 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2017 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2017 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2012 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c)(7) thereof. In addition, the 2012 Trust Depositor entered into an amended and restated trust agreement in respect of the 2012 Securitization Issuer, which includes customary representation, warranties and covenants. The 2012 Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the 2012 Loans. We are entitled to receive a monthly fee from the 2012 Securitization Issuer for servicing the 2012 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the 2012 Loans plus the amount of collections on deposit in the 2012 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). 84 85 16323_HER-10K_CS6-r4.indd 85 4/28/15 2:54 PM We also serve as administrator to the 2012 Securitization Issuer under an administration agreement, which includes customary Convertible Senior Notes representations, warranties and covenants. At December 31, 2014 and December 31, 2013, the 2017 Asset Backed Notes had an outstanding principal balance of $16.0 million and $89.6 million, respectively. Under the terms of the 2017 Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2017 Asset-Backed Notes. We have segregated these funds and classified them as restricted cash. There was approximately $1.2 million and $6.3 million of restricted cash as of December 31, 2014 and 2013, respectively, funded through interest collections. See Note 4 to our consolidated financial statements for more detail on the 2017 Asset-Backed Notes. 2021 Asset-Backed Notes On November 13, 2014, we completed a $237.4 million term debt securitization in connection with which an affiliate of ours made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes. The 2021 Asset-Backed Notes were rated A(sf) by Kroll Bond Rating Agency, Inc. (KBRA) and were sold by the 2014 Securitization Issuer pursuant to a note purchase agreement, dated as of November 13, 2014, by and among us, the 2014 Trust Depositor, the 2014 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. The securitization has an 18-month reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have a stated maturity of April 16, 2021. As part of this transaction, we entered into a sale and contribution agreement with the 2014 Trust Depositor under which we have agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of our portfolio companies. We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor. In connection with the sale of the 2021 Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non- recourse to us. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2014 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c)(7) thereof and Rule 3A-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants. The 2014 Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the 2014 Loans. We are entitled to receive a monthly fee from the Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus the amount of collections on deposit in the 2014 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). We also serve as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2014, the 2021 Asset Backed Notes had an outstanding principal balance of $129.3 million. Under the terms of the 2021 Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2021 Asset-Backed Notes. We have segregated these funds and classified them as restricted cash. There was approximately $11.5 million of restricted cash as of December 31, 2014 funded through interest collections. See Note 4 to our consolidated financial statements for more detail on the 2021 Asset-Backed Notes. In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes due 2016. During the year ended December 31, 2014, holders of approximately $57.3 million of our Convertible Senior Notes exercised their conversion rights. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the indenture. On or after October 15, 2015, until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of December 31, 2014, the conversion rate was 88.0615 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an adjusted conversion price of approximately $11.36 per share of common stock). We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, we record interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 8.1%. Upon meeting the stock trading price conversion requirement during the three months ended June 30, 2014 and September 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, approximately $57.3 million of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the our common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “—Subsequent Events.” We recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt we recorded for the year ended December 31, 2014 was approximately $1.6 million, and was classified as a component of net investment income in the Company’s Consolidated Statements of Operations. 16323_HER-10K_CS6-r4.indd 86 4/28/15 2:54 PM 86 87 We also serve as administrator to the 2012 Securitization Issuer under an administration agreement, which includes customary Convertible Senior Notes representations, warranties and covenants. million and $89.6 million, respectively. At December 31, 2014 and December 31, 2013, the 2017 Asset Backed Notes had an outstanding principal balance of $16.0 Under the terms of the 2017 Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2017 Asset-Backed Notes. We have segregated these funds and classified them as restricted cash. There was approximately $1.2 million and $6.3 million of restricted cash as of December 31, 2014 and 2013, respectively, funded through interest collections. See Note 4 to our consolidated financial statements for more detail on the 2017 Asset-Backed Notes. 2021 Asset-Backed Notes On November 13, 2014, we completed a $237.4 million term debt securitization in connection with which an affiliate of ours made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes. The 2021 Asset-Backed Notes were rated A(sf) by Kroll Bond Rating Agency, Inc. (KBRA) and were sold by the 2014 Securitization Issuer pursuant to a note purchase agreement, dated as of November 13, 2014, by and among us, the 2014 Trust Depositor, the 2014 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. The securitization has an 18-month reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have a stated maturity of April 16, 2021. As part of this transaction, we entered into a sale and contribution agreement with the 2014 Trust Depositor under which we have agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of our portfolio companies. We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor. In connection with the sale of the 2021 Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non- recourse to us. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2014 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c)(7) thereof and Rule 3A-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants. The 2014 Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the 2014 Loans. We are entitled to receive a monthly fee from the Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus the amount of collections on deposit in the 2014 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). We also serve as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2014, the 2021 Asset Backed Notes had an outstanding principal balance of $129.3 million. Under the terms of the 2021 Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2021 Asset-Backed Notes. We have segregated these funds and classified them as restricted cash. There was approximately $11.5 million of restricted cash as of December 31, 2014 funded through interest collections. See Note 4 to our consolidated financial statements for more detail on the 2021 Asset-Backed Notes. In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes due 2016. During the year ended December 31, 2014, holders of approximately $57.3 million of our Convertible Senior Notes exercised their conversion rights. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the indenture. On or after October 15, 2015, until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of December 31, 2014, the conversion rate was 88.0615 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an adjusted conversion price of approximately $11.36 per share of common stock). We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, we record interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 8.1%. Upon meeting the stock trading price conversion requirement during the three months ended June 30, 2014 and September 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, approximately $57.3 million of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the our common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “—Subsequent Events.” We recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt we recorded for the year ended December 31, 2014 was approximately $1.6 million, and was classified as a component of net investment income in the Company’s Consolidated Statements of Operations. 86 87 16323_HER-10K_CS6-r4.indd 87 4/28/15 2:54 PM applicable to Hercules Funding II, LLC. As amended, these covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after June 30, 2014. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2014. See Note 4 to our consolidated financial statements for more detail on the Wells We have a $75.0 million revolving senior secured credit facility with MUFG Union Bank, N.A. (“MUFG Union Bank”). We originally entered into the Union Bank Facility on February 10, 2010 but, following several amendments, amended and restated the Union Bank Facility on August 14, 2014. The amendment and restatement extends the maturity date of the Union Bank Facility to August 1, 2017, increases the size of the Union Bank Facility to $75.0 million from $30.0 million, and adjusts the interest rate for LIBOR borrowings under the Union Bank Facility. LIBOR-based borrowings under the Union Bank Facility will bear interest at a rate per annum equal to LIBOR plus 2.25% with no floor, whereas previously we paid a per annum interest rate on such borrowings equal to LIBOR plus 2.50% with a floor of 4.00%. Other borrowings under the Union Bank Facility, which are based on a reference rate instead of LIBOR, will continue to bear interest at a rate per annum equal to the reference rate (which is the greater of the federal funds rate plus 1.00% and a periodically announced Union Bank index rate) plus the greater of (i) 4.00% minus the reference rate and (ii) 1.00%. We continue to have the option of determining which type of borrowing to request under the Union Bank Facility. Subject to certain conditions, the amendment also removes a previous ceiling on the amount of certain unsecured indebtedness that we may incur. MUFG Union Bank has made commitments to lend up to $75.0 million in aggregate principal amount. The Union Bank Facility contains an accordion feature, pursuant to which we may increase the size of the Union Bank Facility to an aggregate principal amount of $300.0 million by bringing in additional lenders, subject to the approval of MUFG Union Bank and other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility to increase available borrowings. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $240,000 and $152,000, respectively. The amount that we may borrow under the Union Bank Facility is determined by applying an advance rate to eligible loans. The Union Bank Facility generally requires payment of monthly interest on loans based on a reference rate and at the end of a one, two, or three-month period, as applicable, for loans based on LIBOR. All outstanding principal is due upon maturity. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible debt investments placed in the collateral pool. We have various financial and operating covenants required by the Union Bank Facility. These covenants require, among other things, that we maintain certain financial ratios, including liquidity, asset coverage, and debt service coverage, and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $550.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after June 30, 2014. The Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2014. See Note 4 to our consolidated financial statements for more detail on the Union Bank Facility. As of December 31, 2014 and December 31, 2013, the components of the carrying value of the Convertible Senior Notes were The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries, in addition to those as follows: (in thousands) Principal amount of debt ....................................................................... $ Original issue discount, net of accretion ............................................... Carrying value of Convertible Senior Debt ................................. $ December 31, 2014 December 31, 2013 17,674 $ (329 ) 17,345 $ 75,000 (2,481) 72,519 Facility. Union Bank Facility For the years ended December 31, 2014 and 2013, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows: (in thousands) Stated interest expense ............................................................. $ Accretion of original issue discount ......................................... Amortization of debt issuance cost........................................... Total interest expense ....................................................... $ Cash paid for interest expense .................................................. $ Year Ended December 31, 2013 2014 2,753 $ 843 450 4,046 $ 3,465 $ 4,500 1,083 577 6,160 4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2014 and December 31, 2013. During the year ended December 31, 2014 interest expense decreased by approximately $1.7 million from the comparative period in 2013, due to Convertible Senior Notes settled in the period. As of December 31, 2014, we are in compliance with the terms of the indentures governing the Convertible Senior Notes. See Note 4 to our consolidated financial statements for more detail on the Convertible Senior Notes. Wells Facility In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance. On June 20, 2011, we renewed the Wells Facility, and the Wells Facility was further amended on August 1, 2012, December 17, 2012 and August 8, 2014. Under this senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, we entered into an amendment to the Wells Facility that reduced the interest rate floor by 75 basis points to 4.25% and extended the maturity date by one year to August 2015. Additionally, the August 2012 amendment added an amortization period that commences on the day immediately following the end of the revolving credit availability period and ends one year thereafter on the maturity date. The August 2012 amendment also reduced the unused line fee, as further discussed below. On August 8, 2014, the Company entered into a further amendment to the Wells Facility to set the interest rate floor at 4.00% and to extend the revolving credit availability period to August 2017. As amended, borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.00% and an advance rate of 50% against eligible debt investments. The Wells Facility is secured by debt investments in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $380,000 and $380,000, respectively. On June 20, 2011 we paid an additional $1.1 million in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. In connection with the August 2014 amendments, the Company paid an additional $750,000 in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. 16323_HER-10K_CS6-r4.indd 88 4/28/15 2:54 PM 88 89 As of December 31, 2014 and December 31, 2013, the components of the carrying value of the Convertible Senior Notes were The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries, in addition to those as follows: (in thousands) Principal amount of debt ....................................................................... $ Original issue discount, net of accretion ............................................... Carrying value of Convertible Senior Debt ................................. $ 17,674 $ (329 ) 17,345 $ 75,000 (2,481) 72,519 December 31, December 31, 2014 2013 For the years ended December 31, 2014 and 2013, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows: (in thousands) Stated interest expense ............................................................. $ Accretion of original issue discount ......................................... Amortization of debt issuance cost........................................... Total interest expense ....................................................... $ Cash paid for interest expense .................................................. $ Year Ended December 31, 2014 2013 2,753 $ 843 450 4,046 $ 3,465 $ 4,500 1,083 577 6,160 4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2014 and December 31, 2013. During the year ended December 31, 2014 interest expense decreased by approximately $1.7 million from the comparative period in 2013, due to Convertible Senior Notes settled in the period. As of December 31, 2014, we are in compliance with the terms of the indentures governing the Convertible Senior Notes. See Note 4 to our consolidated financial statements for more detail on the Convertible Senior Notes. Wells Facility In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance. On June 20, 2011, we renewed the Wells Facility, and the Wells Facility was further amended on August 1, 2012, December 17, 2012 and August 8, 2014. Under this senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, we entered into an amendment to the Wells Facility that reduced the interest rate floor by 75 basis points to 4.25% and extended the maturity date by one year to August 2015. Additionally, the August 2012 amendment added an amortization period that commences on the day immediately following the end of the revolving credit availability period and ends one year thereafter on the maturity date. The August 2012 amendment also reduced the unused line fee, as further discussed below. On August 8, 2014, the Company entered into a further amendment to the Wells Facility to set the interest rate floor at 4.00% and to extend the revolving credit availability period to August 2017. As amended, borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.00% and an advance rate of 50% against eligible debt investments. The Wells Facility is secured by debt investments in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $380,000 and $380,000, respectively. On June 20, 2011 we paid an additional $1.1 million in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. In connection with the August 2014 amendments, the Company paid an additional $750,000 in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. applicable to Hercules Funding II, LLC. As amended, these covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after June 30, 2014. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2014. See Note 4 to our consolidated financial statements for more detail on the Wells Facility. Union Bank Facility We have a $75.0 million revolving senior secured credit facility with MUFG Union Bank, N.A. (“MUFG Union Bank”). We originally entered into the Union Bank Facility on February 10, 2010 but, following several amendments, amended and restated the Union Bank Facility on August 14, 2014. The amendment and restatement extends the maturity date of the Union Bank Facility to August 1, 2017, increases the size of the Union Bank Facility to $75.0 million from $30.0 million, and adjusts the interest rate for LIBOR borrowings under the Union Bank Facility. LIBOR-based borrowings under the Union Bank Facility will bear interest at a rate per annum equal to LIBOR plus 2.25% with no floor, whereas previously we paid a per annum interest rate on such borrowings equal to LIBOR plus 2.50% with a floor of 4.00%. Other borrowings under the Union Bank Facility, which are based on a reference rate instead of LIBOR, will continue to bear interest at a rate per annum equal to the reference rate (which is the greater of the federal funds rate plus 1.00% and a periodically announced Union Bank index rate) plus the greater of (i) 4.00% minus the reference rate and (ii) 1.00%. We continue to have the option of determining which type of borrowing to request under the Union Bank Facility. Subject to certain conditions, the amendment also removes a previous ceiling on the amount of certain unsecured indebtedness that we may incur. MUFG Union Bank has made commitments to lend up to $75.0 million in aggregate principal amount. The Union Bank Facility contains an accordion feature, pursuant to which we may increase the size of the Union Bank Facility to an aggregate principal amount of $300.0 million by bringing in additional lenders, subject to the approval of MUFG Union Bank and other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility to increase available borrowings. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $240,000 and $152,000, respectively. The amount that we may borrow under the Union Bank Facility is determined by applying an advance rate to eligible loans. The Union Bank Facility generally requires payment of monthly interest on loans based on a reference rate and at the end of a one, two, or three-month period, as applicable, for loans based on LIBOR. All outstanding principal is due upon maturity. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible debt investments placed in the collateral pool. We have various financial and operating covenants required by the Union Bank Facility. These covenants require, among other things, that we maintain certain financial ratios, including liquidity, asset coverage, and debt service coverage, and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $550.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after June 30, 2014. The Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2014. See Note 4 to our consolidated financial statements for more detail on the Union Bank Facility. 88 89 16323_HER-10K_CS6-r4.indd 89 4/28/15 2:54 PM Citibank Credit Facility We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility with Citigroup which expired The following table summarizes our dividends declared and paid, to be paid or reinvested on all shares, including restricted under normal terms. During the first quarter of 2009, we paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through the Warrant Participation Agreement on the pool of debt investments and warrants collateralized under the Citibank Credit Facility. Pursuant to the Warrant Participation Agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the Warrant Participation Agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2014, we reduced our realized gain by approximately $465,000 for Citigroup’s participation in the realized gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded a decrease in participation liability and a decrease in unrealized appreciation by a net amount of approximately $270,000 primarily due to depreciation of fair value on the pool of warrants collateralized under the Warrant Participation Agreement as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments is approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid Citigroup approximately $2.1 million under the Warrant Participation Agreement thereby reducing realized gains by this amount. We will continue to pay Citigroup under the Warrant Participation Agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Warrant Participation Agreement are set to expire between February 2016 and January 2017. Dividends stock, to date: Date Declared Record Date Payment Date Amount Per Share February 12, 2009 .......................................................................... February 23, 2009 March 30, 2009 0.32 * October 27, 2005 ............................................................................ November 1, 2005 November 17, 2005 $ December 9, 2005 .......................................................................... January 6, 2006 January 27, 2006 April 3, 2006 .................................................................................. April 10, 2006 May 5, 2006 July 19, 2006 .................................................................................. July 31, 2006 August 28, 2006 October 16, 2006 ............................................................................ November 6, 2006 December 1, 2006 February 7, 2007 ............................................................................ February 19, 2007 March 19, 2007 May 3, 2007 ................................................................................... May 16, 2007 June 18, 2007 August 2, 2007 ............................................................................... August 16, 2007 September 17, 2007 November 1, 2007 .......................................................................... November 16, 2007 December 17, 2007 February 7, 2008 ............................................................................ February 15, 2008 March 17, 2008 May 8, 2008 ................................................................................... May 16, 2008 June 16, 2008 August 7, 2008 ............................................................................... August 15, 2008 September 19, 2008 November 6, 2008 .......................................................................... November 14, 2008 December 15, 2008 May 7, 2009 ................................................................................... May 15, 2009 June 15, 2009 August 6, 2009 ............................................................................... August 14, 2009 September 14, 2009 October 15, 2009 ............................................................................ October 20, 2009 November 23, 2009 December 16, 2009 ........................................................................ December 24, 2009 December 30, 2009 February 11, 2010 .......................................................................... February 19, 2010 March 19, 2010 May 3, 2010 ................................................................................... May 12, 2010 June 18, 2010 August 2, 2010 ............................................................................... August 12, 2010 September 17,2010 November 4, 2010 .......................................................................... November 10, 2010 December 17, 2010 March 1, 2011 ................................................................................ March 10, 2011 March 24, 2011 May 5, 2011 ................................................................................... May 11, 2011 June 23, 2011 August 4, 2011 ............................................................................... August 15, 2011 September 15, 2011 November 3, 2011 .......................................................................... November 14, 2011 November 29, 2011 February 27, 2012 .......................................................................... March 12, 2012 March 15, 2012 April 30, 2012 ................................................................................ May 18, 2012 May 25, 2012 July 30, 2012 .................................................................................. August 17, 2012 August 24, 2012 October 26, 2012 ............................................................................ November 14, 2012 November 21, 2012 February 26, 2013 .......................................................................... March 11, 2013 March 19, 2013 April 29, 2013 ................................................................................ May 14, 2013 May 21, 2013 July 29, 2013 .................................................................................. August 13, 2013 August 20, 2013 November 4, 2013 .......................................................................... November 18, 2013 November 25, 2013 February 24, 2014 .......................................................................... March 10, 2014 March 17, 2014 April 28, 2014 ................................................................................ May 12, 2014 May 19, 2014 July 28, 2014 .................................................................................. August 18, 2014 August 25, 2014 October 29, 2014 ............................................................................ November 17, 2014 November 24, 2014 February 24, 2015 .......................................................................... March 12, 2015 March 19, 2015 0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 0.31 0.31 0.31 0.31 $ 10.30 * Dividend paid in cash and stock. On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend will represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend 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 year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend, or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. 16323_HER-10K_CS6-r4.indd 90 4/28/15 2:54 PM 90 91 Citibank Credit Facility Dividends We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility with Citigroup which expired The following table summarizes our dividends declared and paid, to be paid or reinvested on all shares, including restricted under normal terms. During the first quarter of 2009, we paid off all principal and interest owed under the Citibank Credit Facility. stock, to date: Citigroup has an equity participation right through the Warrant Participation Agreement on the pool of debt investments and warrants collateralized under the Citibank Credit Facility. Pursuant to the Warrant Participation Agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the Warrant Participation Agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2014, we reduced our realized gain by approximately $465,000 for Citigroup’s participation in the realized gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded a decrease in participation liability and a decrease in unrealized appreciation by a net amount of approximately $270,000 primarily due to depreciation of fair value on the pool of warrants collateralized under the Warrant Participation Agreement as a result of the sale of shares in Acceleron Pharma, Inc., Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments is approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid Citigroup approximately $2.1 million under the Warrant Participation Agreement thereby reducing realized gains by this amount. We will continue to pay Citigroup under the Warrant Participation Agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Warrant Participation Agreement are set to expire between February 2016 and January 2017. Amount Per Share Record Date Payment Date Date Declared November 17, 2005 $ October 27, 2005 ............................................................................ November 1, 2005 January 27, 2006 December 9, 2005 .......................................................................... January 6, 2006 May 5, 2006 April 3, 2006 .................................................................................. April 10, 2006 August 28, 2006 July 19, 2006 .................................................................................. July 31, 2006 December 1, 2006 October 16, 2006 ............................................................................ November 6, 2006 March 19, 2007 February 7, 2007 ............................................................................ February 19, 2007 June 18, 2007 May 3, 2007 ................................................................................... May 16, 2007 August 2, 2007 ............................................................................... August 16, 2007 September 17, 2007 November 1, 2007 .......................................................................... November 16, 2007 December 17, 2007 March 17, 2008 February 7, 2008 ............................................................................ February 15, 2008 June 16, 2008 May 8, 2008 ................................................................................... May 16, 2008 August 7, 2008 ............................................................................... August 15, 2008 September 19, 2008 November 6, 2008 .......................................................................... November 14, 2008 December 15, 2008 March 30, 2009 February 12, 2009 .......................................................................... February 23, 2009 June 15, 2009 May 7, 2009 ................................................................................... May 15, 2009 September 14, 2009 August 6, 2009 ............................................................................... August 14, 2009 October 15, 2009 ............................................................................ October 20, 2009 November 23, 2009 December 16, 2009 ........................................................................ December 24, 2009 December 30, 2009 March 19, 2010 February 11, 2010 .......................................................................... February 19, 2010 June 18, 2010 May 3, 2010 ................................................................................... May 12, 2010 August 2, 2010 ............................................................................... August 12, 2010 September 17,2010 November 4, 2010 .......................................................................... November 10, 2010 December 17, 2010 March 24, 2011 March 1, 2011 ................................................................................ March 10, 2011 June 23, 2011 May 5, 2011 ................................................................................... May 11, 2011 August 4, 2011 ............................................................................... August 15, 2011 September 15, 2011 November 3, 2011 .......................................................................... November 14, 2011 November 29, 2011 February 27, 2012 .......................................................................... March 12, 2012 April 30, 2012 ................................................................................ May 18, 2012 July 30, 2012 .................................................................................. August 17, 2012 October 26, 2012 ............................................................................ November 14, 2012 November 21, 2012 February 26, 2013 .......................................................................... March 11, 2013 April 29, 2013 ................................................................................ May 14, 2013 July 29, 2013 .................................................................................. August 13, 2013 November 4, 2013 .......................................................................... November 18, 2013 November 25, 2013 February 24, 2014 .......................................................................... March 10, 2014 April 28, 2014 ................................................................................ May 12, 2014 July 28, 2014 .................................................................................. August 18, 2014 October 29, 2014 ............................................................................ November 17, 2014 November 24, 2014 February 24, 2015 .......................................................................... March 12, 2015 March 17, 2014 May 19, 2014 August 25, 2014 March 15, 2012 May 25, 2012 August 24, 2012 March 19, 2013 May 21, 2013 August 20, 2013 March 19, 2015 $ 0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.32 * 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 0.31 0.31 0.31 0.31 10.30 * Dividend paid in cash and stock. On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend will represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend 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 year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend, or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. 90 91 16323_HER-10K_CS6-r4.indd 91 4/28/15 2:54 PM Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital Valuation of Portfolio Investments to the extent of the stockholder’s tax basis, 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 fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2014, 2013, and 2012, 100% were distributions of ordinary income and spillover earnings. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2015 distributions to stockholders will actually be. Each year a statement on Form 1099-DIV 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) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current 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 borrowings. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. We maintain an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, cash dividends will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash dividends. Critical Accounting Policies The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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. The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. At December 31, 2014, approximately 78.6% of our total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). Our debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, our investments in these portfolio companies are generally considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, we value substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. We may from time to time engage an independent valuation firm to provide us with valuation assistance with respect to certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) our quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with our investment committee; appropriate, and (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio company as provided by the Investment Committee, which incorporates the results of the independent valuation firm as (4) the Board of Directors, upon the recommendation of the Audit Committee, discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. 16323_HER-10K_CS6-r4.indd 92 4/28/15 2:54 PM 92 93 Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital Valuation of Portfolio Investments to the extent of the stockholder’s tax basis, 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 fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2014, 2013, and 2012, 100% were distributions of ordinary income and spillover earnings. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2015 distributions to stockholders will actually be. Each year a statement on Form 1099-DIV 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) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current 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 borrowings. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. We maintain an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, cash dividends will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash dividends. Critical Accounting Policies The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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. The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. At December 31, 2014, approximately 78.6% of our total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). Our debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, our investments in these portfolio companies are generally considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, we value substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. We may from time to time engage an independent valuation firm to provide us with valuation assistance with respect to certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) our quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with our investment committee; (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio company as provided by the Investment Committee, which incorporates the results of the independent valuation firm as appropriate, and (4) the Board of Directors, upon the recommendation of the Audit Committee, discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. 92 93 16323_HER-10K_CS6-r4.indd 93 4/28/15 2:54 PM Investment Type - Level Three Debt Investments Fair Value at December 31, 2013 (in thousands) Valuation Techniques/Methodologies Unobservable Input (a) Pharmaceuticals ................. $ 25,811 Originated Within 6 Months Origination Yield 250,607 Market Comparable Companies Hypothetical Market Yield Medical Devices ................. 46,900 Originated Within 6 Months Origination Yield 34,723 Market Comparable Companies Hypothetical Market Yield Technology ........................ 18,796 Originated Within 6 Months Origination Yield 98,290 Market Comparable Companies Hypothetical Market Yield 1,643 Liquidation Premium/(Discount) Probability weighting of alternative outcomes Energy Technology ............ 32,597 Originated Within 6 Months Origination Yield 108,238 Market Comparable Companies Hypothetical Market Yield Lower Middle Market ........ 121,347 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Premium/(Discount) Premium/(Discount) Premium/(Discount) Price Quotes Par Value Range 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% Weighted Average (c) 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% 31,818 Broker Quote (b) 99.50% - 100.25% of par $2.0 - $22.5 million 12,576 Liquidation Probability weighting of alternative outcomes 20.00% - 80.00% Debt Investments Where Fair Value Approximates Amortized Cost 15,906 Imminent Payoffs 22,236 Debt Investments Maturing in Less than One Year 500 Convertible Debt at Par $ 821,988 Total Level Three Debt Investments (a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. (b) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (c) Weighted averages are calculated based on the fair market value of each investment. In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2014. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. Investment Type - Level Three Debt Investments Pharmaceuticals ................... $ Fair Value at December 31, 2014 (in thousands) Medical Devices ................... Technology .......................... Energy Technology .............. Lower Middle Market .......... Valuation Techniques/Methodologies Unobservable Input (a) 117,229 Originated Within 6 Months 237,595 Market Comparable Companies Hypothetical Market Yield Origination Yield 60,332 Originated Within 6 Months 60,658 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 12,970 Liquidation(c) 152,645 Originated Within 6 Months 80,835 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 27,159 Liquidation(c) 4,437 Originated Within 6 Months 52,949 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 1,600 Liquidation(c) 2,962 Originated Within 6 Months 59,254 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 4,096 Liquidation(c) Premium/(Discount) Probability weighting of alternative outcomes Weighted Average (b) 11.76% 10.62% 13.69% 12.19% 14.08% 13.01% 19.00% 15.41% 14.04% 13.98% Range 10.34% - 16.52% 9.75% - 17.73% (0.50%) - 1.00% 12.14% - 16.56% 11.64% - 22.22% 0.00% - 1.00% 50.00% 10.54% - 20.02% 6.95% - 15.50% 0.00% - 0.50% 10.00% - 90.00% 13.85% - 21.57% 13.20% - 16.62% 0.00% - 1.50% 100.00% 14.04% 11.91% - 15.33% 0.00% - 0.50% 45.00% - 55.00% Debt Investments Where Fair Value Approximates Cost 9,318 Imminent Payoffs 39,867 Debt Investments Maturing in Less than One Year $ 923,906 Total Level Three Debt Investments (a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Internet Consumer and Business Services, Media/Content/Info, and Healthcare Services – Other industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. (b) Weighted averages are calculated based on the fair market value of each investment. (c) The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes. 16323_HER-10K_CS6-r4.indd 94 4/28/15 2:54 PM 94 95 In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2014. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. Investment Type - Level Three Debt Investments Fair Value at December 31, 2014 (in thousands) Valuation Techniques/Methodologies Unobservable Input (a) Pharmaceuticals ................... $ 117,229 Originated Within 6 Months Origination Yield 237,595 Market Comparable Companies Hypothetical Market Yield Medical Devices ................... 60,332 Originated Within 6 Months Origination Yield 60,658 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Premium/(Discount) Technology .......................... 152,645 Originated Within 6 Months Origination Yield 12,970 Liquidation(c) Probability weighting of alternative outcomes 50.00% 80,835 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) 27,159 Liquidation(c) Probability weighting of alternative outcomes 10.00% - 90.00% Energy Technology .............. 4,437 Originated Within 6 Months Origination Yield 52,949 Market Comparable Companies Hypothetical Market Yield Lower Middle Market .......... 2,962 Originated Within 6 Months Origination Yield 1,600 Liquidation(c) Premium/(Discount) Probability weighting of alternative outcomes Range 10.34% - 16.52% 9.75% - 17.73% (0.50%) - 1.00% 12.14% - 16.56% 11.64% - 22.22% 0.00% - 1.00% 10.54% - 20.02% 6.95% - 15.50% 0.00% - 0.50% 13.85% - 21.57% 13.20% - 16.62% 0.00% - 1.50% 100.00% 14.04% 11.91% - 15.33% 0.00% - 0.50% Weighted Average (b) 11.76% 10.62% 13.69% 12.19% 14.08% 13.01% 19.00% 15.41% 14.04% 13.98% (a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Internet Consumer and Business Services, Media/Content/Info, and Healthcare Services – Other industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. (b) Weighted averages are calculated based on the fair market value of each investment. (c) The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes. 59,254 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) 4,096 Liquidation(c) Probability weighting of alternative outcomes 45.00% - 55.00% (a) Debt Investments Where Fair Value Approximates Cost 9,318 Imminent Payoffs 39,867 Debt Investments Maturing in Less than One Year $ 923,906 Total Level Three Debt Investments Investment Type - Level Three Debt Investments Pharmaceuticals ................. $ Fair Value at December 31, 2013 (in thousands) Valuation Techniques/Methodologies 25,811 Originated Within 6 Months 250,607 Market Comparable Companies Hypothetical Market Yield Origination Yield Unobservable Input (a) Medical Devices ................. Technology ........................ Energy Technology ............ 46,900 Originated Within 6 Months 34,723 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 18,796 Originated Within 6 Months 98,290 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 1,643 Liquidation 32,597 Originated Within 6 Months 108,238 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield Premium/(Discount) Lower Middle Market ........ 121,347 Market Comparable Companies Hypothetical Market Yield Range 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% Weighted Average (c) 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% 31,818 Broker Quote (b) 12,576 Liquidation Premium/(Discount) Price Quotes Par Value Probability weighting of alternative outcomes 99.50% - 100.25% of par $2.0 - $22.5 million 20.00% - 80.00% Debt Investments Where Fair Value Approximates Amortized Cost 15,906 Imminent Payoffs 22,236 Debt Investments Maturing in Less than One Year 500 Convertible Debt at Par $ 821,988 Total Level Three Debt Investments The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (b) (c) Weighted averages are calculated based on the fair market value of each investment. 94 95 16323_HER-10K_CS6-r4.indd 95 4/28/15 2:54 PM Investment Type - Level Three Equity and Warrant Investments Equity Investments ....................... $ Fair Value at December 31, 2014 (in thousands) Valuation Techniques/ Methodologies 12,249 Market Comparable Companies 46,686 Market Adjusted OPM Backsolve Average Industry Volatility (d) Warrant Investments .................... 9,725 Market Comparable Companies Total Level Three Warrant and Equity Investments .................... $ 80,858 Risk-Free Interest Rate Estimated Time to Exit (in months) 12,198 Market Adjusted OPM Backsolve Average Industry Volatility (d) Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability © Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 5.2x - 23.4x 0.9x - 3.6x 5.67% - 35.45% 48.10% - 95.18% 0.22% - 0.83% 10 - 28 38.95% - 84.30% 0.10% - 1.32% 6 - 43 0.0x - 98.9x 0.3x - 15.7x 12.12% - 35.50% 37.70% - 108.86% 0.22% - 1.34% 10 - 47 32.85% - 99.81% 0.21% - 2.95% 10 - 48 Weighted Average (e) 8.5x 2.6x 15.95% 62.78% 0.24% 11 55.04% 0.24% 10 16.6x 4.3x 22.14% 67.23% 0.75% 27 67.58% 0.87% 28 (a) The significant unobservable inputs used in the fair value measurement of the our warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when we have determined that market participants would use such multiples when pricing the investments. Represents amounts used when we have determined market participants would take into account these discounts when pricing the investments. Represents the range of average industry volatility used by market participants when pricing the investment. (b) (c) (d) (e) Weighted averages are calculated based on the fair market value of each investment. Investment Type - Level Three Equity and Warrant Investments Equity Investments........................... $ Fair Value at December 31, 2013 (in thousands) Valuation Techniques/ Methodologies 10,244 Market Comparable Companies 9,289 Market Adjusted OPM Backsolve 18,127 Other Warrant Investments ........................ 10,200 Market Comparable Companies 8,913 Market Adjusted OPM Backsolve 9,595 Other Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 8.6x - 17.7x 0.7x - 13.8x 9.1% - 23.6% 43.4% - 110.7% 0.1% - 0.4% 6 - 30 45.6% - 109.7% 0.1% - 0.9% 6 - 42 44.0% 0.1% 12 5.0x - 51.4x 0.5x - 13.8x 6.4% - 36.0% 21.3% - 110.7% 0.1% - 1.0% 6 - 48 35.7% - 109.9% 0.1% - 2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Total Level Three Warrant and Equity Investments ........................ $ 66,368 (a) (b) (c) (d) The significant unobservable inputs used in the fair value measurement of our warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when we have determined that market participants would use such multiples when pricing the investments. Represents amounts used when we have determined market participants would take into account these discounts when pricing the investments. Represents the range of industry volatility used by market participants when pricing the investment. 16323_HER-10K_CS6-r4.indd 96 4/28/15 2:54 PM 96 97 Debt Investments We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. Our debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology at all stages of development. Given the nature of lending to these types of businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, we generally start with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. We then apply the valuation methods as set forth below. We apply a procedure for debt investments that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. We determine the yield at inception for each debt investment. We then use senior secured, leveraged loan yields provided by third party providers to determine the change in market yields between inception of the debt security and the measurement date. Industry specific indices are used to benchmark/assess market based movements. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. measurement date. We consider each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the Our process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yields and interest rate spreads of similar securities as of the measurement date. We value our syndicated debt investments, using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis. We record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a debt investment is doubtful or, if under the in-exchange premise, when the value of a debt security is less than the amortized cost of the investment. Conversely, where appropriate, we record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value or, if under the in- exchange premise, the value of a debt security is greater than amortized cost. When originating a debt instrument, we generally receive warrants or other equity-related securities from the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan. Equity-Related Securities and Warrants Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate our valuation of the warrant and equity related securities. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Investment Type - Level Three Equity and Warrant Investments Fair Value at December 31, 2014 (in thousands) Valuation Techniques/ Methodologies Equity Investments ....................... $ 12,249 Market Comparable Companies 46,686 Market Adjusted OPM Backsolve Average Industry Volatility (d) Warrant Investments .................... 9,725 Market Comparable Companies Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability © Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 5.2x - 23.4x 0.9x - 3.6x 5.67% - 35.45% 48.10% - 95.18% 0.22% - 0.83% 10 - 28 38.95% - 84.30% 0.10% - 1.32% 6 - 43 0.0x - 98.9x 0.3x - 15.7x 12.12% - 35.50% 37.70% - 108.86% 0.22% - 1.34% 10 - 47 32.85% - 99.81% 0.21% - 2.95% 10 - 48 Weighted Average (e) 8.5x 2.6x 15.95% 62.78% 0.24% 11 55.04% 0.24% 10 16.6x 4.3x 22.14% 67.23% 0.75% 67.58% 0.87% 27 28 12,198 Market Adjusted OPM Backsolve Average Industry Volatility (d) Total Level Three Warrant and Equity Investments .................... $ 80,858 (a) The significant unobservable inputs used in the fair value measurement of the our warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when we have determined that market participants would use such multiples when pricing the investments. Represents amounts used when we have determined market participants would take into account these discounts when pricing the investments. Represents the range of average industry volatility used by market participants when pricing the investment. (e) Weighted averages are calculated based on the fair market value of each investment. (b) (c) (d) Investment Type - Level Three Equity and Warrant Investments Equity Investments........................... $ Fair Value at December 31, 2013 (in thousands) Valuation Techniques/ Methodologies 10,244 Market Comparable Companies 9,289 Market Adjusted OPM Backsolve 18,127 Other 8,913 Market Adjusted OPM Backsolve 9,595 Other Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 8.6x - 17.7x 0.7x - 13.8x 9.1% - 23.6% 43.4% - 110.7% 0.1% - 0.4% 6 - 30 45.6% - 109.7% 0.1% - 0.9% 6 - 42 44.0% 0.1% 12 5.0x - 51.4x 0.5x - 13.8x 6.4% - 36.0% 21.3% - 110.7% 0.1% - 1.0% 6 - 48 35.7% - 109.9% 0.1% - 2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Warrant Investments ........................ 10,200 Market Comparable Companies Total Level Three Warrant and Equity Investments ........................ $ 66,368 (a) The significant unobservable inputs used in the fair value measurement of our warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) (c) (d) Represents amounts used when we have determined that market participants would use such multiples when pricing the investments. Represents amounts used when we have determined market participants would take into account these discounts when pricing the investments. Represents the range of industry volatility used by market participants when pricing the investment. Debt Investments We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. Our debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology at all stages of development. Given the nature of lending to these types of businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, we generally start with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. We then apply the valuation methods as set forth below. We apply a procedure for debt investments that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. We determine the yield at inception for each debt investment. We then use senior secured, leveraged loan yields provided by third party providers to determine the change in market yields between inception of the debt security and the measurement date. Industry specific indices are used to benchmark/assess market based movements. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. We consider each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. Our process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yields and interest rate spreads of similar securities as of the measurement date. We value our syndicated debt investments, using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis. We record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a debt investment is doubtful or, if under the in-exchange premise, when the value of a debt security is less than the amortized cost of the investment. Conversely, where appropriate, we record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value or, if under the in- exchange premise, the value of a debt security is greater than amortized cost. When originating a debt instrument, we generally receive warrants or other equity-related securities from the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan. Equity-Related Securities and Warrants Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate our valuation of the warrant and equity related securities. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. 96 97 16323_HER-10K_CS6-r4.indd 97 4/28/15 2:54 PM Income Recognition Income Taxes We record interest income on the accrual basis and we recognize it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2014, we had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively, compared to two debt investments on non-accrual at December 31, 2013 with a cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively. Paid-In-Kind and End of Term Income Contractual PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an end-of-term payment that we amortize into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $3.3 million and $3.5 million in PIK income during the years ended December 31, 2014 and 2013, respectively. Fee Income. Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and deal structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest arrangements, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. We distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for Equity Offering Expenses Our offering costs are charged against the proceeds from equity offerings when received. Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by us in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method as applicable, or the straight line method, which closely approximates the effective yield method. These expenses are accelerated for the proportionate amount of unamortized debt issuance costs and fees in cases where debt is extinguished early. Stock Based Compensation We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We follow ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock based compensation for stock options and restricted stock granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date may require judgment, including estimating stock price volatility, forfeiture rate and expected option life. tax purposes. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we have concluded that there is no impact from adopting this standard on our statement of assets and liabilities or results of operations. We have adopted this standard for our fiscal year ending December 31, 2014. Subsequent Events Dividend Declaration On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015.This dividend would represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share 16323_HER-10K_CS6-r4.indd 98 4/28/15 2:54 PM 98 99 We record interest income on the accrual basis and we recognize it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2014, we had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively, compared to two debt investments on non-accrual at December 31, 2013 with a cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively. Paid-In-Kind and End of Term Income Contractual PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an end-of-term payment that we amortize into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $3.3 million and $3.5 million in PIK income during the years ended December 31, 2014 and 2013, respectively. Fee Income. Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and deal structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. Equity Offering Expenses Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by us in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method as applicable, or the straight line method, which closely approximates the effective yield method. These expenses are accelerated for the proportionate amount of unamortized debt issuance costs and fees in cases where debt is extinguished early. Stock Based Compensation We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We follow ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock based compensation for stock options and restricted stock granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date may require judgment, including estimating stock price volatility, forfeiture rate and expected option life. Income Recognition Income Taxes We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest arrangements, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We intend to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to our shareholders in 2015. We distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. Because federal income tax regulations differ from accounting principles generally accepted in the United States, 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 statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Our offering costs are charged against the proceeds from equity offerings when received. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we have concluded that there is no impact from adopting this standard on our statement of assets and liabilities or results of operations. We have adopted this standard for our fiscal year ending December 31, 2014. Subsequent Events Dividend Declaration On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015.This dividend would represent our thirty-eighth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share 98 99 16323_HER-10K_CS6-r4.indd 99 4/28/15 2:54 PM Convertible Senior Notes Closed and Pending Commitments In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes, or the Convertible As of February 26, 2015, we have: Senior Notes, due 2016. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. Closed commitments of approximately $150.8 million to new and existing portfolio companies. Pending commitments (signed non-binding term sheets) of approximately $36.0 million. The Convertible Senior Notes are convertible into shares of our common stock beginning October 15, 2015, or, under certain circumstances, earlier. Upon conversion of the Convertible Senior Notes, we have the choice to pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. The table below summarizes our year-to-date closed and pending commitments as follows: Closed Commitments and Pending Commitments (in millions) Q1-15 Closed Commitments (as of February 26, 2015)(a) ....................... $ Pending Commitments (as of February 26, 2015)(b) ................................ $ Year to date 2015 Closed and Pending Commitments ....................... $ 150.8 36.0 186.8 Subsequent to December 31, 2014 and as of February 26, 2015, approximately $32,000 of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 613 shares of our common stock in January 2015. Notes: April 2019 Notes – Redemption On February 24, 2015, the Board of Directors approved a redemption of $20.0 million of the $84.5 million in issued and outstanding aggregate principal amount of April 2019 Notes, and notice for such redemption has been provided. We currently intend to make additional redemptions on the April 2019 Notes throughout the 2015 calendar year, depending on our anticipated cash needs. We will provide notice for and complete all redemptions in compliance with the terms of the Base Indenture, as supplemented by the First Supplemental Indenture. future cash requirements. Portfolio Company Developments 2017 Asset-Backed Notes – Contractual Amortization In February 2015, changes in the payment schedule of obligors in the 2017 Asset-Backed Notes collateral pool triggered a Rapid Amortization Event in accordance with the sale and servicing agreement for the 2017 Asset-Backed Notes. Due to this Event, the 2017 Asset-Backed Notes are expected to fully amortize within the first half of 2015. Share Repurchase Program On February 24, 2015, our Board of Directors approved a $50.0 million open market share repurchase program. We may repurchase shares of our common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in our then most recently published financial statements. We anticipate that the manner, timing, and amount of any share purchases will be determined by our management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, we are required to notify shareholders program when such a program is initiated or implemented. The repurchase program does not require us to acquire any specific number of shares and may be extended, modified, or discontinued at any time. a. b. 1. 2. 3. 4. a. Closed Commitments may include renewals of existing credit facilities. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close. b. Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any As of February 26, 2015, we held warrants or equity positions in six companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Good Technology Corp., ViewRay, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2014 the following current and former portfolio companies completed initial public offerings or were acquired: In January 2015, our portfolio company Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares held we hold in Box, Inc. are subject to certain restrictions that govern the timing of our divestment and may thus impact our ultimate gain or (loss). In the case of Box, Inc., we are subject to a customary IPO lockup period and are obligated not to sell the shares of common stock that we own for six months from the date of the initial public offering. The potential gain depends on the price of the shares when we exit the investment. In January 2015, our portfolio company Zosano Pharma, Inc. completed its initial public offering of 4,500,000 shares of its common stock at $11.00 per share. In February 2015, our portfolio company Inotek Pharmaceuticals, Inc. completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. In February 2015, Zillow, Inc. completed its acquisition of our former portfolio company Trulia, Inc. for $2.5 billion in a stock-for-stock transaction and formed Zillow Group, Inc. The Company no longer holds investments in the portfolio company. 16323_HER-10K_CS6-r4.indd 100 4/28/15 2:54 PM 100 101 Convertible Senior Notes Closed and Pending Commitments In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes, or the Convertible As of February 26, 2015, we have: Senior Notes, due 2016. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. a. b. Closed commitments of approximately $150.8 million to new and existing portfolio companies. Pending commitments (signed non-binding term sheets) of approximately $36.0 million. The Convertible Senior Notes are convertible into shares of our common stock beginning October 15, 2015, or, under certain circumstances, earlier. Upon conversion of the Convertible Senior Notes, we have the choice to pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. The table below summarizes our year-to-date closed and pending commitments as follows: Closed Commitments and Pending Commitments (in millions) Q1-15 Closed Commitments (as of February 26, 2015)(a) ....................... $ Pending Commitments (as of February 26, 2015)(b) ................................ $ Year to date 2015 Closed and Pending Commitments ....................... $ 150.8 36.0 186.8 Subsequent to December 31, 2014 and as of February 26, 2015, approximately $32,000 of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and Notes: approximately 613 shares of our common stock in January 2015. April 2019 Notes – Redemption On February 24, 2015, the Board of Directors approved a redemption of $20.0 million of the $84.5 million in issued and outstanding aggregate principal amount of April 2019 Notes, and notice for such redemption has been provided. We currently intend to make additional redemptions on the April 2019 Notes throughout the 2015 calendar year, depending on our anticipated cash needs. We will provide notice for and complete all redemptions in compliance with the terms of the Base Indenture, as supplemented by the First Supplemental Indenture. 2017 Asset-Backed Notes – Contractual Amortization In February 2015, changes in the payment schedule of obligors in the 2017 Asset-Backed Notes collateral pool triggered a Rapid Amortization Event in accordance with the sale and servicing agreement for the 2017 Asset-Backed Notes. Due to this Event, the 2017 Asset-Backed Notes are expected to fully amortize within the first half of 2015. Share Repurchase Program On February 24, 2015, our Board of Directors approved a $50.0 million open market share repurchase program. We may repurchase shares of our common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in our then most recently published financial statements. We anticipate that the manner, timing, and amount of any share purchases will be determined by our management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, we are required to notify shareholders program when such a program is initiated or implemented. The repurchase program does not require us to acquire any specific number of shares and may be extended, modified, or discontinued at any time. a. b. Closed Commitments may include renewals of existing credit facilities. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close. Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future cash requirements. Portfolio Company Developments As of February 26, 2015, we held warrants or equity positions in six companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Good Technology Corp., ViewRay, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2014 the following current and former portfolio companies completed initial public offerings or were acquired: 1. 2. 3. 4. In January 2015, our portfolio company Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares held we hold in Box, Inc. are subject to certain restrictions that govern the timing of our divestment and may thus impact our ultimate gain or (loss). In the case of Box, Inc., we are subject to a customary IPO lockup period and are obligated not to sell the shares of common stock that we own for six months from the date of the initial public offering. The potential gain depends on the price of the shares when we exit the investment. In January 2015, our portfolio company Zosano Pharma, Inc. completed its initial public offering of 4,500,000 shares of its common stock at $11.00 per share. In February 2015, our portfolio company Inotek Pharmaceuticals, Inc. completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. In February 2015, Zillow, Inc. completed its acquisition of our former portfolio company Trulia, Inc. for $2.5 billion in a stock-for-stock transaction and formed Zillow Group, Inc. The Company no longer holds investments in the portfolio company. 100 101 16323_HER-10K_CS6-r4.indd 101 4/28/15 2:54 PM INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm .................................................................................................... Consolidated Statements of Assets and Liabilities as of December 31, 2014 and 2013 .......................................................... Consolidated Statements of Operations for the three years ended December 31, 2014 ........................................................... Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2014 ........................................ Consolidated Statements of Cash Flows for the three years ended December 31, 2014 .......................................................... Consolidated Schedule of Investments as of December 31, 2014............................................................................................ Consolidated Schedule of Investments as of December 31, 2013............................................................................................ Notes to Consolidated Financial Statements ............................................................................................................................ Schedule of Investments in and Advances to Affiliates ........................................................................................................... 104 105 107 108 109 110 124 136 173 Item 7A. Quantitative and Qualitative Disclosure About Market Risk Item 8. Financial Statements and Supplementary Data We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our investment income will be affected by changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments include variable interest rates. As of December 31, 2014, approximately 98.2% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2014, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings. (in thousands) Basis Point Change 100 .............................................................................. $ 200 .............................................................................. $ 300 .............................................................................. $ 400 .............................................................................. $ 500 .............................................................................. $ Interest Income Interest Expense Net Income 8,365 $ 16,213 $ 27,470 $ 38,241 $ 48,957 $ — $ — $ — $ — $ — $ 8,365 16,213 27,470 38,241 48,957 (1) A decline in interest rates would not have a material impact on our Consolidated Financial Statements. We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During the year ended December 31, 2014, we did not engage in interest rate hedging activities. Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for other business developments, including borrowings under our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes and 2021 Asset-Backed Notes that could affect the net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above. Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio. For additional information regarding the interest rate associated with each of our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes and 2021 Asset-Backed Notes please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” in this report on Form 10-K. 16323_HER-10K_CS6-r4.indd 102 4/28/15 2:54 PM 102 103 Item 7A. Quantitative and Qualitative Disclosure About Market Risk Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm .................................................................................................... Consolidated Statements of Assets and Liabilities as of December 31, 2014 and 2013 .......................................................... Consolidated Statements of Operations for the three years ended December 31, 2014 ........................................................... Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2014 ........................................ Consolidated Statements of Cash Flows for the three years ended December 31, 2014 .......................................................... Consolidated Schedule of Investments as of December 31, 2014............................................................................................ Consolidated Schedule of Investments as of December 31, 2013............................................................................................ Notes to Consolidated Financial Statements ............................................................................................................................ Schedule of Investments in and Advances to Affiliates ........................................................................................................... 104 105 107 108 109 110 124 136 173 We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our investment income will be affected by changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments include variable interest rates. As of December 31, 2014, approximately 98.2% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2014, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings. (in thousands) Basis Point Change Interest Income Interest Expense Net Income 100 .............................................................................. $ 200 .............................................................................. $ 300 .............................................................................. $ 400 .............................................................................. $ 500 .............................................................................. $ 8,365 $ 16,213 $ 27,470 $ 38,241 $ 48,957 $ — $ — $ — $ — $ — $ 8,365 16,213 27,470 38,241 48,957 (1) A decline in interest rates would not have a material impact on our Consolidated Financial Statements. We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During the year ended December 31, 2014, we did not engage in interest rate hedging activities. Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for other business developments, including borrowings under our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes and 2021 Asset-Backed Notes that could affect the net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above. Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio. For additional information regarding the interest rate associated with each of our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes, 2024 Notes, 2017 Asset-Backed Notes and 2021 Asset-Backed Notes please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” in this report on Form 10-K. 102 103 16323_HER-10K_CS6-r4.indd 103 4/28/15 2:54 PM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Board of Directors and Shareholders of Hercules Technology Growth Capital, Inc. In our opinion, the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, and the related consolidated statements of operations, of changes in net assets, and of cash flows present fairly, in all material respects, the financial position of Hercules Technology Growth Capital, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. Our procedures included confirmation of securities at December 31, 2014 by correspondence with the custodian, borrowers and brokers, and where replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Francisco, CA March 2, 2015 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (in thousands, except per share data) December 31, 2014 December 31, 2013 Total assets ................................................................................................................................... $ 1,299,223 $ 1,221,715 Assets ............................................................................................................................................ Investments: Non-control/Non-affiliate investments (cost of $1,019,799 and $891,059, respectively) ..... $ Affiliate investments (cost of $15,538 and $15,238, respectively) ....................................... Total investments, at value (cost of $1,035,337 and $906,297, respectively) ............................... Cash and cash equivalents ............................................................................................................. Restricted cash ............................................................................................................................... Interest receivable .......................................................................................................................... Other assets ................................................................................................................................... Liabilities ...................................................................................................................................... Accounts payable and accrued liabilities ....................................................................................... $ Long-term Liabilities (Convertible Senior Notes) ......................................................................... 2017 Asset-Backed Notes .............................................................................................................. 2021 Asset-Backed Notes .............................................................................................................. 2019 Notes..................................................................................................................................... 2024 Notes..................................................................................................................................... Long-term SBA Debentures .......................................................................................................... Total liabilities ............................................................................................................................. $ Commitments and Contingencies (Note 10) .................................................................................. Net assets consist of: Common stock, par value ..................................................................................................... Capital in excess of par value ............................................................................................... Unrealized appreciation (depreciation) on investments ........................................................ Accumulated realized gains (losses) on investments ............................................................ Undistributed net investment income.................................................................................... Total net assets ............................................................................................................................. $ Total liabilities and net assets ..................................................................................................... $ 1,012,738 $ 7,999 1,020,737 227,116 12,660 9,453 29,257 14,101 $ 17,345 16,049 129,300 170,364 103,000 190,200 640,359 $ 65 657,233 (17,076 ) 14,079 4,563 658,864 $ 1,299,223 $ Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized) ................ Net asset value per share ............................................................................................................. $ 64,715 10.18 $ See notes to consolidated financial statements. 899,314 10,981 910,295 268,368 6,271 8,962 27,819 14,268 72,519 89,557 170,364 — — 225,000 571,708 62 656,594 3,598 (15,240) 4,993 650,007 1,221,715 61,837 10.51 16323_HER-10K_CS6-r4.indd 104 4/28/15 2:54 PM 104 105 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Board of Directors and Shareholders of Hercules Technology Growth Capital, Inc. In our opinion, the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, and the related consolidated statements of operations, of changes in net assets, and of cash flows present fairly, in all material respects, the financial position of Hercules Technology Growth Capital, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. Our procedures included confirmation of securities at December 31, 2014 by correspondence with the custodian, borrowers and brokers, and where replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Francisco, CA March 2, 2015 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (in thousands, except per share data) December 31, 2014 December 31, 2013 Assets ............................................................................................................................................ Investments: Non-control/Non-affiliate investments (cost of $1,019,799 and $891,059, respectively) ..... $ Affiliate investments (cost of $15,538 and $15,238, respectively) ....................................... Total investments, at value (cost of $1,035,337 and $906,297, respectively) ............................... Cash and cash equivalents ............................................................................................................. Restricted cash ............................................................................................................................... Interest receivable .......................................................................................................................... Other assets ................................................................................................................................... Total assets ................................................................................................................................... $ Liabilities ...................................................................................................................................... Accounts payable and accrued liabilities ....................................................................................... $ Long-term Liabilities (Convertible Senior Notes) ......................................................................... 2017 Asset-Backed Notes .............................................................................................................. 2021 Asset-Backed Notes .............................................................................................................. 2019 Notes..................................................................................................................................... 2024 Notes..................................................................................................................................... Long-term SBA Debentures .......................................................................................................... Total liabilities ............................................................................................................................. $ Commitments and Contingencies (Note 10) .................................................................................. Net assets consist of: Common stock, par value ..................................................................................................... Capital in excess of par value ............................................................................................... Unrealized appreciation (depreciation) on investments ........................................................ Accumulated realized gains (losses) on investments ............................................................ Undistributed net investment income.................................................................................... Total net assets ............................................................................................................................. $ Total liabilities and net assets ..................................................................................................... $ 1,012,738 $ 7,999 1,020,737 227,116 12,660 9,453 29,257 1,299,223 $ 14,101 $ 17,345 16,049 129,300 170,364 103,000 190,200 640,359 $ 65 657,233 (17,076 ) 14,079 4,563 658,864 $ 1,299,223 $ Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized) ................ Net asset value per share ............................................................................................................. $ 64,715 10.18 $ See notes to consolidated financial statements. 899,314 10,981 910,295 268,368 6,271 8,962 27,819 1,221,715 14,268 72,519 89,557 — 170,364 — 225,000 571,708 62 656,594 3,598 (15,240) 4,993 650,007 1,221,715 61,837 10.51 104 105 16323_HER-10K_CS6-r4.indd 105 4/28/15 2:54 PM The following table presents the assets and liabilities of our consolidated securitization trusts for the asset-backed notes (see Note 4), which are variable interest entities (“VIE”). The assets of our securitization VIEs can only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statements of Assets and Liabilities above. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) December 31, 2014 December 31, 2013 (Dollars in thousands) Assets .................................................................................................................................................... Restricted Cash ...................................................................................................................................... $ Total investments, at value (cost of $296,314 and $166,513, respectively) .......................................... Total assets ........................................................................................................................................... $ Investment income: 12,660 $ 291,464 304,124 $ 6,271 165,445 171,716 Interest income ............................................................................................... Non-Control/Non-Affiliate investments ................................................ $ Affiliate investments ............................................................................. Total interest income .................................................................... 124,776 $ 1,842 126,618 For the Years Ended December 31, 2014 2013 2012 Compensation and benefits ................................................................... 16,604 Non-Control/Non-Affiliate investments ................................................ Affiliate investments ............................................................................. Total fees ...................................................................................... Total investment income ...................................................................................... Operating expenses: Interest ........................................................................................................... Loan fees ........................................................................................................ General and administrative ............................................................................ Employee Compensation: Stock-based compensation .................................................................... Total employee compensation ...................................................... Total operating expenses ...................................................................................... Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ..... Net investment income ......................................................................................... Net realized gain on investments Non-Control/Non-Affiliate investments ................................................ Total net realized gain on investments .......................................... Net increase in unrealized appreciation (depreciation) on investments Non-Control/Non-Affiliate investments ................................................ Affiliate investments ............................................................................. Total net unrealized appreciation (depreciation) on investments .. 17,013 34 17,047 143,665 28,041 5,919 10,209 9,561 26,165 70,334 (1,581) 71,750 20,112 20,112 (17,392) (3,282) (20,674) (562) Total net realized and unrealized gain (loss) ...................................................... Net increase in net assets resulting from operations .......................................... $ 71,188 $ Net investment income before investment gains and losses per common share: Basic .............................................................................................................. $ 1.13 $ 1.22 $ Change in net assets resulting from operations per common share: Basic .............................................................................................................. $ Diluted ........................................................................................................... $ 1.12 $ 1.10 $ 1.67 $ 1.63 $ Weighted average shares outstanding Basic .............................................................................................................. Diluted ........................................................................................................... 61,862 63,225 58,838 60,292 Dividends declared per common share: Basic .............................................................................................................. $ 1.24 $ 1.11 $ 0.95 See notes to consolidated financial statements. 121,302 $ 2,369 123,671 16,016 26 16,042 139,713 30,334 4,807 9,354 16,179 5,974 22,153 66,648 — 73,065 14,836 14,836 12,370 (825 ) 11,545 26,381 99,446 $ 85,258 2,345 87,603 9,897 20 9,917 97,520 19,835 3,917 8,108 13,326 4,227 17,553 49,413 — 48,107 3,168 3,168 (2,448) (2,068) (4,516) (1,348) 46,759 0.96 0.93 0.93 49,068 49,156 Liabilities .............................................................................................................................................. Asset-Backed Notes .............................................................................................................................. $ Total liabilities ..................................................................................................................................... $ 145,349 $ 145,349 $ 89,557 89,557 Fees See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 106 4/28/15 2:54 PM 106 107 The following table presents the assets and liabilities of our consolidated securitization trusts for the asset-backed notes (see Note 4), which are variable interest entities (“VIE”). The assets of our securitization VIEs can only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statements of Assets and Liabilities above. (Dollars in thousands) December 31, 2014 December 31, 2013 Assets .................................................................................................................................................... Restricted Cash ...................................................................................................................................... $ Total investments, at value (cost of $296,314 and $166,513, respectively) .......................................... Total assets ........................................................................................................................................... $ 12,660 $ 291,464 304,124 $ 6,271 165,445 171,716 Liabilities .............................................................................................................................................. Asset-Backed Notes .............................................................................................................................. $ Total liabilities ..................................................................................................................................... $ 145,349 $ 145,349 $ 89,557 89,557 See notes to consolidated financial statements. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) For the Years Ended December 31, 2013 2012 2014 Investment income: Interest income ............................................................................................... Non-Control/Non-Affiliate investments ................................................ $ Affiliate investments ............................................................................. Total interest income .................................................................... Fees Non-Control/Non-Affiliate investments ................................................ Affiliate investments ............................................................................. Total fees ...................................................................................... Total investment income ...................................................................................... Operating expenses: Interest ........................................................................................................... Loan fees ........................................................................................................ General and administrative ............................................................................ Employee Compensation: Compensation and benefits ................................................................... Stock-based compensation .................................................................... Total employee compensation ...................................................... Total operating expenses ...................................................................................... Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ..... Net investment income ......................................................................................... Net realized gain on investments Non-Control/Non-Affiliate investments ................................................ Total net realized gain on investments .......................................... Net increase in unrealized appreciation (depreciation) on investments Non-Control/Non-Affiliate investments ................................................ Affiliate investments ............................................................................. Total net unrealized appreciation (depreciation) on investments .. Total net realized and unrealized gain (loss) ...................................................... Net increase in net assets resulting from operations .......................................... $ Net investment income before investment gains and losses per common share: 124,776 $ 1,842 126,618 17,013 34 17,047 143,665 28,041 5,919 10,209 16,604 9,561 26,165 70,334 (1,581) 71,750 20,112 20,112 (17,392) (3,282) (20,674) (562) 71,188 $ 121,302 $ 2,369 123,671 16,016 26 16,042 139,713 30,334 4,807 9,354 16,179 5,974 22,153 66,648 — 73,065 14,836 14,836 12,370 (825 ) 11,545 26,381 99,446 $ Basic .............................................................................................................. $ 1.13 $ 1.22 $ Change in net assets resulting from operations per common share: Basic .............................................................................................................. $ Diluted ........................................................................................................... $ 1.12 $ 1.10 $ 1.67 $ 1.63 $ Weighted average shares outstanding Basic .............................................................................................................. Diluted ........................................................................................................... 61,862 63,225 58,838 60,292 85,258 2,345 87,603 9,897 20 9,917 97,520 19,835 3,917 8,108 13,326 4,227 17,553 49,413 — 48,107 3,168 3,168 (2,448) (2,068) (4,516) (1,348) 46,759 0.96 0.93 0.93 49,068 49,156 Dividends declared per common share: Basic .............................................................................................................. $ 1.24 $ 1.11 $ 0.95 See notes to consolidated financial statements. 106 107 16323_HER-10K_CS6-r4.indd 107 4/28/15 2:54 PM Realized Net Assets Capital in excess Unrealized Appreciation (Depreciation) Gains (Losses) Common Stock Shares Par Value of par value on Investments on Investments Undistributed net investment income/ Accumulated (Distributions Provision for Income Taxes in excess of on Investment investment Gains income) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (dollars and shares in thousands) Balance at December 31, 2011 ........................ 43,853 $ 44 $ 484,244 $ (3,431) $ (43,042) $ (6,432 ) $ (342) $431,041 578 505 Net increase in net assets resulting from operations .......................... — Issuance of common stock ........................... Issuance of common stock under restricted stock plan .................................. Issuance of common stock as 219 stock dividend ........................................... Retired shares from net issuance .................. (330 ) Public Offering ............................................ 8,100 Dividends declared ...................................... — Stock-based compensation ........................... — Tax Reclassification of stockholders' equity in accordance with generally accepted accounting principles ................. — Balance at December 31, 2012 ........................ 52,925 $ 423 Net increase in net assets resulting from operations .......................... — $ Issuance of common stock ........................... 2,019 Issuance of common stock under restricted stock plan .................................. Issuance of common stock as stock dividend ........................................... 159 Retired shares from net issuance .................. (1,739 ) Public Offering ............................................ 8,050 Dividends declared ...................................... — Stock-based compensation ........................... — Tax Reclassification of stockholders' equity in accordance with generally accepted accounting principles ................. — Balance at December 31, 2013 ........................ 61,837 $ 593 Net increase (decrease) in net assets resulting from operations .......... — $ Issuance of common stock ..................... 354 Issuance of common stock under restricted stock plan ............................ Issuance of common stock as stock dividend ..................................... 97 Retired shares from net issuance ............ (277 ) Public offering ....................................... 2,111 Dividends declared ................................ — Stock-based compensation ..................... — Tax Reclassification of stockholders' equity in accordance with generally accepted accounting principles ........... — Balance at December 31, 2014 ........................ 64,715 $ — 1 — — — 8 — — — 3,287 — 2,305 (4,625) 80,872 — 4,303 (4,516) 3,168 48,107 — — — — — — — — — — — — — — — — — — — (47,983 ) — — 46,759 3,288 — — — 2,305 — — (4,625) — 80,880 — (47,983) 4,303 — (5,878) — 53 $ 564,508 $ — (7,947) $ 2,958 (36,916) $ 2,920 (3,388 ) $ — — (342) $515,968 — $ 2 — $ 25,245 11,545 $ — 14,836 $ — 73,065 $ — — $ 99,446 — 25,247 1 — (2) 8 — — (1) 2,201 (27,990) 95,529 — 6,054 — — — — — — — — — — — — — — — Cash flows from investing activities: — — — (66,454 ) — — 2,201 — (27,992) — 95,537 — (66,454) 6,054 — — (8,952) 62 $ 656,594 $ — 3,598 $ 6,840 (15,240) $ 2,112 5,335 $ — — (342) $650,007 — $ — — $ 3,955 (20,674) $ — 20,112 $ — 71,750 $ — — $ 71,188 3,955 — 1 — — 2 — — (1) 1,485 (7,856) 9,007 — 9,638 — — — — — — — — — — — — — — — — — — (78,562 ) — 1,485 — (7,856) — — 9,009 — (78,562) 9,638 — (15,589) — 65 $ 657,233 $ — (17,076) $ 9,207 14,079 $ 6,382 4,905 $ — — (342) $658,864 See notes to consolidated financial statements. 108 16323_HER-10K_CS6-r4.indd 108 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 4,516 (3,048) (1,400) (5,441) 1,083 — — (3,986) 2,301 (1,900) 1,560 289 4,303 (988) 279 926 (87) — — (87) Net increase in net assets resulting from operations ......................................................................................... $ 71,188 $ 99,446 $ 46,759 Cash flows from operating activities: Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: Purchase of investments.................................................................................................................................... (623,232 ) (487,558) (507,098) Principal and fee payments received on investments ........................................................................................ 503,003 477,535 245,777 Proceeds from the sale of investments .............................................................................................................. 33,432 44,832 25,948 For the Years Ended December 31, 2014 2013 2012 Net unrealized depreciation (appreciation) on investments .............................................................................. 20,674 (11,545) Net realized gain on investments ...................................................................................................................... (20,112 ) (14,836) Accretion of paid-in-kind principal................................................................................................................... Accretion of loan discounts .............................................................................................................................. Accretion of loan discount on Convertible Senior Notes .................................................................................. (2,549 ) (9,792 ) 843 Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ........................................... 1,581 Payment of loan discount on Convertible Senior Notes .................................................................................... (4,195 ) Accretion of loan exit fees ................................................................................................................................ (11,541 ) Change in deferred loan origination revenue .................................................................................................... (281 ) Unearned fees related to unfunded commitments ............................................................................................. (6,426 ) Amortization of debt fees and issuance costs ................................................................................................... 5,256 Depreciation...................................................................................................................................................... 266 Stock-based compensation and amortization of restricted stock grants ............................................................ 9,638 (3,103) (6,652) 1,083 — — (9,251) 1,409 (3,087) 4,044 252 6,054 Change in operating assets and liabilities: Interest and fees receivable ...................................................................................................................... 672 (3,815) Prepaid expenses and other assets ............................................................................................................ Accounts payable ..................................................................................................................................... (490 ) 7,518 271 2,488 54 Accrued liabilities .................................................................................................................................... (1,583 ) 1,757 Net cash provided by (used in) operating activities ................................................................................................... (26,531 ) 103,594 (193,935) Purchases of capital equipment ......................................................................................................................... (190 ) (311) Reduction of (investment in) restricted cash ..................................................................................................... (6,389 ) (6,271) Other long-term assets ...................................................................................................................................... 25 — Net cash (used in) investing activities ........................................................................................................................ (6,554 ) (6,582) Cash flows from financing activities: Proceeds from issuance (repurchase of employee shares due to restricted stock vesting) of common stock, net(1) .. 5,936 92,376 79,647 Dividends paid .................................................................................................................................................. (77,076 ) (64,252) (45,678) Issuance of 2019 Notes Payable ....................................................................................................................... — — 170,365 Issuance of 2024 Notes Payable ....................................................................................................................... 103,000 Issuance of 2017 Asset-Backed Notes .............................................................................................................. — — 129,300 Issuance of 2021 Asset-Backed Notes .............................................................................................................. 129,300 Repayments of 2017 Asset-Backed Notes ........................................................................................................ (73,508 ) (39,743) Repayments of Long-Term SBA Debentures ................................................................................................... (34,800 ) Borrowings of credit facilities .......................................................................................................................... Repayments of credit facilities .......................................................................................................................... — — Cash paid for debt issuance costs ...................................................................................................................... (6,669 ) Cash Paid for redemption of Convertible Senior Notes .................................................................................... (53,131 ) Fees paid for credit facilities and debentures .................................................................................................... (1,219 ) — — — — — — — (19) — — — — — — 64,000 (74,228) (10,864) Net cash provided by (used in) financing activities ................................................................................................... (8,167 ) (11,638) 312,542 Net decrease in cash and cash equivalents ................................................................................................................. (41,252 ) 85,374 118,520 Cash and cash equivalents at beginning of period ..................................................................................................... 268,368 182,994 64,474 Cash and cash equivalents at end of period ............................................................................................................... $ 227,116 $ 268,368 $ 182,994 Supplemental non-cash investing and financing activities: Interest paid ...................................................................................................................................................... $ 25,738 $ 25,245 $ 18,928 Income taxes paid ............................................................................................................................................. $ Dividends Reinvested ....................................................................................................................................... $ Paid-in-Kind Principal ...................................................................................................................................... $ 133 $ 1,485 $ 2,699 $ 85 $ 2,201 $ 1,153 $ 44 2,305 115 (1) Net issuance of employee shares due to restricted stock vesting equals $3,901, $2,744, and $1,341 for the years ended December 31, 2014, December 31 2013, and December 31, 2012, respectively. See notes to consolidated financial statements. 109 For the Years Ended December 31, 2013 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (dollars and shares in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: 2012 2014 accepted accounting principles ................. — Balance at December 31, 2012 ........................ 52,925 $ — (5,878) 53 $ 564,508 $ — 2,958 (7,947) $ (36,916) $ 2,920 (3,388 ) $ — — (342) $515,968 — $ 11,545 $ 14,836 $ 73,065 $ Balance at December 31, 2011 ........................ 43,853 $ 44 $ 484,244 $ (3,431) $ (43,042) $ (6,432 ) $ (342) $431,041 Unrealized Accumulated (Distributions Provision for Capital in Appreciation Realized in excess of Income Taxes Common Stock excess (Depreciation) Gains (Losses) investment on Investment Shares Par Value of par value on Investments on Investments income) Gains Net Assets — 3,287 (4,516) — 3,168 48,107 Net increase in net assets resulting from operations .......................... — Issuance of common stock ........................... 578 Issuance of common stock under restricted stock plan .................................. 505 Issuance of common stock as stock dividend ........................................... Retired shares from net issuance .................. 219 (330 ) Public Offering ............................................ 8,100 Dividends declared ...................................... — Stock-based compensation ........................... — Tax Reclassification of stockholders' equity in accordance with generally Net increase in net assets resulting from operations .......................... — $ Issuance of common stock ........................... 2,019 Issuance of common stock under restricted stock plan .................................. 423 Issuance of common stock as stock dividend ........................................... 159 Retired shares from net issuance .................. (1,739 ) Public Offering ............................................ 8,050 Dividends declared ...................................... — Stock-based compensation ........................... — Tax Reclassification of stockholders' equity in accordance with generally — 1 — — — 8 — — — 2,305 (4,625) 80,872 — 4,303 — $ 2 1 — (2) 8 — — 25,245 (1) 2,201 (27,990) 95,529 — 6,054 Net increase (decrease) in net assets resulting from operations .......... — $ Issuance of common stock ..................... 354 — $ — 3,955 Issuance of common stock under restricted stock plan ............................ 593 1 (1) Issuance of common stock as stock dividend ..................................... 97 Retired shares from net issuance ............ (277 ) Public offering ....................................... 2,111 Dividends declared ................................ — Stock-based compensation ..................... — — — 2 — — 1,485 (7,856) 9,007 — 9,638 Tax Reclassification of stockholders' equity in accordance with generally — — — — — — — — — — — — — — — — — — — — Undistributed net investment income/ — — — — — — — — — — — — (47,983 ) — — — — — — — — — — — — — (66,454 ) — — — — — — — — — — — — — (78,562 ) — — 46,759 — 3,288 — — — — 2,305 (4,625) — 80,880 — (47,983) — 4,303 — $ 99,446 — 25,247 — — — 2,201 — (27,992) — 95,537 — (66,454) — 6,054 — $ 71,188 — 3,955 — — — — — 1,485 (7,856) 9,009 — (78,562) — 9,638 accepted accounting principles ................. — Balance at December 31, 2013 ........................ 61,837 $ — (8,952) 62 $ 656,594 $ — 6,840 3,598 $ (15,240) $ 2,112 5,335 $ — — (342) $650,007 — $ (20,674) $ 20,112 $ 71,750 $ accepted accounting principles ........... — Balance at December 31, 2014 ........................ 64,715 $ — (15,589) 65 $ 657,233 $ — (17,076) $ 9,207 14,079 $ 6,382 4,905 $ — — (342) $658,864 Net increase in net assets resulting from operations ......................................................................................... $ 71,188 $ 99,446 $ 46,759 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: Purchase of investments.................................................................................................................................... (623,232 ) (487,558) (507,098) Principal and fee payments received on investments ........................................................................................ 503,003 477,535 245,777 25,948 Proceeds from the sale of investments .............................................................................................................. 33,432 4,516 Net unrealized depreciation (appreciation) on investments .............................................................................. 20,674 (3,048) Net realized gain on investments ...................................................................................................................... (20,112 ) (1,400) (2,549 ) Accretion of paid-in-kind principal................................................................................................................... (5,441) (9,792 ) Accretion of loan discounts .............................................................................................................................. 1,083 843 Accretion of loan discount on Convertible Senior Notes .................................................................................. — 1,581 Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes) ........................................... Payment of loan discount on Convertible Senior Notes .................................................................................... — (4,195 ) (3,986) Accretion of loan exit fees ................................................................................................................................ (11,541 ) 2,301 (281 ) Change in deferred loan origination revenue .................................................................................................... (1,900) (6,426 ) Unearned fees related to unfunded commitments ............................................................................................. 1,560 5,256 Amortization of debt fees and issuance costs ................................................................................................... 289 266 Depreciation...................................................................................................................................................... Stock-based compensation and amortization of restricted stock grants ............................................................ 4,303 9,638 Change in operating assets and liabilities: 44,832 (11,545) (14,836) (3,103) (6,652) 1,083 — — (9,251) 1,409 (3,087) 4,044 252 6,054 Interest and fees receivable ...................................................................................................................... Prepaid expenses and other assets ............................................................................................................ Accounts payable ..................................................................................................................................... Accrued liabilities .................................................................................................................................... (3,815) (988) 279 926 Net cash provided by (used in) operating activities ................................................................................................... (26,531 ) 103,594 (193,935) Cash flows from investing activities: (490 ) 7,518 271 (1,583 ) 672 2,488 54 1,757 Purchases of capital equipment ......................................................................................................................... Reduction of (investment in) restricted cash ..................................................................................................... Other long-term assets ...................................................................................................................................... Net cash (used in) investing activities ........................................................................................................................ Cash flows from financing activities: (190 ) (6,389 ) 25 (6,554 ) (311) (6,271) — (6,582) (87) — — (87) 92,376 (64,252) Proceeds from issuance (repurchase of employee shares due to restricted stock vesting) of common stock, net(1) .. 5,936 79,647 Dividends paid .................................................................................................................................................. (77,076 ) (45,678) Issuance of 2019 Notes Payable ....................................................................................................................... — — 170,365 Issuance of 2024 Notes Payable ....................................................................................................................... 103,000 — — Issuance of 2017 Asset-Backed Notes .............................................................................................................. — — 129,300 Issuance of 2021 Asset-Backed Notes .............................................................................................................. 129,300 — — Repayments of 2017 Asset-Backed Notes ........................................................................................................ (73,508 ) — (39,743) Repayments of Long-Term SBA Debentures ................................................................................................... (34,800 ) — — — Borrowings of credit facilities .......................................................................................................................... 64,000 — — Repayments of credit facilities .......................................................................................................................... (74,228) — (6,669 ) Cash paid for debt issuance costs ...................................................................................................................... (10,864) — Cash Paid for redemption of Convertible Senior Notes .................................................................................... (53,131 ) — — (1,219 ) Fees paid for credit facilities and debentures .................................................................................................... — (19) Net cash provided by (used in) financing activities ................................................................................................... (8,167 ) (11,638) 312,542 Net decrease in cash and cash equivalents ................................................................................................................. (41,252 ) 85,374 118,520 64,474 Cash and cash equivalents at beginning of period ..................................................................................................... 268,368 182,994 Cash and cash equivalents at end of period ............................................................................................................... $ 227,116 $ 268,368 $ 182,994 Supplemental non-cash investing and financing activities: Interest paid ...................................................................................................................................................... $ 25,738 $ 25,245 $ 18,928 44 Income taxes paid ............................................................................................................................................. $ 2,305 Dividends Reinvested ....................................................................................................................................... $ 115 Paid-in-Kind Principal ...................................................................................................................................... $ 85 $ 2,201 $ 1,153 $ 133 $ 1,485 $ 2,699 $ See notes to consolidated financial statements. (1) Net issuance of employee shares due to restricted stock vesting equals $3,901, $2,744, and $1,341 for the years ended December 31, 2014, December 31 2013, and December 31, 2012, respectively. 108 See notes to consolidated financial statements. 109 16323_HER-10K_CS6-r4.indd 109 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Portfolio Company Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Type of Principal Biotechnology Tools Senior Secured June 2016 Interest rate PRIME + 6.70% or Floor rate of 9.95% $ 2,695 $ Portfolio Company Debt Investments Biotechnology Tools 1-5 Years Maturity Labcyte, Inc. (10)(12)(13) Subtotal: 1-5 Years Maturity Subtotal: Biotechnology Tools (0.44%)* Communications & Networking 1-5 Years Maturity OpenPeak, Inc. (10)(12) Communications & Networking Senior Secured April 2017 SkyCross, Inc. (12)(13) Spring Mobile Solutions, Inc. (10)(12) Communications & Networking Senior Secured January 2018 Communications & Networking Senior Secured November 2016 Subtotal: 1-5 Years Maturity Subtotal: Communications & Networking (7.96%)* Consumer & Business Products 1-5 Years Maturity Antenna79 (p.k.a. Pong Research Corporation) (12)(13) Consumer & Business Products Senior Secured December 2017 Consumer & Business Products Senior Secured June 2016 Total Antenna79 (p.k.a. Pong Research Corporation) Fluc, Inc. (8) Consumer & Business Products Consumer & Business Products March 2017 Convertible Senior Note Senior Secured November 2017 Consumer & Business Products Senior Secured September 2017 IronPlanet, Inc. (12) The Neat Company (11)(12)(13) Subtotal: 1-5 Years Maturity Subtotal: Consumer & Business Products (9.23%)* 2,869 $ 2,869 2,869 2,869 2,869 2,869 Drug Delivery Under 1 Year Maturity Revance Therapeutics, Inc. (10)(12) Drug Delivery Drug Delivery Total Revance Therapeutics, Inc. Subtotal: Under 1 Year Maturity 1-5 Years Maturity Senior Secured March 2015 Interest rate PRIME + 6.60% or Floor rate of 9.85% $ 2,098 $ 2,458 $ 2,458 Senior Secured March 2015 Interest rate PRIME + 6.60% or Floor rate of 9.85% $ $ 210 2,308 246 246 2,704 2,704 2,704 2,704 Interest rate PRIME + 8.75% or Floor rate of 12.00% Interest rate PRIME + 9.70% or Floor rate of 12.95% Interest rate PRIME + 8.00% or Floor rate of 11.25% $ 12,889 13,193 13,193 $ 22,000 21,580 20,149 $ 18,840 18,928 19,116 53,701 52,458 53,701 52,458 Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate FIXED 4.00% Interest rate PRIME + 6.20% or Floor rate of 9.45% Interest rate PRIME + 7.75% or Floor rate of 11.00%, PIK Interest 1.00% $ 5,000 4,912 4,884 $ $ 216 5,216 89 89 5,001 4,973 $ 100 100 100 $ 37,500 36,345 36,345 $ 20,061 19,422 19,422 60,868 60,840 60,868 60,840 AcelRx Pharmaceuticals, Drug Delivery Senior Secured October 2017 Interest rate PRIME + 3.85% Drug Delivery Senior Secured September 2016 Interest rate PRIME + 7.00% BioQuiddity Incorporated Drug Delivery Senior Secured May 2018 Interest rate PRIME + 8.00% Celator Pharmaceuticals, Drug Delivery Senior Secured June 2018 Interest rate PRIME + 6.50% Celsion Corporation (10)(12) Drug Delivery Senior Secured June 2017 Interest rate PRIME + 8.00% Dance Biopharm, Inc. Drug Delivery Senior Secured November 2017 Interest rate PRIME + 7.40% Edge Therapeutics, Inc. (12) Drug Delivery Senior Secured March 2018 Interest rate PRIME + 5.95% Neos Therapeutics, Inc. Drug Delivery Senior Secured October 2017 Interest rate PRIME + 7.25% Inc.(9)(10)(12)(13) BIND Therapeutics, Inc.(12)(13) (12) Inc. (10)(12) (12)(13) (12)(13) or Floor rate of 9.10% $ 25,000 24,831 24,969 or Floor rate of 10.25% $ 3,274 3,343 3,228 or Floor rate of 11.25% $ 7,500 7,439 7,439 or Floor rate of 9.75% $ 10,000 9,927 9,899 or Floor rate of 11.25% $ 10,000 9,858 10,027 or Floor rate of 10.65% $ 3,905 3,871 3,864 or Floor rate of 10.45% $ 3,000 2,847 2,847 or Floor rate of 10.50% $ 5,000 $ 10,000 $ 15,000 4,916 4,916 10,010 10,063 14,926 14,979 Drug Delivery Senior Secured October 2017 Interest rate FIXED 9.00% Senior Secured June 2017 Interest rate PRIME + 6.80% or Floor rate of 12.05% $ 4,000 3,894 3,881 Total Neos Therapeutics, Inc. Zosano Pharma, Inc. (10)(12) Drug Delivery Subtotal: 1-5 Years Maturity Subtotal: Drug Delivery (12.72%)* 80,936 81,133 83,640 83,837 See notes to consolidated financial statements. See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 110 4/28/15 2:54 PM 110 111 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Portfolio Company Sub-Industry Type of Principal Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Portfolio Company Debt Investments Biotechnology Tools 1-5 Years Maturity Labcyte, Inc. (10)(12)(13) Subtotal: 1-5 Years Maturity Subtotal: Biotechnology Tools (0.44%)* Communications & Networking 1-5 Years Maturity OpenPeak, Inc. (10)(12) SkyCross, Inc. (12)(13) Inc. (10)(12) Subtotal: 1-5 Years Maturity Subtotal: Communications & Networking (7.96%)* Consumer & Business Products 1-5 Years Maturity Research Corporation) (12)(13) Total Antenna79 (p.k.a. Pong Research Corporation) Communications & Networking Senior Secured April 2017 Interest rate PRIME + 8.75% Communications & Networking Senior Secured January 2018 Interest rate PRIME + 9.70% Spring Mobile Solutions, Communications & Networking Senior Secured November 2016 Interest rate PRIME + 8.00% or Floor rate of 12.00% $ 12,889 13,193 13,193 or Floor rate of 12.95% $ 22,000 21,580 20,149 or Floor rate of 11.25% $ 18,840 18,928 19,116 53,701 52,458 53,701 52,458 Antenna79 (p.k.a. Pong Consumer & Business Products Senior Secured December 2017 Interest rate PRIME + 6.75% Consumer & Business Products Senior Secured June 2016 Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 5,000 4,912 4,884 or Floor rate of 10.00% $ $ 216 5,216 89 89 5,001 4,973 Biotechnology Tools Senior Secured June 2016 Interest rate PRIME + 6.70% or Floor rate of 9.95% $ 2,695 $ 2,869 $ 2,869 Drug Delivery Under 1 Year Maturity Revance Therapeutics, Inc. (10)(12) Drug Delivery Drug Delivery 2,869 2,869 2,869 2,869 Senior Secured March 2015 Senior Secured March 2015 Interest rate PRIME + 6.60% or Floor rate of 9.85% Interest rate PRIME + 6.60% or Floor rate of 9.85% Total Revance Therapeutics, Inc. Subtotal: Under 1 Year Maturity 1-5 Years Maturity AcelRx Pharmaceuticals, Inc.(9)(10)(12)(13) BIND Therapeutics, Inc.(12)(13) BioQuiddity Incorporated (12) Celator Pharmaceuticals, Inc. (10)(12) Celsion Corporation (10)(12) Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Dance Biopharm, Inc. (12)(13) Edge Therapeutics, Inc. (12) Neos Therapeutics, Inc. (12)(13) Drug Delivery Drug Delivery Drug Delivery Senior Secured October 2017 Senior Secured September 2016 Senior Secured May 2018 Senior Secured June 2018 Senior Secured June 2017 Senior Secured November 2017 Senior Secured March 2018 Senior Secured October 2017 Drug Delivery Senior Secured October 2017 Interest rate PRIME + 3.85% or Floor rate of 9.10% Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 8.00% or Floor rate of 11.25% Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate PRIME + 8.00% or Floor rate of 11.25% Interest rate PRIME + 7.40% or Floor rate of 10.65% Interest rate PRIME + 5.95% or Floor rate of 10.45% Interest rate PRIME + 7.25% or Floor rate of 10.50% Interest rate FIXED 9.00% $ 2,098 $ 2,458 $ 2,458 $ $ 210 2,308 246 246 2,704 2,704 2,704 2,704 $ 25,000 24,831 24,969 $ 3,274 3,343 3,228 $ 7,500 7,439 7,439 $ 10,000 9,927 9,899 $ 10,000 9,858 10,027 $ 3,905 3,871 3,864 $ 3,000 2,847 2,847 $ 5,000 $ 10,000 $ 15,000 4,916 4,916 10,010 10,063 14,926 14,979 Consumer & Business Products March 2017 Interest rate FIXED 4.00% Convertible Senior Note Consumer & Business Products Senior Secured November 2017 Interest rate PRIME + 6.20% $ 100 100 100 or Floor rate of 9.45% $ 37,500 36,345 36,345 The Neat Company Consumer & Business Products Senior Secured September 2017 Interest rate PRIME + 7.75% Fluc, Inc. (8) IronPlanet, Inc. (12) (11)(12)(13) Total Neos Therapeutics, Inc. Zosano Pharma, Inc. (10)(12) Drug Delivery Subtotal: 1-5 Years Maturity Subtotal: Drug Delivery (12.72%)* Subtotal: 1-5 Years Maturity Subtotal: Consumer & Business Products (9.23%)* or Floor rate of 11.00%, PIK Interest 1.00% $ 20,061 19,422 19,422 60,868 60,840 60,868 60,840 Senior Secured June 2017 Interest rate PRIME + 6.80% or Floor rate of 12.05% $ 4,000 3,894 3,881 80,936 81,133 83,640 83,837 See notes to consolidated financial statements. See notes to consolidated financial statements. 110 111 16323_HER-10K_CS6-r4.indd 111 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Portfolio Company Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Type of Principal Drug Discovery & Development Senior Secured December 2015 Interest rate PRIME + 7.15% Portfolio Company Drug Discovery & Development Under 1 Year Maturity Aveo Pharmaceuticals, Inc. (9)(10)(12)(13) Concert Pharmaceuticals, Inc. (10) Drug Discovery & Development Senior Secured October 2015 Subtotal: Under 1 Year Maturity 1-5 Years Maturity ADMA Biologics, Inc. (10)(11)(12) Drug Discovery & Development Senior Secured December 2017 Drug Discovery & Development Senior Secured December 2017 Total ADMA Biologics, Inc. Aveo Pharmaceuticals, Inc. (9)(10)(12)(13) Celladon Corporation (12)(13) Cempra, Inc. (10)(12) Cerecor Inc. (12) Cleveland BioLabs, Inc. (12)(13) Drug Discovery & Development Senior Secured January 2018 Drug Discovery & Development Senior Secured February 2018 Drug Discovery & Development Senior Secured April 2018 Drug Discovery & Development Senior Secured August 2017 Drug Discovery & Development Senior Secured January 2017 CTI BioPharma Corp. (pka Drug Discovery & Development Senior Secured October 2016 Cell Therapeutics, Inc.) (10)(12) Drug Discovery & Development Senior Secured October 2016 Total CTI BioPharma Corp. (pka Cell Therapeutics, Inc.) Dynavax Technologies (9)(12) Epirus Biopharmaceuticals, Drug Discovery & Development Drug Discovery & Development Inc. (12) Senior Secured July 2018 Senior Secured April 2018 Genocea Biosciences, Inc. (12) Insmed, Incorporated (10)(12) Melinta Therapeutics (12) Merrimack Pharmaceuticals, Inc. (12) Neothetics, Inc. (pka Lithera, Inc) (12)(13) Neuralstem, Inc. (12)(13) uniQure B.V. (4)(9)(10)(12) Drug Discovery & Development Senior Secured July 2018 Drug Discovery & Development Senior Secured January 2018 Drug Discovery & Development Senior Secured June 2018 Drug Discovery & Development Senior Secured November 2016 Drug Discovery & Development Senior Secured January 2018 Drug Discovery & Development Senior Secured April 2017 Drug Discovery & Development Senior Secured June 2018 Drug Discovery & Development Senior Secured June 2018 Total Uniqure B.V. Subtotal: 1-5 Years Maturity Subtotal: Drug Discovery & Development (38.41%)* or Floor rate of 11.90% Interest rate PRIME + 3.25% or Floor rate of 8.50% Interest rate PRIME + 5.5% or Floor rate of 8.75%, PIK Interest 1.95% Interest rate PRIME + 3.00% or Floor rate of 8.75%, PIK Interest 1.95% Interest rate PRIME + 6.65% or Floor rate of 11.90% Interest rate PRIME + 5.00% or Floor rate of 8.25% Interest rate PRIME + 6.30% or Floor rate of 9.55% Interest rate PRIME + 6.30% or Floor rate of 9.55% Interest rate PRIME + 6.10% or Floor rate of 9.35% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 9.00% or Floor rate of 12.25% Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate PRIME + 4.70% or Floor rate of 7.95% Interest rate PRIME + 2.25% or Floor rate of 7.25% Interest rate PRIME + 4.75% or Floor rate of 9.25% Interest rate PRIME + 5.00% or Floor rate of 8.25% Interest rate PRIME + 5.30% or Floor rate of 10.55% Interest rate PRIME + 5.75% or Floor rate of 9.00% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 5.00% or Floor rate of 10.25% Interest rate PRIME + 5.25% or Floor rate of 10.25% $ 11,611 $ 11,611 $ 11,611 Electronics & Computer Hardware Senior Secured October 2016 Interest rate LIBOR + 8.75% $ 7,175 7,142 7,142 18,753 18,753 $ 5,000 4,879 4,933 $ 10,153 $ 15,153 10,032 10,144 14,911 15,077 $ 10,000 9,766 9,766 $ 10,000 10,022 10,022 $ 18,000 18,020 18,560 $ 7,500 7,374 7,374 $ 1,883 1,883 1,920 Corporation (10)(12) American Superconductor Energy Technology Senior Secured March 2017 Interest rate PRIME + 7.75% $ 4,584 4,584 4,712 $ 13,890 $ 18,474 13,890 14,279 18,474 18,991 $ 10,000 9,897 9,897 $ 7,500 7,308 7,308 $ 12,000 11,814 11,814 $ 25,000 24,854 24,854 $ 20,000 19,272 19,272 $ 40,000 40,578 40,677 $ 10,000 9,751 9,697 $ 9,489 9,333 9,333 $ 15,000 14,890 14,798 $ 5,000 $ 20,000 4,962 4,931 19,852 19,729 233,109 234,291 251,862 253,044 Electronics & Computer Hardware 1-5 Years Maturity Plures Technologies, Inc. (7)(11) Subtotal: 1-5 Years Maturity Subtotal: Electronics & Computer Hardware (0.00%)* Energy Technology Under 1 Year Maturity Glori Energy, Inc. (10)(12) Scifiniti (pka Integrated Photovoltaics, Inc.) (13) Stion Corporation (5)(12) Subtotal: Under 1 Year Maturity 1-5 Years Maturity Agrivida, Inc. (12)(13) Energy Technology Senior Secured June 2015 Interest rate PRIME + 6.75% Energy Technology Senior Secured February 2015 Interest rate PRIME + 7.38% Energy Technology Senior Secured February 2015 Interest rate PRIME + 8.75% TAS Energy, Inc. (10)(12) Energy Technology Senior Secured December 2015 Interest rate PRIME + 7.75% Energy Technology Senior Secured December 2016 Interest rate PRIME + 6.75% or Floor rate of 12.00%, PIK Interest 4.00% $ 267 $ 180 $ — 180 180 — — or Floor rate of 10.00% $ 1,778 2,042 2,042 or Floor rate of 10.63% $ 227 227 227 or Floor rate of 12.00% $ 2,954 2,993 1,600 or Floor rate of 11.00% $ 6,901 7,091 7,091 12,353 10,960 or Floor rate of 10.00% $ 4,921 5,013 4,923 or Floor rate of 11.00% $ 1,500 1,446 1,446 Energy Technology Senior Secured November Interest rate PRIME + 7.25% Total American Superconductor Corporation Amyris, Inc. (9)(12) Energy Technology Senior Secured February 2017 Interest rate PRIME + 6.25% 2016 or Floor rate of 11.00% $ $ 7,667 7,847 7,847 9,167 9,293 9,293 Energy Technology Senior Secured February 2017 Interest rate PRIME + 5.25% Total Amyris, Inc. Fluidic, Inc. (10)(12) Energy Technology Senior Secured March 2016 Interest rate PRIME + 8.00% Modumetal, Inc. (12) Energy Technology Senior Secured March 2017 Interest rate PRIME + 8.70% Polyera Corporation (12)(13) Energy Technology Senior Secured June 2016 Interest rate PRIME + 6.75% or Floor rate of 9.50% $ 25,000 25,000 25,170 or Floor rate of 8.50% $ 5,000 5,000 5,034 $ 30,000 30,000 30,204 or Floor rate of 11.25% $ 3,674 3,747 3,721 or Floor rate of 11.95% $ 3,000 2,991 2,991 or Floor rate of 10.00% $ 3,654 3,818 3,810 54,862 54,942 67,215 65,902 Subtotal: 1-5 Years Maturity Subtotal: Energy Technology (10.00%)* Healthcare Services, Other 1-5 Years Maturity Chromadex Corporation (12)(13) LLC (13) MDEverywhere, Inc. (10)(12) Subtotal: 1-5 Years Maturity Subtotal: Healthcare Services, Other (1.58%)* Healthcare Services, Other Senior Secured April 2018 Interest rate PRIME + 4.70% InstaMed Communications, Healthcare Services, Other Senior Secured March 2018 Interest rate PRIME + 6.75% Healthcare Services, Other Senior Secured January 2018 Interest rate LIBOR + 9.50% or Floor rate of 7.95% $ 2,500 2,407 2,407 or Floor rate of 10.00% $ 5,000 5,041 5,041 or Floor rate of 10.75% $ 3,000 2,962 2,962 10,410 10,410 10,410 10,410 See notes to consolidated financial statements. See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 112 4/28/15 2:54 PM 112 113 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Portfolio Company Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Portfolio Company Sub-Industry Type of Principal Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Electronics & Computer Hardware 1-5 Years Maturity Plures Technologies, Inc. (7)(11) Electronics & Computer Hardware Subtotal: 1-5 Years Maturity Subtotal: Electronics & Computer Hardware (0.00%)* Senior Secured October 2016 Interest rate LIBOR + 8.75% or Floor rate of 12.00%, PIK Interest 4.00% $ 267 $ 180 $ — — 180 — 180 Drug Discovery & Development Senior Secured February 2018 Interest rate PRIME + 5.00% TAS Energy, Inc. (10)(12) Energy Technology Senior Secured December 2015 Energy Technology Under 1 Year Maturity Glori Energy, Inc. (10)(12) Scifiniti (pka Integrated Photovoltaics, Inc.) (13) Stion Corporation (5)(12) Energy Technology Senior Secured June 2015 Energy Technology Senior Secured February 2015 Energy Technology Senior Secured February 2015 Subtotal: Under 1 Year Maturity 1-5 Years Maturity Agrivida, Inc. (12)(13) Energy Technology Senior Secured December 2016 American Superconductor Corporation (10)(12) Energy Technology Senior Secured March 2017 Energy Technology Senior Secured November 2016 Total American Superconductor Corporation Amyris, Inc. (9)(12) Energy Technology Senior Secured February 2017 Energy Technology Senior Secured February 2017 Genocea Biosciences, Inc. Drug Discovery & Development Senior Secured July 2018 Interest rate PRIME + 2.25% Modumetal, Inc. (12) Energy Technology Senior Secured March 2017 or Floor rate of 9.75% $ 10,000 9,897 9,897 or Floor rate of 7.95% $ 7,500 7,308 7,308 Total Amyris, Inc. Fluidic, Inc. (10)(12) Energy Technology Senior Secured March 2016 Polyera Corporation (12)(13) Energy Technology Senior Secured June 2016 Subtotal: 1-5 Years Maturity Subtotal: Energy Technology (10.00%)* Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 7.38% or Floor rate of 10.63% Interest rate PRIME + 8.75% or Floor rate of 12.00% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 7.25% or Floor rate of 11.00% Interest rate PRIME + 6.25% or Floor rate of 9.50% Interest rate PRIME + 5.25% or Floor rate of 8.50% Interest rate PRIME + 8.00% or Floor rate of 11.25% Interest rate PRIME + 8.70% or Floor rate of 11.95% Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 1,778 2,042 2,042 $ 227 227 227 $ 2,954 2,993 1,600 $ 6,901 7,091 7,091 12,353 10,960 $ 4,921 5,013 4,923 $ 1,500 1,446 1,446 $ $ 7,667 9,167 7,847 7,847 9,293 9,293 $ 25,000 25,000 25,170 $ 5,000 $ 30,000 5,034 5,000 30,000 30,204 $ 3,674 3,747 3,721 $ 3,000 2,991 2,991 $ 3,654 3,818 3,810 54,862 54,942 67,215 65,902 Healthcare Services, Other 1-5 Years Maturity Chromadex Corporation (12)(13) InstaMed Communications, LLC (13) MDEverywhere, Inc. (10)(12) Healthcare Services, Other Senior Secured April 2018 Healthcare Services, Other Senior Secured March 2018 Healthcare Services, Other Senior Secured January 2018 Interest rate PRIME + 4.70% or Floor rate of 7.95% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate LIBOR + 9.50% or Floor rate of 10.75% Subtotal: 1-5 Years Maturity Subtotal: Healthcare Services, Other (1.58%)* $ 2,500 2,407 2,407 $ 5,000 5,041 5,041 $ 3,000 2,962 2,962 10,410 10,410 10,410 10,410 Aveo Pharmaceuticals, Drug Discovery & Development Senior Secured December 2015 Interest rate PRIME + 7.15% Concert Pharmaceuticals, Drug Discovery & Development Senior Secured October 2015 Interest rate PRIME + 3.25% Drug Discovery & Development Senior Secured December 2017 Interest rate PRIME + 5.5% Drug Discovery & Development Senior Secured December 2017 Interest rate PRIME + 3.00% Aveo Pharmaceuticals, Drug Discovery & Development Senior Secured January 2018 Interest rate PRIME + 6.65% Drug Discovery & Development Senior Secured April 2018 Interest rate PRIME + 6.30% Drug Discovery & Development Senior Secured August 2017 Interest rate PRIME + 6.30% Cleveland BioLabs, Drug Discovery & Development Senior Secured January 2017 Interest rate PRIME + 6.10% CTI BioPharma Corp. (pka Drug Discovery & Development Senior Secured October 2016 Drug Discovery & Development Senior Secured October 2016 Interest rate PRIME + 9.00% Total CTI BioPharma Corp. (pka Cell Therapeutics, Inc.) Dynavax Technologies Drug Discovery & Development Senior Secured July 2018 Interest rate PRIME + 6.50% Epirus Biopharmaceuticals, Drug Discovery & Development Senior Secured April 2018 Interest rate PRIME + 4.70% or Floor rate of 11.90% $ 11,611 $ 11,611 $ 11,611 or Floor rate of 8.50% $ 7,175 7,142 7,142 18,753 18,753 or Floor rate of 8.75%, PIK Interest 1.95% or Floor rate of 8.75%, PIK Interest 1.95% $ 5,000 4,879 4,933 $ 10,153 10,032 10,144 $ 15,153 14,911 15,077 or Floor rate of 11.90% $ 10,000 9,766 9,766 or Floor rate of 8.25% $ 10,000 10,022 10,022 or Floor rate of 9.55% $ 18,000 18,020 18,560 or Floor rate of 9.55% $ 7,500 7,374 7,374 or Floor rate of 9.35% $ 1,883 1,883 1,920 Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 4,584 4,584 4,712 or Floor rate of 12.25% $ 13,890 13,890 14,279 $ 18,474 18,474 18,991 Drug Discovery & Development Under 1 Year Maturity Inc. (9)(10)(12)(13) Inc. (10) 1-5 Years Maturity ADMA Biologics, Inc. (10)(11)(12) Subtotal: Under 1 Year Maturity Total ADMA Biologics, Inc. Inc. (9)(10)(12)(13) Celladon Corporation (12)(13) Cempra, Inc. (10)(12) Cerecor Inc. (12) Inc. (12)(13) Cell Therapeutics, Inc.) (10)(12) (9)(12) Inc. (12) (12) Insmed, Incorporated (10)(12) Drug Discovery & Development Senior Secured January 2018 Interest rate PRIME + 4.75% Melinta Therapeutics (12) Merrimack Pharmaceuticals, Inc. (12) Neothetics, Inc. (pka Lithera, Inc) (12)(13) Neuralstem, Inc. (12)(13) uniQure B.V. (4)(9)(10)(12) Drug Discovery & Development Senior Secured June 2018 Interest rate PRIME + 5.00% Drug Discovery & Development Senior Secured November 2016 Interest rate PRIME + 5.30% Drug Discovery & Development Senior Secured January 2018 Interest rate PRIME + 5.75% Drug Discovery & Development Senior Secured April 2017 Interest rate PRIME + 6.75% Drug Discovery & Development Senior Secured June 2018 Interest rate PRIME + 5.00% Drug Discovery & Development Senior Secured June 2018 Interest rate PRIME + 5.25% or Floor rate of 7.25% $ 12,000 11,814 11,814 or Floor rate of 9.25% $ 25,000 24,854 24,854 or Floor rate of 8.25% $ 20,000 19,272 19,272 or Floor rate of 10.55% $ 40,000 40,578 40,677 or Floor rate of 9.00% $ 10,000 9,751 9,697 or Floor rate of 10.00% $ 9,489 9,333 9,333 or Floor rate of 10.25% $ 15,000 14,890 14,798 or Floor rate of 10.25% $ 5,000 4,962 4,931 $ 20,000 19,852 19,729 233,109 234,291 251,862 253,044 Total Uniqure B.V. Subtotal: 1-5 Years Maturity Subtotal: Drug Discovery & Development (38.41%)* See notes to consolidated financial statements. See notes to consolidated financial statements. 112 113 16323_HER-10K_CS6-r4.indd 113 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Type of Principal Portfolio Company Information Services Under 1 Year Maturity Eccentex Corporation (10)(12) Information Services Senior Secured May 2015 Interest rate PRIME + 7.00% or Floor rate of 10.25% $ 204 $ Subtotal: Under 1 Year Maturity 1-5 Years Maturity INMOBI Inc. (4)(9)(11)(12) Information Services Senior Secured December 2016 Information Services Senior Secured December 2017 Total INMOBI Inc. InXpo, Inc. (12)(13) Information Services Senior Secured July 2016 Interest rate PRIME + 7.75% or Floor rate of 10.75% $ 2,057 Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 5.75% or Floor rate of 9.00%, PIK Interest 2.50% $ 9,612 9,283 9,283 Total Zoom Media Group, Inc. Subtotal: Under 1 Year Maturity 1-5 Years Maturity $ 15,013 $ 24,625 14,820 14,820 24,103 24,103 Inc. (10)(11)(13) Rhapsody International, Media/Content/Info Senior Secured April 2018 Interest rate PRIME + 5.25% $ 218 218 184 184 Media/Content/Info Senior Secured December 2015 Interest rate PRIME + 7.25% Media/Content/Info Senior Secured December 2015 Interest rate PRIME + 5.25% 2,073 1,976 26,176 26,079 26,394 26,263 Subtotal: 1-5 Years Maturity Subtotal: Media/Content/Info (4.11%)* Medical Devices & Equipment Under 1 Year Maturity Baxano Surgical, Inc. (7)(12) Home Dialysis Plus, Medical Devices & Equipment Medical Devices & Equipment Portfolio Company Media/Content/Info Under 1 Year Maturity Zoom Media Group, Inc. (10)(11) Subtotal: Under 1 Year Maturity Inc. (10)(12) Inc. (10)(11)(12) 1-5 Years Maturity Amedica Corporation (8)(12)(13) Avedro, Inc. (12)(13) Baxano Surgical, Inc. (7)(12) Flowonix Medical Incorporated (12) Gamma Medica, Inc. (12) Inc. (10)(12) InspireMD, Inc. (4)(9)(10)(12) Medrobotics Corporation (12)(13) nContact Surgical, Inc (12) NetBio, Inc. (10) Inc. (12)(13) (10)(12) (10)(12) SynergEyes, Inc. (12)(13) ViewRay, Inc. (11)(13) Oraya Therapeutics, Medical Devices & Equipment Senior Secured September 2015 Interest rate PRIME + 5.50% Senior Secured February 2015 Interest rate FIXED 12.50% $ 100 86 80 Senior Secured September 2015 Interest rate FIXED 8.00% $ 500 500 500 Medical Devices & Equipment Senior Secured January 2018 Interest rate PRIME + 7.70% Medical Devices & Equipment Senior Secured December 2017 Interest rate PRIME + 8.25% Medical Devices & Equipment Senior Secured March 2017 Interest rate PRIME + 7.75% Medical Devices & Equipment Senior Secured May 2018 Interest rate PRIME + 5.25% Medical Devices & Equipment Senior Secured January 2018 Interest rate PRIME + 6.50% Medical Devices & Equipment Senior Secured February 2017 Interest rate PRIME +7.25% Medical Devices & Equipment Senior Secured March 2016 Interest rate PRIME + 7.85% Medical Devices & Equipment Senior Secured November 2018 Interest rate PRIME + 9.25% Medical Devices & Equipment Senior Secured August 2017 Interest rate PRIME + 5.00% or Floor rate of 10.50%, PIK Interest 3.75% or Floor rate of 8.50% or Floor rate of 9.00%, PIK interest of 1.50% $ 2,510 $ 2,466 $ 2,466 $ 5,060 $ 7,570 5,002 7,468 7,468 5,002 7,468 7,468 $ 20,206 19,750 19,579 19,750 19,579 27,218 27,047 or Floor rate of 10.25%, PIK Interest 1.00% $ 6,174 6,146 6,732 6,146 6,726 or Floor rate of 10.95% $ 20,000 19,704 19,902 or Floor rate of 11.50% $ 7,500 7,247 7,247 or Floor rate of 12.50% $ 7,113 7,040 6,405 or Floor rate of 10.00% $ 15,000 14,675 14,675 or Floor rate of 9.75% $ 4,000 3,874 3,874 or Floor rate of 9.60% $ 15,000 14,780 14,780 or Floor rate of 10.50% $ 8,818 8,897 6,486 or Floor rate of 11.10% $ 2,680 2,765 2,755 or Floor rate of 9.25% $ 10,000 9,735 9,735 or Floor rate of 11.00% $ 4,870 4,669 4,718 or Floor rate of 9.10% $ 3,241 3,357 3,342 or Floor rate of 8.00% $ 5,000 4,930 4,911 or Floor rate of 11.00% $ 875 1,200 1,209 or Floor rate of 11.00% $ 5,000 5,034 4,983 or Floor rate of 10.25%, PIK Interest 1.50% $ 15,220 14,920 14,973 122,827 119,995 129,559 126,721 $ 1,231 1,231 1,231 $ $ $ 89 381 470 89 373 462 — — — $ 7,615 7,757 4,322 $ $ 1,680 9,295 1,749 955 9,506 5,277 $ 563 563 121 $ 9,070 9,070 1,511 Home Dialysis Plus, Medical Devices & Equipment Senior Secured October 2017 Interest rate PRIME + 6.35% $ 5,000 5,000 1,074 $ 6,468 $ 21,101 6,468 1,390 21,101 4,096 32,300 10,604 $ 20,563 20,546 20,559 NinePoint Medical, Medical Devices & Equipment Senior Secured January 2016 Interest rate PRIME + 5.85% $ 13,712 13,498 13,498 $ 15,000 14,468 14,768 (pka US HIFU, LLC) Quanterix Corporation Medical Devices & Equipment Senior Secured November 2017 Interest rate PRIME + 2.75% SonaCare Medical, LLC Medical Devices & Equipment Senior Secured April 2016 Interest rate PRIME + 7.75% $ 2,000 1,985 1,994 Medical Devices & Equipment Senior Secured January 2018 Interest rate PRIME + 7.75% Medical Devices & Equipment Senior Secured June 2017 Interest rate PRIME + 7.00% $ 2,721 2,658 1,548 $ 3,000 2,921 2,921 Subtotal: 1-5 Years Maturity Subtotal: Medical Devices & Equipment (19.23%)* $ 300 303 303 56,379 55,591 88,679 66,195 See notes to consolidated financial statements. 115 Subtotal: 1-5 Years Maturity Subtotal: Information Services (3.99%)* Internet Consumer & Business Services Under 1 Year Maturity Gazelle, Inc. (11)(13) Internet Consumer & Business Services NetPlenish (7)(8)(13) Internet Consumer & Business Services Senior Secured December 2015 Convertible Senior Note April 2015 Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate FIXED 10.00% Internet Consumer & Business Services Senior Secured September 2015 Interest rate FIXED 10.00% Total NetPlenish Reply! Inc. (10)(11)(12) Total Reply! Inc. Tectura Corporation (7)(11)(15) Internet Consumer & Business Services Senior Secured September 2015 Internet Consumer & Business Services Senior Secured September 2015 Internet Consumer & Business Services Senior Secured May 2014 Internet Consumer & Business Services Senior Secured May 2014 Internet Consumer & Business Services Senior Secured May 2014 Internet Consumer & Business Services Senior Secured May 2014 Total Tectura Corporation Subtotal: Under 1 Year Maturity 1-5 Years Maturity Education Dynamics, LLC (11)(13) Internet Consumer & Business Services Senior Secured March 2016 Gazelle, Inc. (11)(13) Internet Consumer & Business Services Senior Secured July 2017 Just Fabulous, Inc. (10)(12) Internet Consumer & Business Services Senior Secured February 2017 Lightspeed POS, Inc. (4)(9)(10) Reply! Inc. (10)(11)(12) Tapjoy, Inc. (12) WaveMarket, Inc. (12) Internet Consumer & Business Services Senior Secured May 2018 Internet Consumer & Business Services Senior Secured February 2016 Internet Consumer & Business Services Senior Secured July 2018 Internet Consumer & Business Services Senior Secured March 2017 Subtotal: 1-5 Years Maturity Subtotal: Internet Consumer & Business Services (10.05%)* Interest rate PRIME + 6.88% or Floor rate of 10.13%, PIK Interest 2.00% Interest rate PRIME + 7.25% or Floor rate of 11.00%, PIK Interest 2.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 8.00% or Floor rate of 11.00%, PIK Interest 1.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 12.5% or Floor rate of 12.50%, PIK Interest 1.50% Interest rate PRIME + 7.00% or Floor rate of 10.25%, PIK Interest 2.50% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 3.25% or Floor rate of 6.50% Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK Interest 2.00% Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate PRIME + 6.50% or Floor rate of 9.75% See notes to consolidated financial statements. 114 16323_HER-10K_CS6-r4.indd 114 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Media/Content/Info Senior Secured December 2015 Media/Content/Info Senior Secured December 2015 Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK Interest 3.75% Interest rate PRIME + 5.25% or Floor rate of 8.50% $ 2,510 $ 2,466 $ 2,466 $ 5,060 $ 7,570 5,002 7,468 7,468 5,002 7,468 7,468 Portfolio Company Media/Content/Info Under 1 Year Maturity Zoom Media Group, Inc. (10)(11) Total Zoom Media Group, Inc. Subtotal: Under 1 Year Maturity 1-5 Years Maturity Rhapsody International, Inc. (10)(11)(13) Media/Content/Info Subtotal: 1-5 Years Maturity Subtotal: Media/Content/Info (4.11%)* Medical Devices & Equipment Under 1 Year Maturity Baxano Surgical, Inc. (7)(12) Home Dialysis Plus, Inc. (10)(12) Oraya Therapeutics, Inc. (10)(11)(12) Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Subtotal: Under 1 Year Maturity 1-5 Years Maturity Amedica Corporation (8)(12)(13) Avedro, Inc. (12)(13) Medical Devices & Equipment Medical Devices & Equipment HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Portfolio Company Information Services Under 1 Year Maturity Eccentex Corporation (10)(12) Subtotal: Under 1 Year Maturity 1-5 Years Maturity INMOBI Inc. (4)(9)(11)(12) Total INMOBI Inc. InXpo, Inc. (12)(13) Subtotal: 1-5 Years Maturity Subtotal: Information Services (3.99%)* Internet Consumer & Business Services Under 1 Year Maturity Gazelle, Inc. (11)(13) NetPlenish (7)(8)(13) Total NetPlenish Reply! Inc. (10)(11)(12) Total Reply! Inc. Tectura Corporation (7)(11)(15) Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Type of Principal Information Services Senior Secured May 2015 Interest rate PRIME + 7.00% Information Services Senior Secured December 2016 Interest rate PRIME + 7.00% Information Services Senior Secured December 2017 Interest rate PRIME + 5.75% Information Services Senior Secured July 2016 Interest rate PRIME + 7.75% or Floor rate of 10.25% $ 204 $ 218 $ 218 184 184 or Floor rate of 10.25% $ 9,612 9,283 9,283 or Floor rate of 9.00%, PIK Interest 2.50% $ 15,013 $ 24,625 14,820 14,820 24,103 24,103 or Floor rate of 10.75% $ 2,057 2,073 1,976 26,176 26,079 26,394 26,263 Internet Consumer & Business Services Senior Secured December 2015 Interest rate PRIME + 6.50% or Floor rate of 9.75% $ 1,231 1,231 1,231 Internet Consumer & Business Services April 2015 Interest rate FIXED 10.00% Convertible Senior Note Internet Consumer & Business Services Senior Secured September 2015 Interest rate FIXED 10.00% Internet Consumer & Business Services Senior Secured September 2015 Interest rate PRIME + 6.88% Internet Consumer & Business Services Senior Secured September 2015 Interest rate PRIME + 7.25% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 8.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Internet Consumer & Business Services Senior Secured March 2016 Interest rate LIBOR + 12.5% Internet Consumer & Business Services Senior Secured July 2017 Interest rate PRIME + 7.00% Just Fabulous, Inc. (10)(12) Internet Consumer & Business Services Senior Secured February 2017 Interest rate PRIME + 8.25% Lightspeed POS, Inc. Internet Consumer & Business Services Senior Secured May 2018 Interest rate PRIME + 3.25% Internet Consumer & Business Services Senior Secured February 2016 Interest rate PRIME + 7.25% Total Tectura Corporation Subtotal: Under 1 Year Maturity 1-5 Years Maturity Education Dynamics, LLC (11)(13) Gazelle, Inc. (11)(13) (4)(9)(10) Reply! Inc. (10)(11)(12) Tapjoy, Inc. (12) WaveMarket, Inc. (12) Subtotal: 1-5 Years Maturity Subtotal: Internet Consumer & Business Services (10.05%)* or Floor rate of 10.13%, PIK Interest 2.00% or Floor rate of 11.00%, PIK Interest 2.00% $ $ $ 89 381 470 89 373 462 — — — $ 7,615 7,757 4,322 $ $ 1,680 9,295 1,749 955 9,506 5,277 or Floor rate of 13.00% $ 563 563 121 or Floor rate of 11.00%, PIK Interest 1.00% $ 9,070 9,070 1,511 or Floor rate of 13.00% $ 5,000 5,000 1,074 or Floor rate of 13.00% $ 6,468 6,468 1,390 $ 21,101 21,101 4,096 32,300 10,604 or Floor rate of 12.50%, PIK Interest 1.50% or Floor rate of 10.25%, PIK Interest 2.50% $ 20,563 20,546 20,559 $ 13,712 13,498 13,498 or Floor rate of 11.50% $ 15,000 14,468 14,768 or Floor rate of 6.50% $ 2,000 1,985 1,994 or Floor rate of 10.50%, PIK Interest 2.00% $ 2,721 2,658 1,548 or Floor rate of 9.75% $ 3,000 2,921 2,921 or Floor rate of 9.75% $ 300 303 303 56,379 55,591 88,679 66,195 Baxano Surgical, Inc. (7)(12) Flowonix Medical Incorporated (12) Gamma Medica, Inc. (12) Home Dialysis Plus, Inc. (10)(12) InspireMD, Inc. (4)(9)(10)(12) Medrobotics Corporation (12)(13) nContact Surgical, Inc (12) NetBio, Inc. (10) NinePoint Medical, Inc. (12)(13) Quanterix Corporation (10)(12) SonaCare Medical, LLC (pka US HIFU, LLC) (10)(12) SynergEyes, Inc. (12)(13) ViewRay, Inc. (11)(13) Medical Devices & Equipment Senior Secured March 2017 Medical Devices & Equipment Senior Secured May 2018 Medical Devices & Equipment Senior Secured January 2018 Medical Devices & Equipment Senior Secured October 2017 Medical Devices & Equipment Senior Secured February 2017 Medical Devices & Equipment Senior Secured March 2016 Medical Devices & Equipment Senior Secured November 2018 Medical Devices & Equipment Senior Secured August 2017 Medical Devices & Equipment Senior Secured January 2016 Medical Devices & Equipment Senior Secured November 2017 Medical Devices & Equipment Senior Secured April 2016 Medical Devices & Equipment Senior Secured January 2018 Medical Devices & Equipment Senior Secured June 2017 Internet Consumer & Business Services Senior Secured July 2018 Interest rate PRIME + 6.50% Internet Consumer & Business Services Senior Secured March 2017 Interest rate PRIME + 6.50% Subtotal: 1-5 Years Maturity Subtotal: Medical Devices & Equipment (19.23%)* Senior Secured April 2018 Interest rate PRIME + 5.25% or Floor rate of 9.00%, PIK interest of 1.50% $ 20,206 19,750 19,579 19,750 19,579 27,218 27,047 Senior Secured February 2015 Senior Secured September 2015 Interest rate FIXED 12.50% Interest rate FIXED 8.00% $ 100 86 80 $ 500 500 500 Senior Secured September 2015 Interest rate PRIME + 5.50% or Floor rate of 10.25%, PIK Interest 1.00% $ 6,174 6,146 6,732 6,146 6,726 Senior Secured January 2018 Senior Secured December 2017 Interest rate PRIME + 7.70% or Floor rate of 10.95% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 7.75% or Floor rate of 12.50% Interest rate PRIME + 5.25% or Floor rate of 10.00% Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate PRIME + 6.35% or Floor rate of 9.60% Interest rate PRIME +7.25% or Floor rate of 10.50% Interest rate PRIME + 7.85% or Floor rate of 11.10% Interest rate PRIME + 9.25% or Floor rate of 9.25% Interest rate PRIME + 5.00% or Floor rate of 11.00% Interest rate PRIME + 5.85% or Floor rate of 9.10% Interest rate PRIME + 2.75% or Floor rate of 8.00% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 7.00% or Floor rate of 10.25%, PIK Interest 1.50% $ 20,000 19,704 19,902 $ 7,500 7,247 7,247 $ 7,113 7,040 6,405 $ 15,000 14,675 14,675 $ 4,000 3,874 3,874 $ 15,000 14,780 14,780 $ 8,818 8,897 6,486 $ 2,680 2,765 2,755 $ 10,000 9,735 9,735 $ 4,870 4,669 4,718 $ 3,241 3,357 3,342 $ 5,000 4,930 4,911 $ 875 1,200 1,209 $ 5,000 5,034 4,983 $ 15,220 14,920 14,973 122,827 119,995 129,559 126,721 See notes to consolidated financial statements. 114 See notes to consolidated financial statements. 115 16323_HER-10K_CS6-r4.indd 115 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Sub-Industry Maturity Date Interest Rate and Floor Type of Investment(1) Principal Amount Cost(2) Value(3) 95 $ 95 95 95 4,983 4,990 4,983 4,990 5,078 5,085 Cranford Pharmaceuticals, Specialty Pharmaceuticals Senior Secured August 2015 Interest rate LIBOR + 8.25% or Floor rate of 9.50% $ 2,000 $ 1,977 $ 1,986 1,977 1,986 Cranford Pharmaceuticals, Specialty Pharmaceuticals Senior Secured February 2017 Interest rate LIBOR + 9.55% Specialty Pharmaceuticals Senior Secured May 2018 Interest rate PRIME + 7.65% or Floor rate of 10.90% $ 35,000 34,138 33,429 or Floor rate of 10.80%, PIK Interest 1.35% $ 15,644 15,595 15,465 49,733 48,894 51,710 50,880 Portfolio Company Specialty Pharmaceuticals Under 1 Year Maturity LLC (11)(12)(13) Subtotal: Under 1 Year Maturity 1-5 Years Maturity Alimera Sciences, Inc. (10) LLC (11)(12)(13) Subtotal: 1-5 Years Maturity Subtotal: Specialty Pharmaceuticals (7.72%)* Surgical Devices Under 1 Year Maturity Transmedics, Inc. (10)(12) Subtotal: Under 1 Year Maturity Subtotal: Surgical Devices (0.91%)* Total Debt Investments (140.23%)* Surgical Devices Senior Secured November 2015 Interest rate FIXED 12.95% $ 6,061 5,989 5,989 5,989 5,989 5,989 5,989 951,982 923,906 Semiconductors Under 1 Year Maturity Achronix Semiconductor Corporation Semiconductors Senior Secured January 2015 Interest rate PRIME + 10.60% or Floor rate of 13.85% $ 95 $ Senior Secured April 2017 Interest rate PRIME + 5.75% or Floor rate of 9.00% $ 5,000 Subtotal: Under 1 Year Maturity 1-5 Years Maturity Avnera Corporation (10)(12) Semiconductors Subtotal: 1-5 Years Maturity Subtotal: Semiconductors (0.77%)* Software Under 1 Year Maturity CareCloud Corporation (12)(13) Clickfox, Inc. (12)(13) Software Software Mobile Posse, Inc. (12)(13) Software Touchcommerce, Inc. (12)(13) Software Subtotal: Under 1 Year Maturity 1-5 Years Maturity CareCloud Corporation (12)(13) Software Software Software Total CareCloud Corporation Clickfox, Inc. (12)(13) Software JumpStart Games, Inc. (p.k.a Knowledge Adventure, Inc.) (12)(13) Software Software Total JumpStart Games, Inc. (p.k.a Knowledge Adventure, Inc.) Mobile Posse, Inc. (12)(13) Software Neos Geosolutions, Inc. (12)(13) Poplicus, Inc. (12)(13) Soasta, Inc. (12)(13) Total Soasta, Inc. Sonian, Inc. (12)(13) StrongView Systems, Inc. (12) Software Software Software Software Software Software Senior Secured July 2015 Senior Secured July 2015 Senior Secured June 2015 Senior Secured January 2015 Interest rate PRIME + 1.40% or Floor rate of 4.65% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 2.00% or Floor rate of 5.25% Interest rate PRIME + 2.25% or Floor rate of 6.50% Senior Secured December 2017 Senior Secured July 2017 Senior Secured January 2018 Senior Secured December 2017 Senior Secured March 2018 Senior Secured October 2016 Senior Secured December 2016 Senior Secured May 2016 Senior Secured June 2017 Senior Secured February 2018 Senior Secured February 2018 Senior Secured July 2017 Senior Secured December 2017 Interest rate PRIME + 3.25% or Floor rate of 6.50% Interest rate PRIME + 5.50% or Floor rate of 8.75% Interest rate PRIME + 1.70% or Floor rate of 4.95% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate PRIME + 5.75% or Floor rate of 10.50% Interest rate PRIME + 5.25% or Floor rate of 8.50% Interest rate PRIME + 4.75% or Floor rate of 8.00% Interest rate PRIME + 2.25% or Floor rate of 5.50% Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 6.00% or Floor rate of 9.25%, PIK Interest 3.00% Interest rate PRIME + 6.00% or Floor rate of 10.25% $ 3,000 2,968 2,968 $ 2,000 2,000 2,000 $ 1,000 993 988 $ 3,811 3,811 3,805 9,772 9,761 $ 208 204 201 $ 10,000 9,839 9,740 $ 3,000 $ 13,208 2,929 2,884 12,972 12,825 $ 6,000 6,010 5,948 $ 11,750 11,771 11,709 1,356 $ $ 13,106 1,332 1,332 13,103 13,041 $ 2,950 2,943 2,972 $ 2,332 2,454 2,444 $ 1,500 1,504 1,487 $ 15,000 14,367 14,367 3,500 $ $ 18,500 3,353 3,353 17,720 17,720 $ 5,500 5,450 5,436 $ 10,000 9,779 9,779 $ 5,000 4,903 4,953 76,838 76,605 86,610 86,366 Touchcommerce, Inc. (12)(13) Software Senior Secured June 2017 Subtotal: 1-5 Years Maturity Subtotal: Software (13.11%)* See notes to consolidated financial statements. See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 116 4/28/15 2:54 PM 116 117 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Portfolio Company Specialty Pharmaceuticals Under 1 Year Maturity Cranford Pharmaceuticals, LLC (11)(12)(13) Specialty Pharmaceuticals Senior Secured August 2015 95 $ 95 95 95 4,983 4,990 4,983 4,990 5,078 5,085 Subtotal: Under 1 Year Maturity 1-5 Years Maturity Alimera Sciences, Inc. (10) Specialty Pharmaceuticals Senior Secured May 2018 Cranford Pharmaceuticals, LLC (11)(12)(13) Specialty Pharmaceuticals Senior Secured February 2017 Interest rate LIBOR + 8.25% or Floor rate of 9.50% $ 2,000 $ 1,977 1,977 $ 1,986 1,986 Interest rate PRIME + 7.65% or Floor rate of 10.90% Interest rate LIBOR + 9.55% or Floor rate of 10.80%, PIK Interest 1.35% $ 35,000 34,138 33,429 $ 15,644 15,595 15,465 49,733 48,894 51,710 50,880 Subtotal: 1-5 Years Maturity Subtotal: Specialty Pharmaceuticals (7.72%)* Surgical Devices Under 1 Year Maturity Transmedics, Inc. (10)(12) Subtotal: Under 1 Year Maturity Subtotal: Surgical Devices (0.91%)* Total Debt Investments (140.23%)* Surgical Devices Senior Secured November 2015 Interest rate FIXED 12.95% $ 6,061 5,989 5,989 5,989 5,989 5,989 5,989 923,906 951,982 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Portfolio Company Sub-Industry Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Type of Principal Achronix Semiconductor Semiconductors Senior Secured January 2015 Interest rate PRIME + 10.60% or Floor rate of 13.85% $ 95 $ Semiconductors Senior Secured April 2017 Interest rate PRIME + 5.75% or Floor rate of 9.00% $ 5,000 Semiconductors Under 1 Year Maturity Corporation Subtotal: Under 1 Year Maturity 1-5 Years Maturity Avnera Corporation (10)(12) Subtotal: 1-5 Years Maturity Subtotal: Semiconductors (0.77%)* Software Under 1 Year Maturity CareCloud Corporation (12)(13) Clickfox, Inc. (12)(13) Software Software Mobile Posse, Inc. (12)(13) Software Touchcommerce, Inc. (12)(13) Software Subtotal: Under 1 Year Maturity 1-5 Years Maturity CareCloud Corporation Software (12)(13) Software Software Total CareCloud Corporation Clickfox, Inc. (12)(13) Software (p.k.a Knowledge Adventure, Inc.) (12)(13) (12)(13) Poplicus, Inc. (12)(13) Soasta, Inc. (12)(13) Total Soasta, Inc. Sonian, Inc. (12)(13) (12) Software Software Software Software Touchcommerce, Inc. (12)(13) Software Subtotal: 1-5 Years Maturity Subtotal: Software (13.11%)* Senior Secured July 2015 Interest rate PRIME + 1.40% or Floor rate of 4.65% $ 3,000 2,968 2,968 Senior Secured July 2015 Interest rate PRIME + 6.75% Senior Secured June 2015 Interest rate PRIME + 2.00% or Floor rate of 10.00% $ 2,000 2,000 2,000 or Floor rate of 5.25% $ 1,000 993 988 Senior Secured January 2015 Interest rate PRIME + 2.25% or Floor rate of 6.50% $ 3,811 3,811 3,805 9,772 9,761 Senior Secured December 2017 Interest rate PRIME + 3.25% Senior Secured July 2017 Interest rate PRIME + 5.50% or Floor rate of 8.75% $ 10,000 9,839 9,740 or Floor rate of 6.50% $ 208 204 201 Senior Secured January 2018 Interest rate PRIME + 1.70% or Floor rate of 4.95% $ 3,000 2,929 2,884 $ 13,208 12,972 12,825 Senior Secured December 2017 Interest rate PRIME + 8.25% or Floor rate of 11.50% $ 6,000 6,010 5,948 or Floor rate of 11.50% $ 11,750 11,771 11,709 or Floor rate of 11.50% $ 1,356 $ 13,106 1,332 1,332 13,103 13,041 Senior Secured December 2016 Interest rate PRIME + 7.50% or Floor rate of 10.75% $ 2,950 2,943 2,972 or Floor rate of 10.50% $ 2,332 2,454 2,444 Senior Secured June 2017 Interest rate PRIME + 5.25% Senior Secured February 2018 Interest rate PRIME + 4.75% or Floor rate of 8.50% $ 1,500 1,504 1,487 or Floor rate of 8.00% $ 15,000 14,367 14,367 Senior Secured February 2018 Interest rate PRIME + 2.25% or Floor rate of 5.50% $ 3,500 $ 18,500 3,353 3,353 17,720 17,720 Senior Secured July 2017 Interest rate PRIME + 7.00% or Floor rate of 10.25% $ 5,500 5,450 5,436 or Floor rate of 9.25%, PIK Interest 3.00% $ 10,000 9,779 9,779 Senior Secured June 2017 Interest rate PRIME + 6.00% or Floor rate of 10.25% $ 5,000 4,903 4,953 76,838 76,605 86,610 86,366 JumpStart Games, Inc. Software Senior Secured March 2018 Interest rate PRIME + 8.25% Software Senior Secured October 2016 Interest rate PRIME + 8.25% Total JumpStart Games, Inc. (p.k.a Knowledge Adventure, Inc.) Mobile Posse, Inc. (12)(13) Software Neos Geosolutions, Inc. Software Senior Secured May 2016 Interest rate PRIME + 5.75% StrongView Systems, Inc. Software Senior Secured December 2017 Interest rate PRIME + 6.00% See notes to consolidated financial statements. See notes to consolidated financial statements. 116 117 16323_HER-10K_CS6-r4.indd 117 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Everyday Health, Inc. (pka Waterfront Media/Content/Info Equity Common Stock Biotechnology Tools Equity Preferred Series C 189,394 $ Portfolio Company Equity Investments Biotechnology Tools NuGEN Technologies, Inc. (13) Subtotal: Biotechnology Tools (0.08%)* Communications & Networking GlowPoint, Inc. (3) Peerless Network, Inc. Subtotal: Communications & Networking (1.12%)* Communications & Networking Communications & Networking Consumer & Business Products Market Force Information, Inc. Subtotal: Consumer & Business Products (0.05%)* Consumer & Business Products Equity Equity Common Stock Preferred Series A 114,192 1,000,000 Equity Preferred Series B 187,970 Diagnostic Singulex, Inc. Subtotal: Diagnostic (0.11%)* Drug Delivery AcelRx Pharmaceuticals, Inc. (3)(9)(13) Merrion Pharmaceuticals, Plc (3)(4)(9) Neos Therapeutics, Inc. (13) Subtotal: Drug Delivery (0.30%)* Drug Discovery & Development Aveo Pharmaceuticals, Inc. (3)(9)(13) Celladon Corporation (3)(13) Cempra, Inc. (3) Cerecor Inc. Dicerna Pharmaceuticals, Inc. (3)(13) Genocea Biosciences, Inc. (3) Inotek Pharmaceuticals Corporation (14) Insmed, Incorporated (3) Paratek Pharmaceuticals, Inc. (p.k.a Transcept Pharmaceuticals, Inc.) (3) Diagnostic Equity Common Stock 937,998 Drug Delivery Drug Delivery Drug Delivery Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Common Stock Common Stock Preferred Series C 54,240 20,000 300,000 Common Stock Common Stock Common Stock Preferred Series B Common Stock Common Stock Common Stock Common Stock Common Stock 167,864 105,263 97,931 3,334,445 142,858 223,463 4,523 70,771 Subtotal: Drug Discovery & Development (1.68%)* Electronics & Computer Hardware Identiv, Inc. (3) Subtotal: Electronics & Computer Hardware (0.10%)* Electronics & Computer Hardware 31,580 1,743 10,543 1,158 11,040 Equity Common Stock 49,097 247 247 682 682 Energy Technology Glori Energy, Inc. (3) SCIEnergy, Inc. Subtotal: Energy Technology (0.01%)* Information Services Good Technology Corporation (pka Visto Corporation) (13) Energy Technology Energy Technology Equity Equity Common Stock Preferred Series 1 18,208 385,000 Information Services Equity Common Stock Subtotal: Information Services (0.09%)* Internet Consumer & Business Services Blurb, Inc. (13) Lightspeed POS, Inc. (4)(9) Philotic, Inc. Progress Financial Taptera, Inc. Subtotal: Internet Consumer & Business Services (0.14%)* Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Preferred Series B Preferred Series C Common Stock Preferred Series G Preferred Series B 500,000 220,653 23,003 9,023 218,351 454,545 500 $ 500 498 498 102 1,000 1,102 126 7,229 7,355 500 500 750 750 109 9 1,500 1,618 842 1,000 458 1,000 1,000 2,000 1,500 1,000 317 317 750 750 365 — 1,635 2,000 141 2,056 2,303 922 2,353 1,262 — 845 165 761 926 603 603 175 250 93 250 150 918 76 22 98 605 605 265 260 — 233 162 920 See notes to consolidated financial statements. See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 118 4/28/15 2:54 PM 118 Total Optiscan Biomedical, Corp Oraya Therapeutics, Inc. Subtotal: Medical Devices & Equipment (1.23%)* Medical Devices & Equipment Equity Preferred Series 1 13,242 8,109 Portfolio Company Media/Content/Info Media, Inc.) (3) Subtotal: Media/Content/Info (0.22%)* Medical Devices & Equipment Flowonix Medical Incorporated Gelesis, Inc. (5)(13) Total Gelesis, Inc. Medrobotics Corporation (13) Total Medrobotics Corporation Novasys Medical, Inc. Optiscan Biomedical, Corp. (5)(13) Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Software Atrenta, Inc. Total Atrenta, Inc Box, Inc. (13)(14) Software Software Software Software Software Software Software Software Software Software Software Software Total Box, Inc CapLinked, Inc. ForeScout Technologies, Inc. HighRoads, Inc. WildTangent, Inc. (13) Subtotal: Software (5.31%)* Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Total QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.00%)* Surgical Devices Gynesonics, Inc. (13) Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.45%)* Total: Equity Investments (10.89%)* Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices 97,060 $ 1,000 $ 1,000 1,432 1,432 1,500 1,614 Preferred Series E LLC Interest LLC Interest LLC interests (Common) Preferred Series E Preferred Series F 221,893 674,208 675,676 674,208 2,024,092 136,798 73,971 210,769 Preferred Series D-1 4,118,444 Preferred Series B 6,185,567 Preferred Series C 1,927,309 Preferred Series D 55,103,923 63,216,799 1,086,969 Preferred Series C 1,196,845 Preferred Series D 635,513 1,832,358 Preferred Series B Preferred Series C Preferred Series D Preferred Series D-1 Preferred Series D-2 Preferred Series E Preferred Series A-3 Preferred Series D Preferred Series B Preferred Series 3 271,070 589,844 158,133 186,766 220,751 38,183 53,614 319,099 190,170 100,000 Preferred Series E Preferred Series E-1 241,829 26,955 Preferred Series G 4,667,636 4,936,420 Preferred Series B Preferred Series C 219,298 656,538 Preferred Series D 1,991,157 Preferred Series B Preferred Series C Preferred Series D 2,866,993 88,961 119,999 260,000 468,960 425 500 — 925 250 155 405 1,000 3,000 655 5,257 8,912 500 986 508 1,494 251 872 500 1,694 2,001 500 51 398 307 402 750 — — 750 750 250 282 712 1,244 1,100 300 650 2,050 3,294 181 114 31 326 149 167 316 — 455 138 5,260 5,853 — 1,745 1,109 2,854 5,747 12,506 3,352 3,960 4,680 810 79 519 228 228 — — — — — 101 186 1,073 1,360 353 180 1,071 1,604 2,964 8,470 34,963 44,463 71,733 1,464,747 5,818 31,055 Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity 119 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Equity Preferred Series C 189,394 $ Portfolio Company Equity Investments Biotechnology Tools NuGEN Technologies, Inc. (13) Subtotal: Biotechnology Tools (0.08%)* Communications & Networking GlowPoint, Inc. (3) Peerless Network, Inc. Subtotal: Communications & Networking (1.12%)* Consumer & Business Products Market Force Information, Inc. Subtotal: Consumer & Business Products (0.05%)* Diagnostic Singulex, Inc. Subtotal: Diagnostic (0.11%)* Drug Delivery AcelRx Pharmaceuticals, Inc. (3)(9)(13) Merrion Pharmaceuticals, Plc (3)(4)(9) Neos Therapeutics, Inc. (13) Subtotal: Drug Delivery (0.30%)* Drug Discovery & Development Aveo Pharmaceuticals, Inc. (3)(9)(13) Celladon Corporation (3)(13) Cempra, Inc. (3) Cerecor Inc. Dicerna Pharmaceuticals, Inc. (3)(13) Genocea Biosciences, Inc. (3) Inotek Pharmaceuticals Corporation (14) Insmed, Incorporated (3) Paratek Pharmaceuticals, Inc. (p.k.a Transcept Pharmaceuticals, Inc.) (3) Subtotal: Drug Discovery & Development (1.68%)* Electronics & Computer Hardware Identiv, Inc. (3) Subtotal: Electronics & Computer Hardware (0.10%)* Energy Technology Glori Energy, Inc. (3) SCIEnergy, Inc. Subtotal: Energy Technology (0.01%)* Information Services Corporation) (13) Subtotal: Information Services (0.09%)* Internet Consumer & Business Services Blurb, Inc. (13) Lightspeed POS, Inc. (4)(9) Philotic, Inc. Progress Financial Taptera, Inc. Subtotal: Internet Consumer & Business Services (0.14%)* Communications & Networking Communications & Networking Equity Equity Common Stock 114,192 Preferred Series A 1,000,000 Consumer & Business Products Equity Preferred Series B 187,970 Diagnostic Equity Common Stock 937,998 Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Preferred Series B 3,334,445 Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock 167,864 105,263 97,931 142,858 223,463 4,523 70,771 31,580 Electronics & Computer Hardware Equity Common Stock 49,097 Energy Technology Energy Technology Equity Equity Common Stock Preferred Series 1 18,208 385,000 Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Internet Consumer & Business Services Equity Preferred Series B Preferred Series C Common Stock Preferred Series G Preferred Series B 500,000 220,653 23,003 9,023 218,351 454,545 Good Technology Corporation (pka Visto Information Services Equity Common Stock 500 $ 500 498 498 102 1,000 1,102 126 7,229 7,355 500 500 750 750 109 9 1,500 1,618 842 1,000 458 1,000 1,000 2,000 1,500 1,000 165 761 926 603 603 175 250 93 250 150 918 317 317 750 750 365 — 1,635 2,000 141 2,056 2,303 922 2,353 1,262 — 845 76 22 98 605 605 265 260 — 233 162 920 1,743 1,158 10,543 11,040 247 247 682 682 Drug Delivery Drug Delivery Drug Delivery Common Stock Common Stock Preferred Series C 54,240 20,000 300,000 Total Optiscan Biomedical, Corp Oraya Therapeutics, Inc. Subtotal: Medical Devices & Equipment (1.23%)* Medical Devices & Equipment Equity Preferred Series 1 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Media/Content/Info Equity Common Stock 97,060 $ 1,000 $ 1,000 1,432 1,432 Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Preferred Series E LLC Interest LLC Interest LLC interests (Common) Preferred Series E Preferred Series F Preferred Series D-1 Preferred Series B Preferred Series C Preferred Series D 221,893 674,208 675,676 674,208 2,024,092 136,798 73,971 210,769 4,118,444 6,185,567 1,927,309 55,103,923 63,216,799 1,086,969 Portfolio Company Media/Content/Info Everyday Health, Inc. (pka Waterfront Media, Inc.) (3) Subtotal: Media/Content/Info (0.22%)* Medical Devices & Equipment Flowonix Medical Incorporated Gelesis, Inc. (5)(13) Total Gelesis, Inc. Medrobotics Corporation (13) Total Medrobotics Corporation Novasys Medical, Inc. Optiscan Biomedical, Corp. (5)(13) Software Atrenta, Inc. Total Atrenta, Inc Box, Inc. (13)(14) Total Box, Inc CapLinked, Inc. ForeScout Technologies, Inc. HighRoads, Inc. WildTangent, Inc. (13) Subtotal: Software (5.31%)* Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Software Software Software Software Software Software Software Software Software Software Software Software Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Total QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.00%)* Surgical Devices Gynesonics, Inc. (13) Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.45%)* Total: Equity Investments (10.89%)* Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series D Preferred Series D-1 Preferred Series D-2 Preferred Series E Preferred Series A-3 Preferred Series D Preferred Series B Preferred Series 3 1,196,845 635,513 1,832,358 271,070 589,844 158,133 186,766 220,751 38,183 1,464,747 53,614 319,099 190,170 100,000 Preferred Series E Preferred Series E-1 Preferred Series G 241,829 26,955 4,667,636 4,936,420 Preferred Series B Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series D 219,298 656,538 1,991,157 2,866,993 88,961 119,999 260,000 468,960 1,500 425 500 — 925 250 155 405 1,000 3,000 655 5,257 8,912 500 13,242 986 508 1,494 251 872 500 1,694 2,001 500 5,818 51 398 307 402 8,470 750 — — 750 750 1,614 181 114 31 326 149 167 316 — 455 138 5,260 5,853 — 8,109 1,745 1,109 2,854 5,747 12,506 3,352 3,960 4,680 810 31,055 79 519 228 228 34,963 — — — — — 250 282 712 1,244 1,100 300 650 2,050 3,294 44,463 101 186 1,073 1,360 353 180 1,071 1,604 2,964 71,733 See notes to consolidated financial statements. See notes to consolidated financial statements. 118 119 16323_HER-10K_CS6-r4.indd 119 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Warrant Preferred Series C 1,127,624 $ Portfolio Company Warrant Investments Biotechnology Tools Labcyte, Inc. (13) Subtotal: Biotechnology Tools (0.05%)* Communications & Networking Intelepeer, Inc. (13) OpenPeak, Inc. PeerApp, Inc. Peerless Network, Inc. Ping Identity Corporation SkyCross, Inc. (13) Spring Mobile Solutions, Inc. Subtotal: Communications & Networking (0.25%)* Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Consumer & Business Products Antenna79 (p.k.a. Pong Research Corporation) (13) Intelligent Beauty, Inc. (13) IronPlanet, Inc. Market Force Information, Inc. The Neat Company (13) Subtotal: Consumer & Business Products (0.31%)* Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series C Common Stock Preferred Series B Preferred Series A Preferred Series B Preferred Series F Preferred Series D 117,958 108,982 298,779 135,000 1,136,277 9,762,777 2,834,375 Warrant Warrant Warrant Warrant Warrant Preferred Series A Preferred Series B Preferred Series D Preferred Series A Preferred Series C-1 1,662,441 190,234 1,155,821 99,286 540,540 Diagnostic Navidea Biopharmaceuticals, Inc. (pka Neoprobe) (3)(13) Subtotal: Diagnostic (0.01%)* Drug Delivery AcelRx Pharmaceuticals, Inc. (3)(9)(13) Alexza Pharmaceuticals, Inc. (3) BIND Therapeutics, Inc. (3)(13) BioQuiddity Incorporated Celator Pharmaceuticals, Inc. (3) Celsion Corporation (3) Dance Biopharm, Inc. (13) Edge Therapeutics, Inc. Kaleo, Inc. (p.k.a. Intelliject, Inc.) Neos Therapeutics, Inc. (13) Revance Therapeutics, Inc. (3) Zosano Pharma, Inc. (14) Subtotal: Drug Delivery (0.40%)* Diagnostic Warrant Common Stock 333,333 Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series A Preferred Series C-1 Preferred Series B Preferred Series C Common Stock Common Stock 176,730 37,639 71,359 459,183 158,006 194,986 97,701 107,526 82,500 170,000 53,511 31,674 323 $ 323 354 354 102 149 61 95 52 394 418 1,271 228 230 1,077 24 365 1,924 18 104 45 844 183 — 426 1,620 202 327 1,067 21 451 2,068 244 244 75 75 786 645 367 1 107 428 74 390 594 285 557 164 4,398 420 — 6 1 67 248 109 217 1,108 235 64 179 2,654 See notes to consolidated financial statements. 120 121 16323_HER-10K_CS6-r4.indd 120 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Preferred Series 3 1,151,936 590 1,421 Drug Discovery & Development Warrant Common Stock 5,359 3,534 Clustrix, Inc. Electronics & Computer Hardware Warrant Common Stock 50,000 Portfolio Company Drug Discovery & Development ADMA Biologics, Inc. (3) Anthera Pharmaceuticals, Inc. (3)(13) Aveo Pharmaceuticals, Inc. (3)(9)(13) Cerecor Inc. Chroma Therapeutics, Ltd. (4)(9) Cleveland BioLabs, Inc. (3)(13) Concert Pharmaceuticals, Inc. (3) Coronado Biosciences, Inc. (3) Dicerna Pharmaceuticals, Inc. (3)(13) Epirus Biopharmaceuticals, Inc. (3) Genocea Biosciences, Inc. (3) Horizon Pharma, Inc. (3) Melinta Therapeutics Nanotherapeutics, Inc. (13) Neothetics, Inc. (pka Lithera, Inc) (3)(13) Neuralstem, Inc. (3)(13) Paratek Pharmaceutcals, Inc. (p.k.a Transcept Pharmaceuticals, Inc) (3) uniQure B.V. (3)(4)(9) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Subtotal: Drug Discovery & Development (0.54%)* Electronics & Computer Hardware Subtotal: Electronics & Computer Hardware (0.00%)* Energy Technology Agrivida, Inc. (13) Alphabet Energy, Inc. (13) American Superconductor Corporation (3) Brightsource Energy, Inc. (13) Calera, Inc. (13) EcoMotors, Inc. (13) Fluidic, Inc. Fulcrum Bioenergy, Inc. GreatPoint Energy, Inc. (13) Polyera Corporation (13) SCIEnergy, Inc. Total SCIEnergy, Inc. Inc.) (13) Solexel, Inc. (13) Stion Corporation (5) TAS Energy, Inc. TPI Composites, Inc. Trilliant, Inc. (13) Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Preferred Series B Preferred Series D Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series D Preferred Series A Common Stock Preferred Series 1 Preferred Series C Preferred Series B Preferred Series C Preferred Series C-1 Preferred Series D-1 Preferred Series C Common Stock Preferred Series 1 89,750 $ 40,178 608,696 625,208 325,261 156,250 70,796 73,009 200 64,194 73,725 3,735 171,389 46,838 75,187 5,121 37,174 471,327 86,329 588,235 174,999 44,529 437,500 59,665 280,897 393,212 161,575 530,811 145,811 676,622 390,000 428,571 160 320,000 Scifiniti (pka Integrated Photovoltaics, Energy Technology Warrant Preferred Series A-1 Subtotal: Energy Technology (0.35%)* Healthcare Services, Other Chromadex Corporation (3)(13) MDEverywhere, Inc. Subtotal: Healthcare Services, Other (0.02%)* Information Services Cha Cha Search, Inc. (13) INMOBI Inc. (4)(9) InXpo, Inc. (13) Total InXpo, Inc. RichRelevance, Inc. (13) Subtotal: Information Services (0.02%)* Healthcare Services, Other Healthcare Services, Other Warrant Warrant Common Stock Common Stock 419,020 129 Information Services Information Services Information Services Information Services Warrant Warrant Warrant Warrant Preferred Series G Common Stock Preferred Series C Preferred Series C-1 48,232 42,187 648,400 740,832 1,389,232 Information Services Warrant Preferred Series E 112,612 See notes to consolidated financial statements. 295 $ 984 194 70 490 105 367 142 28 276 266 52 604 838 266 77 87 218 12 12 120 81 39 780 513 308 102 275 548 69 181 50 231 82 1,162 1,378 299 273 161 156 94 250 58 74 98 58 156 98 386 366 — 107 47 — 10 164 43 — 207 188 4 122 71 10 184 10 10 186 135 40 213 — 256 60 135 — 228 — — — 65 666 — 157 107 32 106 11 117 20 72 26 30 56 — 148 Preferred Series C 1,171,625 Preferred Series Seed 2154 Preferred Series F Preferred Series B Preferred Series A 6,421 2,280 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Warrant Preferred Series C 1,127,624 $ Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series C Common Stock Preferred Series B Preferred Series A 117,958 108,982 298,779 135,000 Preferred Series B 1,136,277 Preferred Series F 9,762,777 Preferred Series D 2,834,375 Subtotal: Communications & Networking (0.25%)* 1,271 1,620 Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Warrant Warrant Warrant Warrant Warrant Preferred Series A Preferred Series B 1,662,441 190,234 Preferred Series A Preferred Series C-1 99,286 540,540 Preferred Series D 1,155,821 1,077 1,067 Subtotal: Consumer & Business Products (0.31%)* 1,924 2,068 Portfolio Company Warrant Investments Biotechnology Tools Labcyte, Inc. (13) Subtotal: Biotechnology Tools (0.05%)* Communications & Networking Intelepeer, Inc. (13) OpenPeak, Inc. PeerApp, Inc. Peerless Network, Inc. Ping Identity Corporation SkyCross, Inc. (13) Spring Mobile Solutions, Inc. Consumer & Business Products Antenna79 (p.k.a. Pong Research Corporation) (13) Intelligent Beauty, Inc. (13) IronPlanet, Inc. Market Force Information, Inc. The Neat Company (13) Diagnostic Navidea Biopharmaceuticals, Inc. (pka Neoprobe) (3)(13) Subtotal: Diagnostic (0.01%)* Drug Delivery AcelRx Pharmaceuticals, Inc. (3)(9)(13) Alexza Pharmaceuticals, Inc. (3) BIND Therapeutics, Inc. (3)(13) BioQuiddity Incorporated Celator Pharmaceuticals, Inc. (3) Celsion Corporation (3) Dance Biopharm, Inc. (13) Edge Therapeutics, Inc. Kaleo, Inc. (p.k.a. Intelliject, Inc.) Neos Therapeutics, Inc. (13) Revance Therapeutics, Inc. (3) Zosano Pharma, Inc. (14) Subtotal: Drug Delivery (0.40%)* Diagnostic Warrant Common Stock 333,333 Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series A Preferred Series C-1 Preferred Series B Preferred Series C Common Stock Common Stock 176,730 37,639 71,359 459,183 158,006 194,986 97,701 107,526 82,500 170,000 53,511 31,674 323 $ 323 102 149 61 95 52 394 418 228 230 24 365 244 244 786 645 367 1 107 428 74 390 594 285 557 164 354 354 18 104 45 844 183 — 426 202 327 21 451 75 75 420 — 6 1 67 248 109 217 235 64 179 1,108 4,398 2,654 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Portfolio Company Drug Discovery & Development ADMA Biologics, Inc. (3) Anthera Pharmaceuticals, Inc. (3)(13) Aveo Pharmaceuticals, Inc. (3)(9)(13) Cerecor Inc. Chroma Therapeutics, Ltd. (4)(9) Cleveland BioLabs, Inc. (3)(13) Concert Pharmaceuticals, Inc. (3) Coronado Biosciences, Inc. (3) Dicerna Pharmaceuticals, Inc. (3)(13) Epirus Biopharmaceuticals, Inc. (3) Genocea Biosciences, Inc. (3) Horizon Pharma, Inc. (3) Melinta Therapeutics Nanotherapeutics, Inc. (13) Neothetics, Inc. (pka Lithera, Inc) (3)(13) Neuralstem, Inc. (3)(13) Paratek Pharmaceutcals, Inc. (p.k.a Transcept Pharmaceuticals, Inc) (3) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Preferred Series B Preferred Series D Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series 3 Common Stock Common Stock Common Stock Common Stock 89,750 $ 40,178 608,696 625,208 325,261 156,250 70,796 73,009 200 64,194 73,725 3,735 1,151,936 171,389 46,838 75,187 5,121 37,174 uniQure B.V. (3)(4)(9) Subtotal: Drug Discovery & Development (0.54%)* Drug Discovery & Development Warrant Common Stock Electronics & Computer Hardware Clustrix, Inc. Subtotal: Electronics & Computer Hardware (0.00%)* Electronics & Computer Hardware Warrant Common Stock 50,000 Energy Technology Agrivida, Inc. (13) Alphabet Energy, Inc. (13) American Superconductor Corporation (3) Brightsource Energy, Inc. (13) Calera, Inc. (13) EcoMotors, Inc. (13) Fluidic, Inc. Fulcrum Bioenergy, Inc. GreatPoint Energy, Inc. (13) Polyera Corporation (13) SCIEnergy, Inc. Total SCIEnergy, Inc. Scifiniti (pka Integrated Photovoltaics, Inc.) (13) Solexel, Inc. (13) Stion Corporation (5) TAS Energy, Inc. TPI Composites, Inc. Trilliant, Inc. (13) Subtotal: Energy Technology (0.35%)* Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D Preferred Series A Common Stock Preferred Series 1 Preferred Series C Preferred Series B Preferred Series C Preferred Series C-1 Preferred Series D-1 Preferred Series C Common Stock Preferred Series 1 471,327 86,329 588,235 174,999 44,529 437,500 59,665 280,897 393,212 161,575 530,811 145,811 676,622 Energy Technology Warrant Preferred Series A-1 Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Warrant Warrant Warrant Warrant Warrant Preferred Series C Preferred Series Seed Preferred Series F Preferred Series B Preferred Series A 390,000 1,171,625 2154 428,571 160 320,000 Healthcare Services, Other Chromadex Corporation (3)(13) MDEverywhere, Inc. Subtotal: Healthcare Services, Other (0.02%)* Healthcare Services, Other Healthcare Services, Other Information Services Cha Cha Search, Inc. (13) INMOBI Inc. (4)(9) InXpo, Inc. (13) Information Services Information Services Information Services Information Services Total InXpo, Inc. RichRelevance, Inc. (13) Subtotal: Information Services (0.02%)* Information Services Warrant Warrant Common Stock Common Stock 419,020 129 Warrant Warrant Warrant Warrant Preferred Series G Common Stock Preferred Series C Preferred Series C-1 Warrant Preferred Series E 48,232 42,187 648,400 740,832 1,389,232 112,612 295 $ 984 194 70 490 105 367 142 28 276 266 52 604 838 266 77 87 218 5,359 12 12 120 81 39 780 513 308 102 275 548 69 181 50 231 366 — 107 47 — 10 164 43 — 207 188 4 590 1,421 122 71 10 184 3,534 10 10 186 135 40 213 — 256 60 135 — 228 — — — 82 1,162 1,378 299 273 161 6,421 65 666 — 157 107 32 2,280 156 94 250 58 74 98 58 156 98 386 106 11 117 20 72 26 30 56 — 148 See notes to consolidated financial statements. See notes to consolidated financial statements. 120 121 16323_HER-10K_CS6-r4.indd 121 4/28/15 2:54 PM Portfolio Company Internet Consumer & Business Services Blurb, Inc. (13) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Preferred Series B Preferred Series C Total Blurb, Inc. CashStar, Inc. (13) Gazelle, Inc. (13) Just Fabulous, Inc. Lightspeed POS, Inc. (4)(9) Prism Education Group, Inc. (13) Progress Financial Reply! Inc. ShareThis, Inc. (13) Tapjoy, Inc. Tectura Corporation Subtotal: Internet Consumer & Business Services (0.39%)* Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Preferred Series C-2 Preferred Series A-1 Preferred Series B Preferred Series C Preferred Series B Preferred Series G Preferred Series B Preferred Series C Preferred Series D Preferred Series B-1 218,684 $ 234,280 452,964 727,272 991,288 206,184 24,561 200,000 174,562 137,225 493,502 430,485 253,378 299 $ 636 935 130 158 1,101 20 43 78 320 547 263 51 79 173 252 83 185 1,490 60 — 63 — 282 125 3,646 2,540 Portfolio Company Software Atrenta, Inc. Braxton Technologies, LLC CareCloud Corporation (13) Clickfox, Inc. (13) Total Clickfox, Inc. Daegis Inc. (pka Unify Corporation) (3)(13) ForeScout Technologies, Inc. Hillcrest Laboratories, Inc. (13) JumpStart Games, Inc. (p.k.a Knowledge Holdings, Inc.) (13) Mobile Posse, Inc. (13) Neos Geosolutions, Inc. (13) NewVoiceMedia Limited(4)(9) Soasta, Inc. (13) Sonian, Inc. (13) StrongView Systems, Inc. SugarSync, Inc. (13) Total SugarSync, Inc. Touchcommerce, Inc. (13) White Sky, Inc. (13) Subtotal: Software (0.62%)* Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Specialty Pharmaceuticals Alimera Sciences, Inc. (3) QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.10%)* Surgical Devices Gynesonics, Inc. (13) Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.15%)* Total Warrant Investments (3.81%)* Total Investments (154.92%)* Value as a percent of net assets Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D Preferred Series A Preferred Series B Preferred Series B Preferred Series C Preferred Series C-A Common Stock Preferred Series E 392,670 $ 168,750 413,433 1,038,563 592,019 46,109 1,676,691 718,860 80,587 Preferred Series E 1,865,650 Preferred Series E Preferred Series C Preferred Series 3 Preferred Series E Preferred Series E Preferred Series C Preferred Series C Preferred Series CC Preferred Series DD Preferred Series E Preferred Series B-2 614,333 396,430 221,150 225,586 410,800 185,949 551,470 332,726 107,526 440,252 992,595 124,295 120 $ 188 258 330 730 14 1,074 1,434 41 54 15 130 22 33 691 106 169 78 34 112 252 54 728 308 1,036 74 320 394 225 100 325 719 1,373 1,014 359 — 482 783 555 35 5 74 106 8 66 — 34 72 218 78 26 104 164 4 656 — 656 48 562 610 — 352 352 962 4,753 4,083 Specialty Pharmaceuticals Specialty Pharmaceuticals Warrant Warrant Common Stock Preferred Series E 285,016 155,324 Surgical Devices Surgical Devices Surgical Devices Surgical Devices Warrant Warrant Warrant Warrant Preferred Series C 180,480 Preferred Series D 1,575,965 Preferred Series B Preferred Series D 1,756,445 40,436 175,000 215,436 38,892 25,098 $ 1,035,337 $ 1,020,737 * (1) (2) (3) (4) (5) (6) (7) (8) (9) Preferred and common stock, warrants, and equity interests are generally non-income producing. Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $46.1 million, $63.4 million and $17.3 million respectively. The tax cost of investments is $1.0 billion. Except for warrants in twenty-nine publicly traded companies and common stock in thirteen publicly traded companies, all investments are restricted at December 31, 2014 and were valued at fair value as determined in good faith by the Audit Committee of the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. Non-U.S. company or the company’s principal place of business is outside the United States. Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 25% of the voting securities of the company or has greater than 50% representation on its board. There were no control investments at December 31, 2014. Debt is on non-accrual status at December 31, 2014, and is therefore considered non-income producing. Denotes that all or a portion of the debt investment is convertible senior debt. Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. (10) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitizations (as defined in Note 4). (11) Denotes that all or a portion of the debt investment principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments. (12) Denotes that all or a portion of the debt investment includes an exit fee receivable. (13) Denotes that all or a portion of the investment in this portfolio company is held by HT II or HT III, the Company’s wholly-owned SBIC subsidiaries. (14) Subsequent to December 31, 2014, this company completed an initial public offering. Note that the December 31, 2014 fair value does not reflect any potential impact of the conversion of our preferred shares to common shares which may include reverse splits associated with the offering. (15) The stated ‘Maturity Date’ for the Tectura assets reflects the last extension of the forbearance period on these loans. The borrower loans remain outstanding and management is continuing to work with the borrower to satisfy the obligations. The Company’s investment team and Investment Committee continue to closely monitor developments at the borrower company. See notes to consolidated financial statements. Media/Content/Info Mode Media Corporation (13) Rhapsody International, Inc. (13) Zoom Media Group, Inc. Subtotal: Media/Content/Info (0.11%)* Media/Content/Info Media/Content/Info Media/Content/Info Warrant Warrant Warrant Preferred Series D Common Stock Preferred Series A 407,457 715,755 1,204 Medical Devices & Equipment Amedica Corporation (3)(13) Avedro, Inc. (13) Baxano Surgical, Inc. (3) Flowonix Medical Incorporated Gamma Medica, Inc. Gelesis, Inc. (5)(13) Home Dialysis Plus, Inc. InspireMD, Inc. (3)(4)(9) Medrobotics Corporation (13) MELA Sciences, Inc. (3) nContact Surgical, Inc NetBio, Inc. NinePoint Medical, Inc. (13) Novasys Medical, Inc. Total Novasys Medical, Inc. Optiscan Biomedical, Corp. (5)(13) Oraya Therapeutics, Inc. Total Oraya Therapeutics, Inc. Quanterix Corporation SonaCare Medical, LLC (pka US HIFU, LLC) Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Preferred Series D Common Stock Preferred Series E Preferred Series A LLC Interest Preferred Series A Common Stock Preferred Series E Common Stock Preferred Series D-1 Common Stock Preferred Series A-1 Common Stock Preferred Series D Preferred Series D-1 Preferred Series D Common Stock Preferred Series 1 Medical Devices & Equipment Warrant Preferred Series C 516,129 1,308,451 882,353 66,568 357,500 263,688 500,000 168,351 455,539 69,320 201,439 2,568 587,840 109,449 526,840 53,607 689,896 10,535,275 954 1,632,084 1,633,038 69,371 Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Preferred Series A Preferred Series C 6,464 312,500 ViewRay, Inc. (13) Subtotal: Medical Devices & Equipment (0.49%)* Semiconductors Achronix Semiconductor Corporation Avnera Corporation Subtotal: Semiconductors (0.01%)* Semiconductors Semiconductors Warrant Warrant Preferred Series C Preferred Series E 360,000 102,958 See notes to consolidated financial statements. 482 385 348 1,215 459 401 439 203 170 78 402 242 370 401 266 408 170 2 125 6 133 1,252 66 676 742 104 188 333 6,761 — 358 382 740 — 553 — 228 196 1 587 12 182 1 450 60 204 — — — — 219 — — — 164 — 359 3,216 160 14 174 9 32 41 16323_HER-10K_CS6-r4.indd 122 4/28/15 2:54 PM 122 123 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Portfolio Company Internet Consumer & Business Services Blurb, Inc. (13) Lightspeed POS, Inc. (4)(9) Prism Education Group, Inc. (13) Total Blurb, Inc. CashStar, Inc. (13) Gazelle, Inc. (13) Just Fabulous, Inc. Progress Financial Reply! Inc. ShareThis, Inc. (13) Tapjoy, Inc. Tectura Corporation Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Preferred Series B Preferred Series C Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Internet Consumer & Business Services Warrant Preferred Series C-2 Preferred Series A-1 Preferred Series B Preferred Series C Preferred Series B Preferred Series G Preferred Series B Preferred Series C Preferred Series D Internet Consumer & Business Services Warrant Preferred Series B-1 218,684 $ 234,280 452,964 727,272 991,288 206,184 24,561 200,000 174,562 137,225 493,502 430,485 253,378 Subtotal: Internet Consumer & Business Services (0.39%)* Media/Content/Info Mode Media Corporation (13) Rhapsody International, Inc. (13) Zoom Media Group, Inc. Subtotal: Media/Content/Info (0.11%)* Media/Content/Info Media/Content/Info Media/Content/Info Warrant Warrant Warrant Preferred Series D Common Stock Preferred Series A 407,457 715,755 1,204 Medical Devices & Equipment Amedica Corporation (3)(13) Avedro, Inc. (13) Baxano Surgical, Inc. (3) Flowonix Medical Incorporated Gamma Medica, Inc. Gelesis, Inc. (5)(13) Home Dialysis Plus, Inc. InspireMD, Inc. (3)(4)(9) Medrobotics Corporation (13) MELA Sciences, Inc. (3) nContact Surgical, Inc NetBio, Inc. NinePoint Medical, Inc. (13) Novasys Medical, Inc. Total Novasys Medical, Inc. Optiscan Biomedical, Corp. (5)(13) Oraya Therapeutics, Inc. Total Oraya Therapeutics, Inc. Quanterix Corporation SonaCare Medical, LLC (pka US HIFU, LLC) ViewRay, Inc. (13) Semiconductors Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock 516,129 Preferred Series D 1,308,451 Common Stock Preferred Series E Preferred Series A LLC Interest Preferred Series A Common Stock Preferred Series E Common Stock Preferred Series D-1 Common Stock Preferred Series A-1 Common Stock Preferred Series D Preferred Series D-1 882,353 66,568 357,500 263,688 500,000 168,351 455,539 69,320 201,439 2,568 587,840 109,449 526,840 53,607 689,896 Preferred Series D 10,535,275 Common Stock 954 Preferred Series 1 1,632,084 1,633,038 Medical Devices & Equipment Warrant Preferred Series C 69,371 Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Preferred Series A Preferred Series C 6,464 312,500 Subtotal: Medical Devices & Equipment (0.49%)* 6,761 3,216 Achronix Semiconductor Corporation Avnera Corporation Semiconductors Semiconductors Subtotal: Semiconductors (0.01%)* Warrant Warrant Preferred Series C Preferred Series E 360,000 102,958 1,101 1,490 51 3,646 2,540 299 $ 636 935 130 158 20 43 78 320 547 263 482 385 348 1,215 459 401 439 203 170 78 402 242 370 401 266 408 170 2 125 6 133 1,252 66 676 742 104 188 333 160 14 174 79 173 252 83 185 60 — 63 — 282 125 — 358 382 740 — 553 — 228 196 1 587 12 182 1 450 60 204 — — — — — — — 219 164 — 359 9 32 41 Portfolio Company Software Atrenta, Inc. Braxton Technologies, LLC CareCloud Corporation (13) Clickfox, Inc. (13) Total Clickfox, Inc. Daegis Inc. (pka Unify Corporation) (3)(13) ForeScout Technologies, Inc. Hillcrest Laboratories, Inc. (13) JumpStart Games, Inc. (p.k.a Knowledge Holdings, Inc.) (13) Mobile Posse, Inc. (13) Neos Geosolutions, Inc. (13) NewVoiceMedia Limited(4)(9) Soasta, Inc. (13) Sonian, Inc. (13) StrongView Systems, Inc. SugarSync, Inc. (13) Total SugarSync, Inc. Touchcommerce, Inc. (13) White Sky, Inc. (13) Subtotal: Software (0.62%)* Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2014 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D Preferred Series A Preferred Series B Preferred Series B Preferred Series C Preferred Series C-A Common Stock Preferred Series E Preferred Series E Preferred Series E Preferred Series C Preferred Series 3 Preferred Series E Preferred Series E Preferred Series C Preferred Series C Preferred Series CC Preferred Series DD Preferred Series E Preferred Series B-2 392,670 $ 168,750 413,433 1,038,563 592,019 46,109 1,676,691 718,860 80,587 1,865,650 614,333 396,430 221,150 225,586 410,800 185,949 551,470 332,726 107,526 440,252 992,595 124,295 120 $ 188 258 330 730 14 1,074 1,434 41 54 15 130 22 33 691 106 169 78 34 112 252 54 4,753 728 308 1,036 359 — 482 783 555 35 1,373 5 74 106 8 66 — 34 1,014 72 218 78 26 104 164 4 4,083 656 — 656 Specialty Pharmaceuticals Alimera Sciences, Inc. (3) QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.10%)* Specialty Pharmaceuticals Specialty Pharmaceuticals Warrant Warrant Common Stock Preferred Series E 285,016 155,324 Surgical Devices Gynesonics, Inc. (13) Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.15%)* Total Warrant Investments (3.81%)* Total Investments (154.92%)* Surgical Devices Surgical Devices Surgical Devices Surgical Devices Warrant Warrant Warrant Warrant Preferred Series C Preferred Series D Preferred Series B Preferred Series D 180,480 1,575,965 1,756,445 40,436 175,000 215,436 $ 74 320 394 225 100 325 719 38,892 48 562 610 — 352 352 962 25,098 1,035,337 $ 1,020,737 (6) (3) (4) (5) * (1) (2) Value as a percent of net assets Preferred and common stock, warrants, and equity interests are generally non-income producing. Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $46.1 million, $63.4 million and $17.3 million respectively. The tax cost of investments is $1.0 billion. Except for warrants in twenty-nine publicly traded companies and common stock in thirteen publicly traded companies, all investments are restricted at December 31, 2014 and were valued at fair value as determined in good faith by the Audit Committee of the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. Non-U.S. company or the company’s principal place of business is outside the United States. Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 25% of the voting securities of the company or has greater than 50% representation on its board. There were no control investments at December 31, 2014. Debt is on non-accrual status at December 31, 2014, and is therefore considered non-income producing. Denotes that all or a portion of the debt investment is convertible senior debt. Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. (10) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitizations (as defined in Note 4). (11) Denotes that all or a portion of the debt investment principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments. (12) Denotes that all or a portion of the debt investment includes an exit fee receivable. (13) Denotes that all or a portion of the investment in this portfolio company is held by HT II or HT III, the Company’s wholly-owned SBIC subsidiaries. (14) Subsequent to December 31, 2014, this company completed an initial public offering. Note that the December 31, 2014 fair value does not reflect any potential impact of the conversion of our preferred shares to common shares which may include reverse splits associated with the offering. The stated ‘Maturity Date’ for the Tectura assets reflects the last extension of the forbearance period on these loans. The borrower loans remain outstanding and management is continuing to work with the borrower to satisfy the obligations. The Company’s investment team and Investment Committee continue to closely monitor developments at the borrower company. (7) (8) (9) See notes to consolidated financial statements. (15) 122 See notes to consolidated financial statements. 123 16323_HER-10K_CS6-r4.indd 123 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Portfolio Company Debt Investmnents Biotechnology Tools 1-5 Years Maturity Labcyte, Inc.(11) Subtotal: 1-5 Years Maturity Subtotal: Biotechnology Tools (0.66%)* Energy Technology Under 1 Year Maturity American Superconductor Corporation(3)(11) Brightsource Energy, Inc. Biotechnology Tools Senior Secured June 2016 Interest rate PRIME + 6.70% or Floor rate of 9.95% $ 4,270 $ 4,323 4,323 4,323 $ 4,289 4,289 4,289 AcelRx Pharmaceuticals, Drug Delivery Senior Secured October 2017 Interest rate PRIME + 3.85% Inc.(3)(10) BIND Therapeutics, Inc.(3) Drug Delivery Senior Secured September 2016 Interest rate Prime + 7.00% or Floor rate of 10.25% $ 4,500 4,407 4,458 or Floor rate of 9.10% $ 15,000 $ 14,556 $ 15,006 Celsion Corporation(3) Drug Delivery Senior Secured June 2017 Interest rate Prime + 8.00% Dance Biopharm, Inc. Drug Delivery Senior Secured August 2017 Interest rate PRIME + 7.4% Energy Technology Senior Secured December 2014 Interest rate PRIME + 7.25% Intelliject, Inc.(11) Drug Delivery Senior Secured June 2016 Interest rate PRIME + 5.75% Energy Technology Senior Secured January 2014 Interest rate Prime + 8.25% NuPathe, Inc.(3) Drug Delivery Senior Secured May 2016 Interest rate Prime - 3.25% or Floor rate of 11.00% $ 4,615 4,991 4,991 or Floor rate of 11.50% $ 15,000 15,886 15,886 Enphase Energy, Inc.(11) Energy Technology Senior Secured June 2014 Interest rate PRIME + 5.75% Revance Therapeutics, Inc. Drug Delivery Senior Secured March 2015 Interest rate PRIME + 6.60% Subtotal: Under 1 Year Maturity 1-5 Years Maturity Agrivida, Inc. Energy Technology or Floor rate of 9.00% $ 1,315 1,358 22,236 1,358 22,236 Drug Delivery Senior Secured March 2015 Interest rate PRIME + 6.60% Senior Secured December 2016 Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 6,000 5,887 5,770 American Superconductor Corporation(3)(11) Energy Technology Senior Secured November 2016 Interest rate PRIME + 7.25% or Floor rate of 11.00% $ 10,000 9,801 9,801 APTwater, Inc Energy Technology Senior Secured April 2017 Interest rate PRIME + 6.75% or Floor rate of 10.00%, PIK Interest 2.75% $ 18,085 17,874 17,874 BioAmber, Inc.(5)(10) Energy Technology Senior Secured June 2016 Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 25,000 25,298 25,798 Enphase Energy, Inc.(11) Energy Technology Senior Secured August 2016 Interest rate PRIME + 8.25% or Floor rate of 11.50% $ 7,400 7,422 7,314 Fluidic, Inc. Energy Technology Senior Secured March 2016 Interest rate PRIME + 8.00% or Floor rate of 11.25% $ 5,000 4,922 4,922 Fulcrum Bioenergy, Inc.(11) Energy Technology Senior Secured November 2016 Interest rate PRIME + 7.75% or Floor rate of 11.00% $ 10,000 9,944 9,694 Glori Energy, Inc.(11) Energy Technology Senior Secured June 2015 Interest rate PRIME + 6.75% Polyera Corporation Energy Technology Senior Secured June 2016 Interest rate PRIME + 6.75% SCIEnergy, Inc.(4) Energy Technology Senior Secured September 2015 Interest rate PRIME + 8.75% Scifiniti (pka Integrated Photovoltaics, Inc.) Stion Corporation.(4)(6) Energy Technology Senior Secured February 2015 Interest rate PRIME + 7.38% Energy Technology Senior Secured February 2015 Interest rate PRIME + 6.75% or Floor rate of 10.00% $ 4,571 4,005 4,096 or Floor rate of 10.63% $ 1,463 1,443 1,429 TAS Energy, Inc. Energy Technology Senior Secured February 2015 Interest rate PRIME + 7.75% or Floor rate of 11.00% $ 15,000 15,277 15,421 or Floor rate of 12.00% $ 4,448 4,596 4,685 or Floor rate of 10.00% $ 5,809 5,797 5,686 or Floor rate of 10.00% $ 5,333 5,457 5,414 Portfolio Company Drug Delivery 1-5 Years Maturity Total Revance Therapeutics, Inc. Subtotal: 1-5 Years Maturity Subtotal: Drug Delivery (8.84%)* Drug Discovery & Development 1-5 Years Maturity or Floor rate of 11.25% $ 5,000 4,897 4,897 or Floor rate of 10.65% $ 1,000 974 974 or Floor rate of 11.00% $ 15,000 15,150 15,450 or Floor rate of 9.85% $ 5,749 5,629 5,744 or Floor rate of 9.85% $ 9,798 10,032 9,943 or Floor rate of 9.85% $ 980 1,011 994 11,043 10,937 56,655 57,466 56,655 57,466 ADMA Biologics, Inc.(3) Drug Discovery & Development Senior Secured April 2016 Interest rate Prime + 2.75% Anacor Pharmaceuticals, Drug Discovery & Development Senior Secured July 2017 Interst rate PRIME + 6.40% Aveo Pharmaceuticals, Drug Discovery & Development Senior Secured September 2015 Interest rate PRIME + 7.15% Cell Therapeutics, Inc.(3)(11) Drug Discovery & Development Senior Secured October 2016 Interest rate Prime + 9.00% Cempra, Inc.(3)(11) Drug Discovery & Development Senior Secured June 2017 Interest rate PRIME + 6.30% Cleveland BioLabs, Inc.(3) Drug Discovery & Development Senior Secured January 2017 Interest rate PRIME + 6.20% Concert Pharmaceuticals, Drug Discovery & Development Senior Secured October 2015 Interest rate PRIME + 3.25% Coronado Biosciences, Drug Discovery & Development Senior Secured March 2016 Interest rate PRIME + 6.00% Dicerna Pharmaceuticals, Drug Discovery & Development Senior Secured January 2015 Interest rate PRIME + 4.40% Insmed, Incorporated(11) Drug Discovery & Development Senior Secured January 2016 Interest rate PRIME + 4.75% or Floor rate of 8.50% $ 5,000 4,956 4,892 or Floor rate of 11.65% $ 30,000 29,083 29,810 or Floor rate of 11.90% $ 19,396 19,396 19,590 or Floor rate of 12.25% $ 15,000 14,750 15,200 or Floor rate of 9.55% $ 15,000 14,795 14,550 or Floor rate of 10.45% $ 6,000 5,909 5,909 or Floor rate of 8.50% $ 15,091 14,933 14,649 or Floor rate of 9.25% $ 13,654 13,720 13,449 or Floor rate of 10.15% $ 5,026 4,991 4,981 or Floor rate of 9.25% $ 20,000 19,708 19,535 Merrimack Drug Discovery & Development Senior Secured November 2016 Interest rate PRIME + 5.30% Pharmaceuticals, Inc.(3) or Floor rate of 10.55% $ 40,000 40,314 39,455 Neuralstem, Inc.(3) Drug Discovery & Development Senior Secured June 2016 Interest rate PRIME + 7.75% or Floor rate of 11.00% $ 8,000 7,874 8,035 Paratek Pharmaceuticals, Drug Discovery & Development Senior Secured N/A Interest rate Fixed 10.00% Inc. Inc.(3)(10)(11) Inc.(4) Inc.(3)(11) Inc. Inc. Drug Discovery & Development Drug Discovery & Development Senior Secured N/A Senior Secured N/A Interest rate Fixed 10.00% N/A Total Paratek Pharmaceuticals, Inc. uniQure B.V.(5)(10)(11) Drug Discovery & Development Senior Secured October 2016 Interest rate PRIME + 8.60% $ $ $ $ 36 45 28 109 36 45 28 109 — — — — Subtotal: 1-5 Years Maturity Subtotal: Drug Discovery & Development (30.75%)* or Floor rate of 11.85% $ 10,000 9,695 9,818 200,232 199,872 200,232 199,872 See notes to consolidated financial statements. Total TAS Energy, Inc. TPI Composites, Inc. Energy Technology Senior Secured February 2015 Interest rate PRIME + 6.25% or Floor rate of 9.50% Energy Technology Senior Secured June 2016 Interest rate PRIME + 8.00% or Floor rate of 11.25% $ 4,503 4,374 19,651 $ 15,000 14,888 136,985 159,221 4,338 19,760 14,889 137,131 159,367 Subtotal: 1-5 Years Maturity Subtotal: Energy Technology (24.52%)*(13) Communications & Networking 1-5 Years Maturity OpenPeak, Inc.(11) Communications & Networking Senior Secured July 2015 Interest rate PRIME + 8.75% or Floor rate of 12.00% $ 10,029 10,714 10,814 Spring Mobile Solutions, Communications & Networking Senior Secured November 2016 Interest rate PRIME + 8.00% Inc. Subtotal: 1-5 Years Maturity Subtotal: Communications & Networking (4.72%)* or Floor rate of 11.25% $ 20,000 19,682 30,396 30,396 19,875 30,690 30,690 See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 124 4/28/15 2:54 PM 124 125 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Biotechnology Tools Senior Secured June 2016 Interest rate PRIME + 6.70% or Floor rate of 9.95% $ 4,270 $ $ 4,323 4,323 4,323 4,289 4,289 4,289 Portfolio Company Debt Investmnents Biotechnology Tools 1-5 Years Maturity Labcyte, Inc.(11) Subtotal: 1-5 Years Maturity Subtotal: Biotechnology Tools (0.66%)* Energy Technology Under 1 Year Maturity Corporation(3)(11) Enphase Energy, Inc.(11) Energy Technology Senior Secured June 2014 Interest rate PRIME + 5.75% Subtotal: Under 1 Year Maturity 1-5 Years Maturity Agrivida, Inc. Corporation(3)(11) Energy Technology Senior Secured December 2016 Interest rate PRIME + 6.75% American Superconductor Energy Technology Senior Secured November 2016 Interest rate PRIME + 7.25% APTwater, Inc Energy Technology Senior Secured April 2017 Interest rate PRIME + 6.75% BioAmber, Inc.(5)(10) Energy Technology Senior Secured June 2016 Interest rate PRIME + 6.75% Enphase Energy, Inc.(11) Energy Technology Senior Secured August 2016 Interest rate PRIME + 8.25% Fluidic, Inc. Energy Technology Senior Secured March 2016 Interest rate PRIME + 8.00% Fulcrum Bioenergy, Inc.(11) Energy Technology Senior Secured November 2016 Interest rate PRIME + 7.75% Glori Energy, Inc.(11) Energy Technology Senior Secured June 2015 Interest rate PRIME + 6.75% Polyera Corporation Energy Technology Senior Secured June 2016 Interest rate PRIME + 6.75% SCIEnergy, Inc.(4) Energy Technology Senior Secured September 2015 Interest rate PRIME + 8.75% Scifiniti (pka Integrated Energy Technology Senior Secured February 2015 Interest rate PRIME + 7.38% Photovoltaics, Inc.) Stion Corporation.(4)(6) Energy Technology Senior Secured February 2015 Interest rate PRIME + 6.75% TAS Energy, Inc. Energy Technology Senior Secured February 2015 Interest rate PRIME + 7.75% Energy Technology Senior Secured February 2015 Interest rate PRIME + 6.25% or Floor rate of 11.00% $ 4,615 4,991 4,991 or Floor rate of 11.50% $ 15,000 15,886 15,886 or Floor rate of 9.00% $ 1,315 1,358 22,236 1,358 22,236 or Floor rate of 10.00% $ 6,000 5,887 5,770 or Floor rate of 11.00% $ 10,000 9,801 9,801 or Floor rate of 10.00%, PIK Interest 2.75% $ 18,085 17,874 17,874 or Floor rate of 10.00% $ 25,000 25,298 25,798 or Floor rate of 11.50% $ 7,400 7,422 7,314 or Floor rate of 11.25% $ 5,000 4,922 4,922 or Floor rate of 11.00% $ 10,000 9,944 9,694 or Floor rate of 10.00% $ 5,333 5,457 5,414 or Floor rate of 10.00% $ 5,809 5,797 5,686 or Floor rate of 12.00% $ 4,448 4,596 4,685 or Floor rate of 10.63% $ 1,463 1,443 1,429 or Floor rate of 10.00% $ 4,571 4,005 4,096 or Floor rate of 11.00% $ 15,000 15,277 15,421 or Floor rate of 9.50% $ 4,503 4,374 19,651 136,985 159,221 4,338 19,760 14,889 137,131 159,367 Communications & Networking Senior Secured July 2015 Interest rate PRIME + 8.75% Spring Mobile Solutions, Communications & Networking Senior Secured November 2016 Interest rate PRIME + 8.00% or Floor rate of 12.00% $ 10,029 10,714 10,814 or Floor rate of 11.25% $ 20,000 19,682 30,396 30,396 19,875 30,690 30,690 See notes to consolidated financial statements. Total TAS Energy, Inc. Subtotal: 1-5 Years Maturity Subtotal: Energy Technology (24.52%)*(13) Communications & Networking 1-5 Years Maturity OpenPeak, Inc.(11) Inc. Subtotal: 1-5 Years Maturity Subtotal: Communications & Networking (4.72%)* HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Drug Delivery 1-5 Years Maturity AcelRx Pharmaceuticals, Inc.(3)(10) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Drug Delivery Senior Secured October 2017 Interest rate PRIME + 3.85% or Floor rate of 9.10% $ 15,000 $ 14,556 $ 15,006 BIND Therapeutics, Inc.(3) Drug Delivery Senior Secured September 2016 Interest rate Prime + 7.00% Celsion Corporation(3) Drug Delivery Senior Secured June 2017 or Floor rate of 10.25% Interest rate Prime + 8.00% or Floor rate of 11.25% $ 4,500 4,407 4,458 $ 5,000 4,897 4,897 Dance Biopharm, Inc. Drug Delivery Senior Secured August 2017 Interest rate PRIME + 7.4% American Superconductor Energy Technology Senior Secured December 2014 Interest rate PRIME + 7.25% Intelliject, Inc.(11) Drug Delivery Senior Secured June 2016 Brightsource Energy, Inc. Energy Technology Senior Secured January 2014 Interest rate Prime + 8.25% NuPathe, Inc.(3) Drug Delivery Senior Secured May 2016 or Floor rate of 10.65% $ 1,000 974 974 Interest rate PRIME + 5.75% or Floor rate of 11.00% Interest rate Prime - 3.25% or Floor rate of 9.85% $ 15,000 15,150 15,450 $ 5,749 5,629 5,744 Revance Therapeutics, Inc. Drug Delivery Senior Secured March 2015 Interest rate PRIME + 6.60% or Floor rate of 9.85% $ 9,798 10,032 9,943 Drug Delivery Senior Secured March 2015 Interest rate PRIME + 6.60% or Floor rate of 9.85% $ 980 1,011 994 11,043 10,937 56,655 57,466 56,655 57,466 Total Revance Therapeutics, Inc. Subtotal: 1-5 Years Maturity Subtotal: Drug Delivery (8.84%)* Drug Discovery & Development 1-5 Years Maturity ADMA Biologics, Inc.(3) Drug Discovery & Development Senior Secured April 2016 Interest rate Prime + 2.75% or Floor rate of 8.50% $ 5,000 4,956 4,892 Anacor Pharmaceuticals, Drug Discovery & Development Senior Secured July 2017 Interst rate PRIME + 6.40% Inc. or Floor rate of 11.65% $ 30,000 29,083 29,810 Aveo Pharmaceuticals, Drug Discovery & Development Senior Secured September 2015 Interest rate PRIME + 7.15% Inc.(3)(10)(11) or Floor rate of 11.90% $ 19,396 19,396 19,590 Cell Therapeutics, Inc.(3)(11) Drug Discovery & Development Senior Secured October 2016 Interest rate Prime + 9.00% or Floor rate of 12.25% Cempra, Inc.(3)(11) Drug Discovery & Development Senior Secured June 2017 Interest rate PRIME + 6.30% or Floor rate of 9.55% Cleveland BioLabs, Inc.(3) Drug Discovery & Development Senior Secured January 2017 Interest rate PRIME + 6.20% $ 15,000 14,750 15,200 $ 15,000 14,795 14,550 or Floor rate of 10.45% $ 6,000 5,909 5,909 Concert Pharmaceuticals, Drug Discovery & Development Senior Secured October 2015 Interest rate PRIME + 3.25% Inc.(4) or Floor rate of 8.50% $ 15,091 14,933 14,649 Coronado Biosciences, Drug Discovery & Development Senior Secured March 2016 Interest rate PRIME + 6.00% Inc.(3)(11) or Floor rate of 9.25% $ 13,654 13,720 13,449 Dicerna Pharmaceuticals, Drug Discovery & Development Senior Secured January 2015 Interest rate PRIME + 4.40% Inc. or Floor rate of 10.15% $ 5,026 4,991 4,981 TPI Composites, Inc. Energy Technology Senior Secured June 2016 Interest rate PRIME + 8.00% or Floor rate of 11.25% $ 15,000 14,888 Paratek Pharmaceuticals, Drug Discovery & Development Senior Secured N/A Inc. or Floor rate of 11.00% Interest rate Fixed 10.00% Drug Discovery & Development Drug Discovery & Development Senior Secured N/A Senior Secured N/A Interest rate Fixed 10.00% N/A Insmed, Incorporated(11) Drug Discovery & Development Senior Secured January 2016 Interest rate PRIME + 4.75% or Floor rate of 9.25% Merrimack Pharmaceuticals, Inc.(3) Drug Discovery & Development Senior Secured November 2016 Interest rate PRIME + 5.30% or Floor rate of 10.55% Neuralstem, Inc.(3) Drug Discovery & Development Senior Secured June 2016 Interest rate PRIME + 7.75% $ 20,000 19,708 19,535 $ 40,000 40,314 39,455 $ 8,000 7,874 8,035 $ $ $ $ 36 45 28 109 36 45 28 109 — — — — Total Paratek Pharmaceuticals, Inc. uniQure B.V.(5)(10)(11) Drug Discovery & Development Subtotal: 1-5 Years Maturity Subtotal: Drug Discovery & Development (30.75%)* Senior Secured October 2016 Interest rate PRIME + 8.60% or Floor rate of 11.85% $ 10,000 9,695 9,818 200,232 199,872 200,232 199,872 124 125 See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 125 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Portfolio Company Sub-Industry Interest Rate and Floor Amount Cost(2) Value(3) Principal Principal Portfolio Company Electronics & Computer Hardware 1-5 Years Maturity Clustrix, Inc. Electronics & Computer Hardware Senior Secured December 2015 Identive Group, Inc.(3)(11) Electronics & Computer Hardware Senior Secured November 2015 OCZ Technology Group, Electronics & Computer Hardware Senior Secured April 2016 Inc. Plures Technologies, Inc.(3) Electronics & Computer Hardware Senior Secured October 2016 Subtotal: 1-5 Years Maturity Subtotal: Electronics & Computer Hardware (1.38%)* Healthcare Services, Other 1-5 Years Maturity InstaMed Communications, LLC Healthcare Services, Other Senior Secured December 2016 MDEverywhere, Inc. Healthcare Services, Other Senior Secured June 2016 Orion Healthcorp, Inc. Healthcare Services, Other Senior Secured June 2017 Healthcare Services, Other Senior Secured June 2017 Healthcare Services, Other Senior Secured June 2016 Total Orion Healthcorp, Inc. Pacific Child & Family Associates, LLC Healthcare Services, Other Senior Secured January 2015 Healthcare Services, Other Senior Secured January 2015 Total Pacific Child & Family Associates, LLC Subtotal: 1-5 Years Maturity Subtotal: Healthcare Services, Other (4.47%)* Information Services 1-5 Years Maturity Eccentex Corporation(11) Information Services Senior Secured May 2015 InXpo, Inc. Information Services Senior Secured April 2016 Jab Wireless, Inc. Information Services Senior Secured November 2017 Information Services Senior Secured November 2017 Total Jab Wireless, Inc. Womensforum.com(11) Information Services Senior Secured October 2016 Information Services Senior Secured October 2016 Information Services Senior Secured April 2015 Total Womensforum.com Subtotal: 1-5 Years Maturity Subtotal: Information Services (7.10%)* HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Type of Investment(1) Maturity Date or Floor rate of 9.75% $ 2,137 $ 2,115 $ 2,115 or Floor rate of 13.00% $ 6,468 6,467 3,566 or Floor rate of 11.00%, PIK Interest 1.00% $ 10,777 10,777 5,943 or Floor rate of 13.00% $ 563 563 310 or Floor rate of 13.00% $ 5,000 5,000 2,757 $ 22,807 22,806 12,576 24,921 14,691 or Floor rate of 8.50% $ 6,351 6,216 6,054 or Floor rate 10.50%, PIK Interest 1.00% or Floor rate 12.50%, PIK Interest 1.5% or Floor rate of 10.25%, PIK Interest 2.50% $ 4,018 3,944 3,916 $ 24,685 24,284 23,582 $ 12,365 12,283 12,128 or Floor rate of 11.50% $ 5,000 4,842 4,842 Internet Consumer & Business Services Under 1 Year Maturity Gazelle, Inc. Internet Consumer & Business Services Senior Secured October 2014 Interest rate PRIME + 6.50% Tectura Corporation(8) Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 8.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Internet Consumer & Business Services Senior Secured May 2014 Interest rate LIBOR + 10.00% Total Tectura Corporation Subtotal: Under 1 Year Maturity 1-5 Years Maturity Blurb, Inc. Internet Consumer & Business Services Senior Secured December 2015 Interest rate PRIME + 5.25% CashStar, Inc. Internet Consumer & Business Services Senior Secured June 2016 Interest rate Prime + 6.25% Education Dynamics, LLC Internet Consumer & Business Services Senior Secured March 2016 Interest rate Libor + 12.5% Gazelle, Inc. Internet Consumer & Business Services Senior Secured April 2016 Interest rate Prime + 7.00% Just Fabulous, Inc. Internet Consumer & Business Services Senior Secured February 2017 Interest rate PRIME + 8.25% NetPlenish(8) Internet Consumer & Business Services Senior Secured September 2015 Interest rate FIXED 10.00% Internet Consumer & Business Services Senior Secured April 2015 Interest rate FIXED 10.00% Internet Consumer & Business Services Senior Secured February 2016 Interest rate PRIME + 7.25% Internet Consumer & Business Services Senior Secured September 2015 Interest rate Prime + 6.88% Internet Consumer & Business Services Senior Secured September 2015 Interest rate Prime + 7.25% or Floor rate of 10.50%, PIK Interest 2.00% or Floor rate of 10.13%, PIK Interest 2.00% or Floor rate of 11.00%, PIK Interest 2.00% Total NetPlenish Reply! Inc.(11) Total Reply! Inc. ShareThis, Inc. Internet Consumer & Business Services Senior Secured June 2016 Interest rate PRIME + 7.50% VaultLogix, LLC Internet Consumer & Business Services Senior Secured September 2015 Interest rate LIBOR + 7.00% Internet Consumer & Business Services Senior Secured September 2016 Interest rate LIBOR + 8.50% $ $ $ 383 97 480 375 97 472 — — — $ 3,031 3,051 3,034 $ 9,169 9,086 9,169 $ 2,020 2,044 2,070 $ 14,220 14,181 14,273 or Floor rate of 10.75% $ 14,578 14,160 14,160 or Floor rate of 8.50% $ 7,897 7,927 7,525 or Floor rate of 10.00%, PIK interest 2.50% $ 7,949 7,898 7,397 $ 15,847 15,826 14,923 or Floor rate of 9.50% $ 10,000 9,940 9,665 106,148 103,545 131,069 118,236 Total VaultLogix, LLC WaveMarket, Inc.(11) Subtotal: 1-5 Years Maturity Internet Consumer & Business Services Senior Secured September 2015 Interest rate Prime + 5.75% Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate Prime + 8.75% or Floor rate of 12.50%, PIK Interest 3.00% Interest rate Prime + 12.75% or Floor rate of 16.00%, PIK Interest 4.00% $ 524 $ 526 $ 526 $ 5,938 5,696 5,755 $ 1,221 1,221 1,221 $ 2,046 1,958 1,458 9,400 8,959 9,400 8,959 Interest rate PRIME + 7.25% or Floor rate of 10.50% Interest rate LIBOR + 9.50% or Floor rate of 10.75% Interest rate LIBOR + 10.50% or Floor rate of 12.00%, PIK Interest 3.00% Interest rate LIBOR + 9.50% or Floor rate of 11.00% Interest rate LIBOR + 8.25% or Floor rate of 9.50% Interest rate LIBOR + 9.00% or Floor rate of 11.50% Interest rate LIBOR + 11.00% or Floor rate of 14.00%, PIK Interest 3.75% Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate Libor + 6.75% or Floor rate of 8.00% Interest rate Prime + 6.75% or Floor rate of 8.00% Interest rate LIBOR + 7.50% or Floor rate of 10.25%, PIK Interest 2.00% Interest rate LIBOR + 6.50% or Floor rate of 9.25% Interest rate LIBOR + 6.50% or Floor rate of 9.00% $ 3,000 2,979 2,979 $ 2,000 1,875 1,907 $ 6,591 6,467 6,413 $ 9,000 8,838 8,445 $ 500 $ 16,091 465 461 15,769 15,318 $ 1,946 2,017 1,988 $ $ 6,836 8,782 6,867 6,833 8,884 29,508 29,025 29,508 29,025 8,822 $ 657 658 185 $ 2,550 2,489 2,384 $ 30,000 29,822 29,822 $ 2,000 $ 32,000 1,996 1,996 31,818 31,818 $ 4,607 4,536 4,127 $ 6,900 6,793 6,470 Subtotal: Internet Consumer & Business Services (18.19%)* $ 1,250 $ 12,757 1,227 1,156 12,556 11,754 47,521 46,140 47,521 46,140 See notes to consolidated financial statements. See notes to consolidated financial statements. 126 127 16323_HER-10K_CS6-r4.indd 126 4/28/15 2:54 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Portfolio Company Internet Consumer & Business Services Under 1 Year Maturity Gazelle, Inc. Internet Consumer & Business Services Senior Secured October 2014 Identive Group, Inc.(3)(11) Electronics & Computer Hardware Senior Secured November 2015 Interest rate PRIME + 7.75% Tectura Corporation(8) Internet Consumer & Business Services Senior Secured May 2014 OCZ Technology Group, Electronics & Computer Hardware Senior Secured April 2016 Interest rate Prime + 8.75% Internet Consumer & Business Services Senior Secured May 2014 Inc. Plures Technologies, Inc.(3) Electronics & Computer Hardware Senior Secured October 2016 Interest rate Prime + 12.75% Internet Consumer & Business Services Senior Secured May 2014 Subtotal: 1-5 Years Maturity Subtotal: Electronics & Computer Hardware (1.38%)* Healthcare Services, Other 1-5 Years Maturity LLC InstaMed Communications, Healthcare Services, Other Senior Secured December 2016 Interest rate PRIME + 7.25% MDEverywhere, Inc. Healthcare Services, Other Senior Secured June 2016 Interest rate LIBOR + 9.50% or Floor rate of 10.50% $ 3,000 2,979 2,979 CashStar, Inc. Internet Consumer & Business Services Senior Secured June 2016 Orion Healthcorp, Inc. Healthcare Services, Other Senior Secured June 2017 Interest rate LIBOR + 10.50% Education Dynamics, LLC Internet Consumer & Business Services Senior Secured March 2016 Healthcare Services, Other Senior Secured June 2017 Interest rate LIBOR + 9.50% Gazelle, Inc. Internet Consumer & Business Services Senior Secured April 2016 or Floor rate of 9.50% $ 500 465 461 Just Fabulous, Inc. Internet Consumer & Business Services Senior Secured February 2017 Internet Consumer & Business Services Senior Secured May 2014 Total Tectura Corporation Subtotal: Under 1 Year Maturity 1-5 Years Maturity Blurb, Inc. Internet Consumer & Business Services Senior Secured December 2015 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Electronics & Computer Hardware 1-5 Years Maturity Clustrix, Inc. Electronics & Computer Hardware Senior Secured December 2015 Interest rate PRIME + 6.50% Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal or Floor rate of 9.75% $ 524 $ 526 $ 526 or Floor rate of 11.00% $ 5,938 5,696 5,755 or Floor rate of 12.50%, PIK Interest 3.00% or Floor rate of 16.00%, PIK Interest 4.00% $ 1,221 1,221 1,221 $ 2,046 1,958 1,458 9,400 8,959 9,400 8,959 or Floor rate of 10.75% $ 2,000 1,875 1,907 or Floor rate of 12.00%, PIK Interest 3.00% $ 6,591 6,467 6,413 or Floor rate of 11.00% $ 9,000 8,838 8,445 $ 16,091 15,769 15,318 or Floor rate of 11.50% $ 1,946 2,017 1,988 or Floor rate of 14.00%, PIK Interest 3.75% $ $ 6,836 6,867 6,833 8,782 8,884 8,822 29,508 29,025 29,508 29,025 or Floor rate of 10.25% $ 657 658 185 or Floor rate of 10.75% $ 2,550 2,489 2,384 or Floor rate of 8.00% $ 30,000 29,822 29,822 or Floor rate of 8.00% $ 2,000 1,996 1,996 $ 32,000 31,818 31,818 or Floor rate of 10.25%, PIK Interest 2.00% $ 4,607 4,536 4,127 or Floor rate of 9.25% $ 6,900 6,793 6,470 or Floor rate of 9.00% $ 1,250 1,227 1,156 $ 12,757 12,556 11,754 47,521 46,140 47,521 46,140 Healthcare Services, Other Senior Secured June 2016 Interest rate LIBOR + 8.25% Total Orion Healthcorp, Inc. Associates, LLC Pacific Child & Family Healthcare Services, Other Senior Secured January 2015 Interest rate LIBOR + 9.00% Healthcare Services, Other Senior Secured January 2015 Interest rate LIBOR + 11.00% Total Pacific Child & Family Associates, LLC Subtotal: 1-5 Years Maturity Subtotal: Healthcare Services, Other (4.47%)* Information Services 1-5 Years Maturity Eccentex Corporation(11) Information Services Senior Secured May 2015 Interest rate PRIME + 7.00% InXpo, Inc. Information Services Senior Secured April 2016 Interest rate PRIME + 7.50% Jab Wireless, Inc. Information Services Senior Secured November 2017 Interest rate Libor + 6.75% Information Services Senior Secured November 2017 Interest rate Prime + 6.75% Total Jab Wireless, Inc. Womensforum.com(11) Information Services Senior Secured October 2016 Interest rate LIBOR + 7.50% Information Services Senior Secured October 2016 Interest rate LIBOR + 6.50% Information Services Senior Secured April 2015 Interest rate LIBOR + 6.50% Total Womensforum.com Subtotal: 1-5 Years Maturity Subtotal: Information Services (7.10%)* NetPlenish(8) Total NetPlenish Reply! Inc.(11) Internet Consumer & Business Services Senior Secured September 2015 Interest rate FIXED 10.00% Interest rate FIXED 10.00% Internet Consumer & Business Services Senior Secured April 2015 Internet Consumer & Business Services Senior Secured February 2016 Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK Interest 2.00% $ 3,031 3,051 3,034 Internet Consumer & Business Services Senior Secured September 2015 Interest rate Prime + 6.88% Internet Consumer & Business Services Senior Secured September 2015 Total Reply! Inc. ShareThis, Inc. Internet Consumer & Business Services Senior Secured June 2016 VaultLogix, LLC Internet Consumer & Business Services Senior Secured September 2015 Internet Consumer & Business Services Senior Secured September 2016 Total VaultLogix, LLC WaveMarket, Inc.(11) Internet Consumer & Business Services Senior Secured September 2015 Subtotal: 1-5 Years Maturity Subtotal: Internet Consumer & Business Services (18.19%)* or Floor rate of 10.13%, PIK Interest 2.00% Interest rate Prime + 7.25% or Floor rate of 11.00%, PIK Interest 2.00% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate LIBOR + 7.00% or Floor rate of 8.50% Interest rate LIBOR + 8.50% or Floor rate of 10.00%, PIK interest 2.50% Interest rate Prime + 5.75% or Floor rate of 9.50% $ 9,169 9,086 9,169 $ 2,020 2,070 $ 14,220 14,181 14,273 2,044 $ 14,578 14,160 14,160 $ 7,897 7,927 7,525 $ 7,949 7,397 $ 15,847 15,826 14,923 7,898 $ 10,000 9,940 9,665 106,148 103,545 131,069 118,236 See notes to consolidated financial statements. See notes to consolidated financial statements. 126 127 16323_HER-10K_CS6-r4.indd 127 4/28/15 2:54 PM Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 8.00% or Floor rate of 11.00%, PIK Interest 1.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate PRIME + 5.25% or Floor rate of 8.50% Interest rate Prime + 6.25% or Floor rate 10.50%, PIK Interest 1.00% Interest rate Libor + 12.5% or Floor rate 12.50%, PIK Interest 1.5% Interest rate Prime + 7.00% or Floor rate of 10.25%, PIK Interest 2.50% Interest rate PRIME + 8.25% or Floor rate of 11.50% $ 2,137 $ 2,115 $ 2,115 $ 6,468 6,467 3,566 $ 10,777 10,777 5,943 $ 563 563 310 $ 5,000 5,000 2,757 $ 22,807 22,806 12,576 24,921 14,691 $ 6,351 6,216 6,054 $ 4,018 3,944 3,916 $ 24,685 24,284 23,582 $ 12,365 12,283 12,128 $ 5,000 383 $ 97 $ 480 $ 4,842 375 97 472 4,842 — — — HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Portfolio Company Media/Content/Info Under 1 Year Maturity Zoom Media Group, Inc. Subtotal: Under 1 Year Maturity 1-5 Years Maturity Zoom Media Group, Inc. Media/Content/Info Subtotal: 1-5 Years Maturity Subtotal: Media/Content/Info (1.22%)* Medical Devices & Equipment Under 1 Year Maturity Oraya Therapeutics, Inc.(9)(11) Subtotal: Under 1 Year Maturity 1-5 Years Maturity Baxano Surgical, Inc.(3) Medical Devices & Equipment Media/Content/Info Senior Secured December 2014 Interest rate PRIME + 5.25% or Floor rate of 8.50% $ 4,000 $ Senior Secured December 2015 Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK interest 3.75% $ 4,288 Senior Secured December 2014 Interest rate Fixed 7.00% $ 500 Medical Devices & Equipment Senior Secured March 2017 Home Dialysis Plus, Inc. Medical Devices & Equipment Senior Secured April 2017 InspireMD, Inc.(3)(5)(10) Medical Devices & Equipment Senior Secured February 2017 Medrobotics Corporation Medical Devices & Equipment Senior Secured March 2016 NetBio, Inc. Medical Devices & Equipment Senior Secured August 2017 NinePoint Medical, Inc. Medical Devices & Equipment Senior Secured January 2016 Oraya Therapeutics, Inc.(9)(11) Medical Devices & Equipment Senior Secured September 2015 SonaCare Medical, LLC Medical Devices & Equipment Senior Secured April 2016 (pka US HIFU, LLC)(11) United Orthopedic Group, Medical Devices & Equipment Senior Secured July 2016 Inc. ViewRay, Inc. Medical Devices & Equipment Senior Secured June 2017 Subtotal: 1-5 Years Maturity Subtotal: Medical Devices & Equipment (14.59%)* Semiconductors 1-5 Years Maturity Achronix Semiconductor Corporation SiTime Corporation Semiconductors Semiconductors Subtotal: 1-5 Years Maturity Subtotal: Semiconductors (0.69%)* Senior Secured January 2015 Senior Secured September 2016 3,858 $ 3,858 3,858 3,858 4,122 4,071 4,122 4,071 7,981 7,929 500 500 500 500 Portfolio Company Software Under 1 Year Maturity Clickfox, Inc. StartApp, Inc. Software Software Subtotal: Under 1 Year Maturity 1-5 Years Maturity Clickfox, Inc. Touchcommerce, Inc. Software Senior Secured December 2014 Interest rate Prime + 2.25% or Senior Secured September 2014 Interest rate PRIME + 6.75% Senior Secured December 2014 Interest rate PRIME + 2.75% or Floor rate of 6.00% $ 200 191 191 or Floor rate of 10.00% $ 2,000 $ 1,979 $ 1,979 Floor rate of 6.50% $ 3,111 3,071 5,241 2,970 5,140 Software Senior Secured November 2015 Interest rate PRIME + 8.25% Hillcrest Laboratories, Inc. Software Senior Secured July 2015 Interest rate PRIME + 7.50% Mobile Posse, Inc. Software Senior Secured December 2016 Interest rate PRIME + 7.50% or Floor rate of 11.50% $ 5,842 5,530 5,530 or Floor rate of 10.75% $ 2,660 2,630 2,604 or Floor rate of 10.75% $ 4,000 3,876 3,879 Neos Geosolutions, Inc. Software Senior Secured May 2016 Interest rate Prime + 5.75% Senior Secured July 2017 Interest rate PRIME + 7.00% or Floor rate of 10.25% $ 5,500 5,332 5,332 or Floor rate of 10.50% $ 3,771 3,808 3,705 Senior Secured March 2017 Interest rate PRIME + 7.75% or Floor rate of 11.00% $ 2,500 2,507 2,498 or Floor rate of 10.25% $ 5,000 4,688 4,767 28,372 28,315 33,613 33,455 Rockwell Medical, Inc. Specialty Pharmaceuticals Senior Secured March 2017 Interest rate PRIME + 9.25% or Floor rate of 12.50% $ 20,000 20,055 20,055 Sonian, Inc. StartApp, Inc. Software Software Subtotal: 1-5 Years Maturity Subtotal: Software (5.15%)* Specialty Pharmaceuticals 1-5 Years Maturity Subtotal: 1-5 Years Maturity Subtotal: Specialty Pharmaceuticals (3.09%)* Surgical Devices 1-5 Years Maturity Transmedics, Inc.(11) Subtotal: 1-5 Years Maturity Subtotal: Surgical Devices (1.11%)* Total Debt Investments (126.46%)* 20,055 20,055 20,055 20,055 7,207 7,207 7,207 7,207 7,207 7,207 835,882 821,988 Surgical Devices Senior Secured November 2015 Interest rate FIXED 12.95% $ 7,250 $ 10,000 $ 10,000 9,732 9,732 9,696 9,696 Touchcommerce, Inc. Software Senior Secured June 2017 Interest rate Prime + 6.00% Interest rate PRIME + 7.75% or Floor rate of 12.5% Interest rate PRIME + 6.35% or Floor rate of 9.60% Interest rate PRIME + 5.00% or Floor rate of 10.50% Interest rate PRIME + 7.85% or Floor rate of 11.10% Interest rate PRIME + 5.00% or Floor rate of 11.00% Interest rate PRIME + 5.85% or Floor rate of 9.10% Interest rate PRIME + 5.50% or Floor rate of 10.25% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 8.60% or Floor rate of 11.85% Interest rate PRIME + 7.00% or Floor rate of 10.25%, PIK Interest 1.50% $ 7,500 7,222 7,222 $ $ $ $ $ 4,561 4,489 4,454 5,000 4,788 4,788 5,946 5,911 5,794 7,064 6,980 7,162 5,667 5,754 5,818 $ 25,000 $ 15,000 24,647 25,166 14,489 14,489 93,707 94,320 94,206 94,819 Interest rate PRIME + 10.60% or Floor rate of 13.85% Interest rate PRIME + 6.50% or Floor rate of 9.75% $ $ 1,032 1,023 1,006 3,500 3,473 3,473 4,495 4,479 4,495 4,479 See notes to consolidated financial statements. See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 128 4/28/15 2:55 PM 128 129 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Software Software Senior Secured September 2014 Senior Secured December 2014 Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 2.75% or Floor rate of 6.00% Interest rate Prime + 2.25% or Floor rate of 6.50% $ 2,000 $ 1,979 $ 1,979 $ 200 191 191 $ 3,111 3,071 5,241 2,970 5,140 Zoom Media Group, Inc. Media/Content/Info Senior Secured December 2015 Interest rate PRIME + 7.25% or Touchcommerce, Inc. Software Senior Secured December 2014 Floor rate of 10.50%, PIK interest 3.75% $ 4,288 4,122 4,071 4,122 4,071 7,981 7,929 Subtotal: Under 1 Year Maturity 1-5 Years Maturity Clickfox, Inc. Software Senior Secured November 2015 Hillcrest Laboratories, Inc. Software Senior Secured July 2015 Oraya Therapeutics, Inc.(9)(11) Medical Devices & Equipment Senior Secured December 2014 Interest rate Fixed 7.00% $ 500 Mobile Posse, Inc. Software Senior Secured December 2016 Floor rate of 12.5% $ 7,500 7,222 7,222 Floor rate of 9.60% $ 10,000 9,732 9,732 Sonian, Inc. StartApp, Inc. Software Software Senior Secured July 2017 Senior Secured March 2017 Floor rate of 10.50% $ 10,000 9,696 9,696 Touchcommerce, Inc. Software Senior Secured June 2017 Neos Geosolutions, Inc. Software Senior Secured May 2016 Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate Prime + 5.75% or Floor rate of 10.50% Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate Prime + 6.00% or Floor rate of 10.25% HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Amount Cost(2) Value(3) Principal Zoom Media Group, Inc. Media/Content/Info Senior Secured December 2014 Interest rate PRIME + 5.25% or Floor rate of 8.50% $ 4,000 $ 3,858 $ 3,858 Portfolio Company Software Under 1 Year Maturity Clickfox, Inc. 3,858 3,858 StartApp, Inc. Portfolio Company Media/Content/Info Under 1 Year Maturity Subtotal: Under 1 Year Maturity 1-5 Years Maturity Subtotal: 1-5 Years Maturity Subtotal: Media/Content/Info (1.22%)* Medical Devices & Equipment Under 1 Year Maturity Subtotal: Under 1 Year Maturity 1-5 Years Maturity 500 500 500 500 Baxano Surgical, Inc.(3) Medical Devices & Equipment Senior Secured March 2017 Interest rate PRIME + 7.75% or Home Dialysis Plus, Inc. Medical Devices & Equipment Senior Secured April 2017 Interest rate PRIME + 6.35% or InspireMD, Inc.(3)(5)(10) Medical Devices & Equipment Senior Secured February 2017 Interest rate PRIME + 5.00% or Medrobotics Corporation Medical Devices & Equipment Senior Secured March 2016 Interest rate PRIME + 7.85% or NetBio, Inc. Medical Devices & Equipment Senior Secured August 2017 Interest rate PRIME + 5.00% or NinePoint Medical, Inc. Medical Devices & Equipment Senior Secured January 2016 Interest rate PRIME + 5.85% or Oraya Therapeutics, Inc.(9)(11) Medical Devices & Equipment Senior Secured September 2015 Interest rate PRIME + 5.50% or SonaCare Medical, LLC Medical Devices & Equipment Senior Secured April 2016 Interest rate PRIME + 7.75% or United Orthopedic Group, Medical Devices & Equipment Senior Secured July 2016 Interest rate PRIME + 8.60% or (pka US HIFU, LLC)(11) Inc. ViewRay, Inc. Medical Devices & Equipment Senior Secured June 2017 Interest rate PRIME + 7.00% or Subtotal: 1-5 Years Maturity Subtotal: Medical Devices & Equipment (14.59%)* Semiconductors 1-5 Years Maturity Corporation Subtotal: 1-5 Years Maturity Subtotal: Semiconductors (0.69%)* Achronix Semiconductor Semiconductors Senior Secured January 2015 Interest rate PRIME + 10.60% SiTime Corporation Semiconductors Senior Secured September 2016 Interest rate PRIME + 6.50% or Floor rate of 11.10% $ 4,561 4,489 4,454 Floor rate of 11.00% $ 5,000 4,788 4,788 Floor rate of 9.10% $ 5,946 5,911 5,794 Floor rate of 10.25% $ 7,064 6,980 7,162 Floor rate of 11.00% $ 5,667 5,754 5,818 Floor rate of 11.85% $ 25,000 24,647 25,166 Floor rate of 10.25%, PIK Interest 1.50% $ 15,000 14,489 14,489 93,707 94,320 94,206 94,819 or Floor rate of 13.85% $ 1,032 1,023 1,006 Floor rate of 9.75% $ 3,500 3,473 3,473 4,495 4,479 4,495 4,479 Subtotal: 1-5 Years Maturity Subtotal: Software (5.15%)* Specialty Pharmaceuticals 1-5 Years Maturity Rockwell Medical, Inc. Specialty Pharmaceuticals Senior Secured March 2017 Interest rate PRIME + 9.25% or Floor rate of 12.50% Subtotal: 1-5 Years Maturity Subtotal: Specialty Pharmaceuticals (3.09%)* Surgical Devices 1-5 Years Maturity Transmedics, Inc.(11) Subtotal: 1-5 Years Maturity Subtotal: Surgical Devices (1.11%)* Total Debt Investments (126.46%)* Surgical Devices Senior Secured November 2015 Interest rate FIXED 12.95% $ 5,842 5,530 5,530 $ 2,660 2,630 2,604 $ 4,000 3,876 3,879 $ 3,771 3,808 3,705 $ 5,500 5,332 5,332 $ 2,500 2,507 2,498 $ 5,000 4,688 4,767 28,372 28,315 33,613 33,455 $ 20,000 20,055 20,055 20,055 20,055 20,055 20,055 $ 7,250 7,207 7,207 7,207 7,207 7,207 7,207 835,882 821,988 See notes to consolidated financial statements. See notes to consolidated financial statements. 128 129 16323_HER-10K_CS6-r4.indd 129 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Equity Preferred Series C 189,394 $ 500 $ 687 687 500 Portfolio Company Equity Investments Biotechnology Tools NuGEN Technologies, Inc. Subtotal: Biotechnology Tools (0.11%)* Communications & Networking GlowPoint, Inc.(3) Peerless Network, Inc. Stoke, Inc. Subtotal: Communications & Networking (0.62%)* Communications & Networking Communications &Networking Communications &Networking Consumer & Business Products Caivis Acquisition Corporation IPA Holdings, LLC Market Force Information, Inc. Subtotal: Consumer & Business Products (0.24%)* Consumer &Business Products Consumer &Business Products Consumer &Business Products Equity Equity Equity Equity Equity Equity Common Stock Preferred Series A Preferred Series E 114,192 1,000,000 152,905 Common Stock LLC Interest Preferred Series B 295,861 500,000 187,970 Diagnostic Equity Common Stock 937,998 Diagnostic Singulex, Inc. Subtotal: Diagnostic (0.12%)* Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Merrion Pharmaceuticals, Plc(3)(5)(10) NuPathe, Inc.(3) Transcept Pharmaceuticals, Inc.(3) Subtotal: Drug Delivery (0.20%)* Drug Discovery & Development Acceleron Pharma, Inc.(3) Aveo Pharmaceuticals, Inc.(3)(10) Dicerna Pharmaceuticals, Inc.(12) Total Dicerna Pharmaceuticals, Inc. Inotek Pharmaceuticals Corporation Merrimack Pharmaceuticals, Inc.(3) Paratek Pharmaceuticals, Inc. Total Paratek Pharmaceuticals, Inc. Subtotal: Drug Discovery & Development (2.12%)* Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Equity Equity Equity Equity Equity Equity Equity Equity Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series B Preferred Series C Drug Discovery &Development Equity Common Stock Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Equity Equity Equity Common Stock Common Stock Preferred Series H 102 1,000 500 1,602 819 500 500 1,819 157 3,621 224 4,002 598 676 285 1,559 750 750 750 750 89,243 178 1,009 20,000 50,000 41,570 256,410 167,864 20,107 142,858 162,965 15,334 546,448 85,450 244,158 329,608 9 146 500 833 1,505 842 503 1,000 1,503 1,500 2,000 5 1,000 1,005 8,355 — 164 140 1,313 9,286 307 228 1,055 1,283 — 2,912 — — — 13,788 See notes to consolidated financial statements. 130 16323_HER-10K_CS6-r4.indd 130 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Information Services Information Services Equity Equity Preferred Series C Common Stock 263,158 $ 250 $ — Portfolio Company Information Services Buzznet, Inc. Good Technologies, Inc. (pka Visto Corporation) Subtotal: Information Services (0.00%)* Internet Consumer & Business Services Blurb, Inc. Philotic, Inc. Progress Financial Trulia, Inc.(3) Media/Content/Info Media, Inc.) Internet Consumer &Business Services Internet Consumer &Business Services Internet Consumer &Business Services Internet Consumer &Business Services Equity Equity Equity Equity Preferred Series B Common Stock Preferred Series G Common Stock Subtotal: Internet Consumer & Business Services (0.27%)* Everyday Health, Inc. (pka Waterfront Media/Content/Info Equity Preferred Series D 500,000 220,653 8,121 218,351 29,340 145,590 603 853 175 92 250 141 658 1,000 1,000 925 250 1,000 3,000 655 3,945 7,600 9,775 500 500 1,000 2,001 500 4,501 51 398 307 — — 750 750 250 282 580 1,112 1,100 300 650 2,050 3,162 — — 444 280 1,035 1,759 425 425 466 269 — 411 135 4,006 4,552 5,287 1,607 1,088 2,695 7,031 2,846 2,241 3,974 687 16,779 94 849 337 — — — — 73 123 749 945 303 212 886 1,401 2,346 36,808 52,670 LLC Interest Preferred Series E Preferred Series D-1 Preferred Series B Preferred Series C 2,024,092 136,798 4,118,444 6,185,567 1,927,309 Preferred Series D 41,352,489 49,465,365 Preferred Series C 1,196,845 Preferred Series D 635,513 986 508 1,832,358 1,494 Preferred Series C Preferred Series D Preferred Series D-1 Preferred Series D-2 Preferred Series E Preferred Series A-3 Preferred Series D Preferred Series B Preferred Series E Preferred Series E-1 Preferred Series G Preferred Series B Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series D 390,625 158,133 124,511 220,751 38,183 932,203 53,614 319,099 190,170 26,955 4,667,636 4,936,420 219,298 656,538 1,621,553 2,497,389 88,961 119,999 260,000 468,960 6,751 20,754 241,829 750 — Software Software Software Software Software Software Software Software Software Software Subtotal: Media/Content/Info (0.07%)* Medical Devices & Equipment Gelesis, Inc.(6) Medrobotics Corporation Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Total Optiscan Biomedical, Corp. Subtotal: Medical Devices & Equipment (0.81%)* Software Atrenta, Inc. Total Atrenta, Inc. Box, Inc. Total Box, Inc. CapLinked, Inc. ForeScout Technologies, Inc. HighRoads, Inc. Subtotal: Software (3.19%)* Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Total QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.00%)* Surgical Devices Gynesonics, Inc. Total Gynesonics, Inc. Transmedics, Inc. Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices Surgical Devices Subtotal: Surgical Devices (0.36%)* Total Equity Investments (8.10%)* Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity 131 See notes to consolidated financial statements. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Equity Investments Biotechnology Tools Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) NuGEN Technologies, Inc. Biotechnology Tools Equity Preferred Series C 189,394 $ 500 $ 687 Portfolio Company Information Services Buzznet, Inc. Good Technologies, Inc. (pka Visto Corporation) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Information Services Information Services Equity Equity Preferred Series C Common Stock 263,158 $ 250 $ — Subtotal: Biotechnology Tools (0.11%)* 500 687 Subtotal: Information Services (0.00%)* Internet Consumer & Business Services Blurb, Inc. Philotic, Inc. Progress Financial Trulia, Inc.(3) Subtotal: Internet Consumer & Business Services (0.27%)* Internet Consumer &Business Services Internet Consumer &Business Services Internet Consumer &Business Services Internet Consumer &Business Services Equity Equity Equity Equity Preferred Series B Common Stock Preferred Series G Common Stock Media/Content/Info Everyday Health, Inc. (pka Waterfront Media, Inc.) Media/Content/Info Equity Preferred Series D 500,000 220,653 8,121 218,351 29,340 603 853 175 92 250 141 658 — — 444 280 1,035 1,759 145,590 1,000 1,000 425 425 Subtotal: Media/Content/Info (0.07%)* Medical Devices & Equipment Gelesis, Inc.(6) Medrobotics Corporation Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Total Optiscan Biomedical, Corp. Subtotal: Medical Devices & Equipment (0.81%)* Software Atrenta, Inc. Total Atrenta, Inc. Box, Inc. Total Box, Inc. CapLinked, Inc. ForeScout Technologies, Inc. HighRoads, Inc. Subtotal: Software (3.19%)* Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Software Software Software Software Software Software Software Software Software Software Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Total QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.00%)* Surgical Devices Gynesonics, Inc. Surgical Devices Surgical Devices Surgical Devices Total Gynesonics, Inc. Transmedics, Inc. Surgical Devices Surgical Devices Surgical Devices Subtotal: Surgical Devices (0.36%)* Total Equity Investments (8.10%)* Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity LLC Interest Preferred Series E Preferred Series D-1 Preferred Series B Preferred Series C Preferred Series D 2,024,092 136,798 4,118,444 6,185,567 1,927,309 41,352,489 49,465,365 Preferred Series C Preferred Series D Preferred Series C Preferred Series D Preferred Series D-1 Preferred Series D-2 Preferred Series E Preferred Series A-3 Preferred Series D Preferred Series B 1,196,845 635,513 1,832,358 390,625 158,133 124,511 220,751 38,183 932,203 53,614 319,099 190,170 Preferred Series E Preferred Series E-1 Preferred Series G Preferred Series B Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series D 241,829 26,955 4,667,636 4,936,420 219,298 656,538 1,621,553 2,497,389 88,961 119,999 260,000 468,960 925 250 1,000 3,000 655 3,945 7,600 9,775 986 508 1,494 500 500 1,000 2,001 500 4,501 51 398 307 6,751 750 — — 750 750 250 282 580 1,112 1,100 300 650 2,050 3,162 36,808 466 269 — 411 135 4,006 4,552 5,287 1,607 1,088 2,695 7,031 2,846 2,241 3,974 687 16,779 94 849 337 20,754 — — — — — 73 123 749 945 303 212 886 1,401 2,346 52,670 Diagnostic Equity Common Stock 937,998 Communications & Networking GlowPoint, Inc.(3) Peerless Network, Inc. Stoke, Inc. Communications & Networking Communications &Networking Communications &Networking Subtotal: Communications & Networking (0.62%)* Consumer & Business Products Caivis Acquisition Corporation IPA Holdings, LLC Market Force Information, Inc. Consumer &Business Products Consumer &Business Products Consumer &Business Products Subtotal: Consumer & Business Products (0.24%)* Diagnostic Singulex, Inc. Subtotal: Diagnostic (0.12%)* Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Merrion Pharmaceuticals, Plc(3)(5)(10) NuPathe, Inc.(3) Transcept Pharmaceuticals, Inc.(3) Subtotal: Drug Delivery (0.20%)* Drug Discovery & Development Acceleron Pharma, Inc.(3) Aveo Pharmaceuticals, Inc.(3)(10) Dicerna Pharmaceuticals, Inc.(12) Total Dicerna Pharmaceuticals, Inc. Inotek Pharmaceuticals Corporation Merrimack Pharmaceuticals, Inc.(3) Paratek Pharmaceuticals, Inc. Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Drug Discovery &Development Total Paratek Pharmaceuticals, Inc. Subtotal: Drug Discovery & Development (2.12%)* Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Common Stock 114,192 Preferred Series A 1,000,000 Preferred Series E 152,905 102 1,000 500 1,602 157 3,621 224 4,002 Common Stock LLC Interest Preferred Series B 295,861 500,000 187,970 819 500 500 598 676 285 1,819 1,559 Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series B Preferred Series C Common Stock Common Stock Preferred Series H 750 750 750 750 89,243 178 1,009 20,000 50,000 41,570 9 146 500 833 — 164 140 1,313 256,410 167,864 20,107 142,858 162,965 15,334 546,448 85,450 244,158 329,608 1,505 9,286 842 503 1,000 1,503 1,500 2,000 5 1,000 1,005 8,355 307 228 1,055 1,283 — 2,912 — — — 13,788 Drug Discovery &Development Equity Common Stock See notes to consolidated financial statements. 130 131 See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 131 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Biotechnology Tools Warrant Warrant Preferred Series C Preferred Series B 1,127,624 $ 234,659 Portfolio Company Warrant Investments Biotechnology Tools Labcyte, Inc. NuGEN Technologies, Inc. Subtotal: Biotechnology Tools (0.05%)* Energy Technology Energy Technology Agrivida, Inc. Energy Technology Alphabet Energy, Inc. American Superconductor Corporation(3) Energy Technology Energy Technology Brightsource Energy, Inc. Energy Technology Calera, Inc. Energy Technology EcoMotors, Inc. Energy Technology Fluidic, Inc. Energy Technology Fulcrum Bioenergy, Inc. Energy Technology Glori Energy, Inc. Energy Technology GreatPoint Energy, Inc. Energy Technology Polyera Corporation Energy Technology Propel Fuels SCIEnergy, Inc. Energy Technology Scifiniti (pka Integrated Photovoltaics, Inc.) Energy Technology Energy Technology Solexel, Inc. Stion Corporation(6) Energy Technology Energy Technology TAS Energy, Inc. Energy Technology TPI Composites, Inc. Trilliant, Inc. Energy Technology Subtotal: Energy Technology (0.78%)*(13) Communications & Networking Intelepeer, Inc. OpenPeak, Inc. PeerApp, Inc. Peerless Network, Inc. Ping Identity Corporation Spring Mobile Solutions, Inc. Stoke, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Total Stoke, Inc. Subtotal: Communications & Networking (0.20%)* Consumer & Business Products Intelligent Beauty, Inc. IPA Holdings, LLC Market Force Information, Inc. Subtotal: Consumer & Business Products (0.22%)* Consumer & Business Products Consumer & Business Products Consumer & Business Products Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series C Preferred Series A Common Stock Preferred Series 1 Preferred Series C Preferred Series B Preferred Series C Preferred Series C-1 Preferred Series C Preferred Series D-1 Preferred Series C Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series Seed Preferred Series F Preferred Series B Preferred Series A 77,447 86,329 512,820 175,000 44,529 437,500 59,665 280,897 145,932 393,212 161,575 3,200,000 1,061,623 390,000 1,171,625 2,154 428,571 120 320,000 323 $ 78 401 65 234 299 120 82 391 780 513 308 102 275 165 548 69 211 360 82 1,162 1,378 299 172 162 7,179 243 176 175 214 — 475 138 210 50 — 44 233 2 68 278 1,627 756 376 34 5,099 Portfolio Company Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Alexza Pharmaceuticals, Inc.(3) BIND Therapeutics, Inc.(3) Celsion Corporation(3) Dance Biopharm, Inc. Intelliject, Inc. NuPathe, Inc.(3) Revance Therapeutics, Inc.(12) Transcept Pharmaceuticals, Inc.(3) Subtotal: Drug Delivery (0.50%)* Drug Discovery & Development Acceleron Pharma, Inc.(3) ADMA Biologics, Inc.(3) Anthera Pharmaceuticals, Inc.(3) Cell Therapeutics, Inc.(3) Cempra, Inc.(3) Chroma Therapeutics, Ltd.(5)(10) Cleveland BioLabs, Inc(3) Concert Pharmaceuticals, Inc.(12) Coronado Biosciences, Inc.(3) Dicerna Pharmaceuticals, Inc.(12) Total Dicerna Pharmaceuticals, Inc. Horizon Pharma, Inc.(3) Merrimack Pharmaceuticals, Inc.(3) Neuralstem, Inc.(3) Portola Pharmaceuticals, Inc.(3) uniQure B.V.(5)(10)(12) Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant 176,730 $ 786 $ Common Stock Common Stock Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Preferred Series E-5 Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series D Common Stock Preferred Series C Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Common Stock Common Stock Common Stock Preferred Series A 37,639 71,359 97,493 97,701 82,500 106,631 802,675 61,452 11,611 31,750 40,178 679,040 138,797 325,261 156,250 400,000 73,009 200 21,000 26,400 47,600 22,408 302,143 648,798 68,702 185,873 Information Services Buzznet, Inc. Cha Cha Search, Inc. InXpo, Inc. Total InXpo, Inc. Jab Wireless, Inc. RichRelevance, Inc. Information Services Information Services Information Services Information Services Information Services Information Services Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series B Preferred Series G Preferred Series C Preferred Series C-1 Preferred Series A Preferred Series E 19,962 48,232 648,400 582,015 1,230,415 266,567 112,612 3,476 3,243 490 500 645 367 227 74 594 139 557 87 39 129 984 405 458 105 367 142 28 237 310 575 231 155 295 153 218 12 247 124 383 94 94 9 57 98 49 147 265 98 576 961 1 294 249 154 136 330 3 1,115 294 73 9 601 728 66 577 41 — 38 48 86 5 488 1,045 683 313 16 136 100 252 55 55 — 10 45 40 85 330 — 425 4,746 5,509 Preferred Series C Preferred Series 2 Preferred Series B Preferred Series A Preferred Series B Preferred Series D Preferred Series C Preferred Series D 117,958 108,982 298,779 135,000 1,136,277 2,834,375 158,536 72,727 231,263 102 149 61 95 52 417 53 65 118 994 112 — 41 368 98 661 5 2 7 1,287 Subtotal: Drug Discovery & Development (0.85%)* Electronics & Computer Hardware Clustrix, Inc. Identive Group, Inc.(3) Plures Technologies, Inc.(3) Subtotal: Electronics & Computer Hardware (0.04%)* Healthcare Services, Other MDEverywhere, Inc. Subtotal: Healthcare Services, Other (0.01%)* Electronics & Computer Hardware Electronics & Computer Hardware Electronics & Computer Hardware Warrant Warrant Warrant Common Stock Common Stock Preferred Series A 50,000 992,084 552,467 Healthcare Services, Other Warrant Common Stock 129 Warrant Warrant Warrant Preferred Series B Common Stock Preferred Series A 190,234 650,000 99,286 230 275 24 529 1,027 408 1 1,436 Diagnostic Navidea Biopharmaceuticals, Inc. (pka Neoprode)(3) Subtotal: Diagnostic (0.02%)* Diagnostic Warrant Common Stock 333,333 244 244 152 152 Subtotal: Information Services (0.07%)* See notes to consolidated financial statements. See notes to consolidated financial statements. 132 133 16323_HER-10K_CS6-r4.indd 132 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Biotechnology Tools Biotechnology Tools Warrant Warrant Preferred Series C 1,127,624 $ Preferred Series B 234,659 Portfolio Company Warrant Investments Biotechnology Tools Labcyte, Inc. NuGEN Technologies, Inc. Subtotal: Biotechnology Tools (0.05%)* Energy Technology Agrivida, Inc. Alphabet Energy, Inc. American Superconductor Corporation(3) Brightsource Energy, Inc. Calera, Inc. EcoMotors, Inc. Fluidic, Inc. Fulcrum Bioenergy, Inc. Glori Energy, Inc. GreatPoint Energy, Inc. Polyera Corporation Propel Fuels SCIEnergy, Inc. Solexel, Inc. Stion Corporation(6) TAS Energy, Inc. TPI Composites, Inc. Trilliant, Inc. Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Scifiniti (pka Integrated Photovoltaics, Inc.) Energy Technology Subtotal: Energy Technology (0.78%)*(13) Communications & Networking Intelepeer, Inc. OpenPeak, Inc. PeerApp, Inc. Peerless Network, Inc. Ping Identity Corporation Spring Mobile Solutions, Inc. Stoke, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Total Stoke, Inc. Subtotal: Communications & Networking (0.20%)* Subtotal: Consumer & Business Products (0.22%)* Consumer & Business Products Intelligent Beauty, Inc. IPA Holdings, LLC Market Force Information, Inc. Diagnostic (pka Neoprode)(3) Subtotal: Diagnostic (0.02%)* Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series C Preferred Series A Common Stock Preferred Series 1 Preferred Series C Preferred Series B Preferred Series C Preferred Series C-1 Preferred Series C Preferred Series D-1 Preferred Series C Preferred Series C Preferred Series D Preferred Series B 77,447 86,329 512,820 175,000 44,529 437,500 59,665 280,897 145,932 393,212 161,575 3,200,000 1,061,623 390,000 Preferred Series C 1,171,625 Preferred Series Seed Preferred Series F Preferred Series B Preferred Series A 2,154 428,571 120 320,000 Preferred Series C Preferred Series 2 Preferred Series B Preferred Series A Preferred Series B Preferred Series D Preferred Series C Preferred Series D 108,982 298,779 135,000 1,136,277 2,834,375 158,536 72,727 231,263 323 $ 78 401 120 82 391 780 513 308 102 275 165 548 69 211 360 82 65 234 299 243 176 175 214 — 475 138 210 50 — 44 233 2 68 1,162 1,378 299 172 162 278 1,627 756 376 34 7,179 5,099 149 61 95 52 417 53 65 118 994 230 275 24 529 — 41 368 98 661 5 2 7 1,287 1,027 408 1 1,436 117,958 102 112 Consumer & Business Products Consumer & Business Products Consumer & Business Products Warrant Warrant Warrant Preferred Series B Common Stock Preferred Series A 190,234 650,000 99,286 Navidea Biopharmaceuticals, Inc. Diagnostic Warrant Common Stock 333,333 244 244 152 152 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Portfolio Company Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Alexza Pharmaceuticals, Inc.(3) BIND Therapeutics, Inc.(3) Celsion Corporation(3) Dance Biopharm, Inc. Intelliject, Inc. NuPathe, Inc.(3) Revance Therapeutics, Inc.(12) Transcept Pharmaceuticals, Inc.(3) Subtotal: Drug Delivery (0.50%)* Drug Discovery & Development Acceleron Pharma, Inc.(3) ADMA Biologics, Inc.(3) Anthera Pharmaceuticals, Inc.(3) Cell Therapeutics, Inc.(3) Cempra, Inc.(3) Chroma Therapeutics, Ltd.(5)(10) Cleveland BioLabs, Inc(3) Concert Pharmaceuticals, Inc.(12) Coronado Biosciences, Inc.(3) Dicerna Pharmaceuticals, Inc.(12) Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Delivery Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Total Dicerna Pharmaceuticals, Inc. Horizon Pharma, Inc.(3) Merrimack Pharmaceuticals, Inc.(3) Neuralstem, Inc.(3) Portola Pharmaceuticals, Inc.(3) uniQure B.V.(5)(10)(12) Subtotal: Drug Discovery & Development (0.85%)* Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Electronics & Computer Hardware Clustrix, Inc. Identive Group, Inc.(3) Plures Technologies, Inc.(3) Subtotal: Electronics & Computer Hardware (0.04%)* Electronics & Computer Hardware Electronics & Computer Hardware Electronics & Computer Hardware Healthcare Services, Other MDEverywhere, Inc. Subtotal: Healthcare Services, Other (0.01%)* Healthcare Services, Other Information Services Buzznet, Inc. Cha Cha Search, Inc. InXpo, Inc. Information Services Information Services Information Services Information Services Total InXpo, Inc. Jab Wireless, Inc. RichRelevance, Inc. Subtotal: Information Services (0.07%)* Information Services Information Services Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Preferred Series E-5 Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Series D Common Stock Preferred Series C Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Common Stock Common Stock Common Stock Preferred Series A 176,730 $ 37,639 71,359 97,493 97,701 82,500 106,631 802,675 61,452 786 $ 645 367 227 74 594 139 557 87 3,476 11,611 31,750 40,178 679,040 138,797 325,261 156,250 400,000 73,009 200 21,000 26,400 47,600 22,408 302,143 648,798 68,702 185,873 39 129 984 405 458 490 105 367 142 28 237 310 575 231 155 295 153 218 4,746 961 1 294 249 154 1,115 136 330 3 3,243 294 73 9 601 728 500 66 577 41 — 38 48 86 5 488 1,045 683 313 5,509 Common Stock Common Stock Preferred Series A 50,000 992,084 552,467 Warrant Common Stock 129 Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series B Preferred Series G Preferred Series C Preferred Series C-1 Preferred Series A Preferred Series E 19,962 48,232 648,400 582,015 1,230,415 266,567 112,612 12 247 124 383 94 94 9 57 98 49 147 265 98 576 16 136 100 252 55 55 — 10 45 40 85 330 — 425 See notes to consolidated financial statements. See notes to consolidated financial statements. 132 133 16323_HER-10K_CS6-r4.indd 133 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Portfolio Company Internet Consumer & Business Services Blurb, Inc. Internet Consumer & Business Services Internet Consumer & Business Services Total Blurb, Inc. CashStar, Inc. Gazelle, Inc. Invoke Solutions, Inc. Just Fabulous, Inc. Prism Education Group, Inc. Progress Financial Reply! Inc. ShareThis, Inc. Tectura Corporation WaveMarket, Inc. Subtotal: Internet Consumer & Business Services (0.32%)* Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Media/Content/Info Everyday Health, Inc. (pka Waterfront Media/Content/Info Media, Inc.) Glam Media, Inc. Zoom Media Group, Inc. Subtotal: Media/Content/Info (0.05%)* Media/Content/Info Media/Content/Info Medical Devices & Equipment Baxano Surgical, Inc.(3) Gelesis, Inc.(6) Home Dialysis Plus, Inc. InspireMD, Inc.(3)(5)(10) Medrobotics Corporation Total Medrobotics Corporation MELA Sciences, Inc.(3) NetBio, Inc. NinePoint Medical, Inc. Novasys Medical, Inc. Total Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Oraya Therapeutics, Inc. Total Oraya Therapeutics, Inc. SonaCare Medical, LLC (pka US HIFU, LLC) Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment United Orthopedic Group, Inc. ViewRay, Inc. Subtotal: Medical Devices & Equipment (0.54%)* Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series B Preferred Series C Preferred Series C-2 Preferred Series D Common Stock Preferred Series B Preferred Series B Preferred Series G Preferred Series B Preferred Series C Preferred Series B-1 Preferred Series B-1 218,684 $ 234,280 452,964 454,545 151,827 53,084 137,456 200,000 174,562 137,225 493,502 253,378 1,083,779 299 $ 636 935 102 165 39 589 43 78 320 546 51 105 2,973 169 248 417 47 62 — 1,057 76 93 241 — 85 2,078 Preferred Series C Preferred Series D Preferred Series A Common Stock LLC Interest Preferred Series A Common Stock Preferred Series D Preferred Series E Common Stock Common Stock Preferred Series A-1 Common Stock Preferred Series D Preferred Series D-1 Preferred Series D Common Stock Preferred Series C Preferred Series A Preferred Series A Preferred Series C 110,018 407,457 1,204 882,353 263,688 300,000 168,351 424,008 34,199 458,207 693,202 2,568 587,840 109,449 526,840 53,607 689,896 60 482 348 890 439 78 245 242 343 27 370 401 408 170 2 125 6 133 10,535,275 1,252 95,498 716,948 812,446 409,704 423,076 312,500 66 677 743 188 608 333 5,610 50 — 275 325 344 7 297 167 184 23 207 94 398 288 — — — — 232 23 134 157 201 785 331 3,508 Semiconductors Achronix Semiconductor Corporation SiTime Corporation Subtotal: Semiconductors (0.03%)* Semiconductors Semiconductors Warrant Warrant Preferred Series C Preferred Series G 360,000 195,683 160 24 184 194 12 206 See notes to consolidated financial statements. 16323_HER-10K_CS6-r4.indd 134 4/28/15 2:55 PM 134 135 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) 392,670 $ 121 $ Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D Preferred Series B Preferred Series C Preferred Series D-1 Preferred Series A Preferred Series B 271,070 199,219 62,255 532,544 168,750 522,769 Preferred Series B 1,038,563 Preferred Series C 592,019 Common Stock Preferred Series E Preferred Series E Preferred Series C Preferred Series 3 Preferred Series C Preferred Series CC Preferred Series DD Preferred Series E Preferred Series B-2 Preferred Series 3 1,630,582 718,860 80,587 1,865,650 396,430 221,150 185,949 332,726 107,526 440,252 992,595 124,295 100,000 1,060 1,433 72 117 194 383 187 108 330 730 41 55 130 22 106 78 34 112 251 54 238 307 307 320 394 225 100 325 719 330 4,701 3,331 625 8,657 — 187 495 363 858 83 82 139 129 — 105 48 16 64 248 4 123 — — 383 410 9 335 344 754 4,301 11,009 Preferred Series C 180,480 74 27 Preferred Series D 1,575,965 Preferred Series B Preferred Series D 1,756,445 40,436 175,000 215,436 33,606 35,637 $ 906,297 $ 910,295 Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Portfolio Company Software Atrenta, Inc. Box, Inc. Total Box, Inc. Braxton Technologies, LLC Central Desktop, Inc. Clickfox, Inc. Total Clickfox, Inc. Daegis Inc. (pka Unify Corporation)(3) ForeScout Technologies, Inc. Hillcrest Laboratories, Inc. Mobile Posse, Inc. Neos Geosolutions, Inc. Sonian, Inc. SugarSync, Inc. Total Sugarsync, Inc. Touchcommerce, Inc. White Sky, Inc. WildTangent, Inc. Subtotal: Software (1.69%)* Specialty Pharmaceuticals Surgical Devices Gynesonics, Inc. Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.12%)* Total Warrants Investments (5.48%)* Total Investments (140.04%)* Value as a percent of net assets Surgical Devices Surgical Devices Surgical Devices Surgical Devices QuatRx Pharmaceuticals Company Specialty Pharmaceuticals Warrant Preferred Series E 155,324 Subtotal: Specialty Pharmaceuticals (0.00%)* * (1) (2) (4) (5) (6) (8) (9) Preferred and common stock, warrants, and equity interests are generally non-income producing. Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $48.8 million, $44.5 million and $4.3 million respectively. The tax cost of investments is $906.2 million (3) Except for warrants in twenty-five publicly traded companies and common stock in nine publicly traded companies, all investments are restricted at December 31, 2013 and were valued at fair value as determined in good faith by the Audit Committee of the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. Debt investments of this portfolio company have been pledged as collateral under the Wells Facility. Non-U.S. company or the company’s principal place of business is outside the United States. Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. (7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners at least 25% of the voting securities of the company or has greater than 50% representation on its board. Debt is on non-accrual status at December 31, 2013, and is therefore considered non-income producing. Convertible Senior Debt (10) Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. (11) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitization (as defined in Note 4). (12) Subsequent to December 31, 2013, this company completed an initial public offering. Note that the December 31, 2013 fair value does not reflect any potential impact of the conversion of our preferred shares to common shares which may include reverse split associated with the offering. (13) In our quarterly and annual reports filed with the commission prior to this Annual Report on Form 10-K for the year ended December 31, 2013, we referred to this industry sector as “Clean Tech.” See notes to consolidated financial statements. Portfolio Company Internet Consumer & Business Services Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Internet Consumer & Business Services Internet Consumer & Business Services Warrant Warrant Preferred Series B Preferred Series C Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Subtotal: Internet Consumer & Business Services (0.32%)* Everyday Health, Inc. (pka Waterfront Media/Content/Info Subtotal: Media/Content/Info (0.05%)* Media/Content/Info Media/Content/Info Blurb, Inc. Total Blurb, Inc. CashStar, Inc. Gazelle, Inc. Invoke Solutions, Inc. Just Fabulous, Inc. Prism Education Group, Inc. Progress Financial Reply! Inc. ShareThis, Inc. Tectura Corporation WaveMarket, Inc. Media/Content/Info Media, Inc.) Glam Media, Inc. Zoom Media Group, Inc. Medical Devices & Equipment Baxano Surgical, Inc.(3) Gelesis, Inc.(6) Home Dialysis Plus, Inc. InspireMD, Inc.(3)(5)(10) Medrobotics Corporation Total Medrobotics Corporation MELA Sciences, Inc.(3) NetBio, Inc. NinePoint Medical, Inc. Novasys Medical, Inc. Total Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Oraya Therapeutics, Inc. Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Total Oraya Therapeutics, Inc. SonaCare Medical, LLC (pka US HIFU, LLC) United Orthopedic Group, Inc. ViewRay, Inc. Medical Devices &Equipment Medical Devices &Equipment Medical Devices &Equipment Subtotal: Medical Devices & Equipment (0.54%)* Semiconductors Achronix Semiconductor Corporation Semiconductors SiTime Corporation Semiconductors Subtotal: Semiconductors (0.03%)* Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series B-1 1,083,779 2,973 2,078 Preferred Series C-2 Preferred Series D Common Stock Preferred Series B Preferred Series B Preferred Series G Preferred Series B Preferred Series C Preferred Series B-1 Preferred Series C Preferred Series D Preferred Series A Common Stock LLC Interest Preferred Series A Common Stock Preferred Series D Preferred Series E Common Stock Common Stock Preferred Series A-1 Common Stock Preferred Series D Preferred Series D-1 Preferred Series D Common Stock Preferred Series C Preferred Series A Preferred Series A Preferred Series C 218,684 $ 234,280 452,964 454,545 151,827 53,084 137,456 200,000 174,562 137,225 493,502 253,378 110,018 407,457 1,204 882,353 263,688 300,000 168,351 424,008 34,199 458,207 693,202 2,568 587,840 109,449 526,840 53,607 689,896 95,498 716,948 812,446 409,704 423,076 312,500 102 47 589 1,057 43 299 $ 636 935 165 39 78 320 546 51 105 60 482 348 890 439 78 245 242 343 27 370 401 408 170 2 125 6 133 66 677 743 188 608 333 160 24 184 169 248 417 62 — 76 93 241 — 85 50 — 275 325 344 7 297 167 184 23 207 94 398 288 — — — — 232 23 134 157 201 785 331 194 12 206 5,610 3,508 10,535,275 1,252 Warrant Warrant Preferred Series C Preferred Series G 360,000 195,683 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Portfolio Company Software Atrenta, Inc. Box, Inc. Total Box, Inc. Braxton Technologies, LLC Central Desktop, Inc. Clickfox, Inc. Total Clickfox, Inc. Daegis Inc. (pka Unify Corporation)(3) ForeScout Technologies, Inc. Hillcrest Laboratories, Inc. Mobile Posse, Inc. Neos Geosolutions, Inc. Sonian, Inc. SugarSync, Inc. Total Sugarsync, Inc. Touchcommerce, Inc. White Sky, Inc. WildTangent, Inc. Subtotal: Software (1.69%)* Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Software Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Subtotal: Specialty Pharmaceuticals (0.00%)* Surgical Devices Gynesonics, Inc. Specialty Pharmaceuticals Surgical Devices Surgical Devices Total Gynesonics, Inc. Transmedics, Inc. Total Transmedics, Inc. Subtotal: Surgical Devices (0.12%)* Total Warrants Investments (5.48%)* Total Investments (140.04%)* Surgical Devices Surgical Devices Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D Preferred Series B Preferred Series C Preferred Series D-1 Preferred Series A Preferred Series B Preferred Series B Preferred Series C Common Stock Preferred Series E Preferred Series E Preferred Series C Preferred Series 3 Preferred Series C Preferred Series CC Preferred Series DD Preferred Series E Preferred Series B-2 Preferred Series 3 392,670 $ 271,070 199,219 62,255 532,544 168,750 522,769 1,038,563 592,019 1,630,582 718,860 80,587 1,865,650 396,430 221,150 185,949 332,726 107,526 440,252 992,595 124,295 100,000 Warrant Preferred Series E 155,324 121 $ 72 117 194 383 187 108 330 730 1,060 1,433 41 55 130 22 106 78 34 112 251 54 238 4,301 330 4,701 3,331 625 8,657 — 187 495 363 858 83 82 139 129 — 105 48 16 64 248 4 123 11,009 307 307 — — Warrant Warrant Warrant Warrant Preferred Series C Preferred Series D Preferred Series B Preferred Series D 180,480 1,575,965 1,756,445 40,436 175,000 215,436 74 320 394 225 100 325 719 33,606 27 383 410 9 335 344 754 35,637 $ 906,297 $ 910,295 * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Value as a percent of net assets Preferred and common stock, warrants, and equity interests are generally non-income producing. Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $48.8 million, $44.5 million and $4.3 million respectively. The tax cost of investments is $906.2 million Except for warrants in twenty-five publicly traded companies and common stock in nine publicly traded companies, all investments are restricted at December 31, 2013 and were valued at fair value as determined in good faith by the Audit Committee of the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. Debt investments of this portfolio company have been pledged as collateral under the Wells Facility. Non-U.S. company or the company’s principal place of business is outside the United States. Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners at least 25% of the voting securities of the company or has greater than 50% representation on its board. Debt is on non-accrual status at December 31, 2013, and is therefore considered non-income producing. Convertible Senior Debt Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. (11) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitization (as defined in Note 4). (12) Subsequent to December 31, 2013, this company completed an initial public offering. Note that the December 31, 2013 fair value does not reflect any potential impact of the conversion of our preferred shares to common shares which may include reverse split associated with the offering. In our quarterly and annual reports filed with the commission prior to this Annual Report on Form 10-K for the year ended December 31, 2013, we referred to this industry sector as “Clean Tech.” See notes to consolidated financial statements. (13) 134 135 16323_HER-10K_CS6-r4.indd 135 4/28/15 2:55 PM See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies 1. Description of Business and Basis of Presentation Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. The Company sources its investments through its principal office located in Palo Alto, CA, as well as through its additional offices in Boston, MA, New York, NY and McLean, VA. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 5). As an investment company, the Company follows accounting and reporting guidance as set forth in Accounting Standards Codification (“ASC”) 946. VIE. Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“HT IV”), are Delaware limited partnerships that were formed in January 2005, September 2009 and December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies (“SBICs”) under the authority of the Small Business Administration (“SBA”) on September 27, 2006 and May 26, 2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license; however, the Company has not yet applied for such license, and HT IV currently has no material assets or liabilities. The Company also formed Hercules Technology SBIC Management, LLC, or (“HTM”), a limited liability company in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the Company’s consolidated financial statements). HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and they accounted for approximately 9.1% and 19.1% of the Company’s total assets, respectively, prior to consolidation at December 31, 2014. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all VIEs of which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has a potentially significant interest in the VIE, then it consolidates the VIE. The Company performs ongoing reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework. As of the date of this report, the VIEs consolidated by the Company are its securitization VIEs formed in conjunction with the issuance of the Asset-Backed Notes (as defined herein) (See Note 4). The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). By investing through these wholly owned subsidiaries, the Company is able to benefit from the tax treatment of these entities and create a tax structure that is more advantageous with respect to the Company’s RIC status. Valuation of Investments The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIEs. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and the Securities and Exchange Act of 1934, the Company does not consolidate portfolio company investments. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. At December 31, 2014, 78.6% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. 16323_HER-10K_CS6-r4.indd 136 4/28/15 2:55 PM 136 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies 1. Description of Business and Basis of Presentation Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related industries, including technology, biotechnology, life science, and energy and renewables technology at all stages of development. The Company sources its investments through its principal office located in Palo Alto, CA, as well as through its additional offices in Boston, MA, New York, NY and McLean, VA. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 5). As an investment company, the Company follows accounting and reporting guidance as set forth in Accounting Standards Codification (“ASC”) 946. Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“HT IV”), are Delaware limited partnerships that were formed in January 2005, September 2009 and December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies (“SBICs”) under the authority of the Small Business Administration (“SBA”) on September 27, 2006 and May 26, 2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license; however, the Company has not yet applied for such license, and HT IV currently has no material assets or liabilities. The Company also formed Hercules Technology SBIC Management, LLC, or (“HTM”), a limited liability company in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the Company’s consolidated financial statements). HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and they accounted for approximately 9.1% and 19.1% of the Company’s total assets, respectively, prior to consolidation at December 31, 2014. The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). By investing through these wholly owned subsidiaries, the Company is able to benefit from the tax treatment of these entities and create a tax structure that is more advantageous with respect to the Company’s RIC status. The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIEs. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and the Securities and Exchange Act of 1934, the Company does not consolidate portfolio company investments. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all VIEs of which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE. To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has a potentially significant interest in the VIE, then it consolidates the VIE. The Company performs ongoing reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework. As of the date of this report, the VIEs consolidated by the Company are its securitization VIEs formed in conjunction with the issuance of the Asset-Backed Notes (as defined herein) (See Note 4). Valuation of Investments At December 31, 2014, 78.6% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. 136 137 16323_HER-10K_CS6-r4.indd 137 4/28/15 2:55 PM With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee which incorporates the results of the independent valuation firm as appropriate, and (4) the Audit Committee discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. Medical Devices ................... 60,332 Originated Within 6 Months Origination Yield 60,658 Market Comparable Companies Hypothetical Market Yield ASC 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. In accordance with ASU 2011-04, the following tables provide quantitative information about the Company’s Level 3 fair value measurements of the Company’s investments as of December 31, 2014 and 2013. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. Investment Type - Level Three Debt Investments Fair Value at December 31, 2014 (in thousands) Valuation Techniques/Methodologies Unobservable Input (a) Pharmaceuticals ................... $ 117,229 Originated Within 6 Months Origination Yield 237,595 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Premium/(Discount) Technology .......................... 152,645 Originated Within 6 Months Origination Yield 12,970 Liquidation(c) Probability weighting of alternative outcomes 50.00% 80,835 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) 27,159 Liquidation(c) Probability weighting of alternative outcomes 10.00% - 90.00% Energy Technology .............. 4,437 Originated Within 6 Months Origination Yield 52,949 Market Comparable Companies Hypothetical Market Yield Lower Middle Market .......... 2,962 Originated Within 6 Months Origination Yield 1,600 Liquidation(c) Premium/(Discount) Probability weighting of alternative outcomes 59,254 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) 4,096 Liquidation(c) Probability weighting of alternative outcomes 45.00% - 55.00% Range 10.34% - 16.52% 9.75% - 17.73% (0.50%) - 1.00% 12.14% - 16.56% 11.64% - 22.22% 0.00% - 1.00% 10.54% - 20.02% 6.95% - 15.50% 0.00% - 0.50% 13.85% - 21.57% 13.20% - 16.62% 0.00% - 1.50% 100.00% 14.04% 11.91% - 15.33% 0.00% - 0.50% Weighted Average (b) 11.76% 10.62% 13.69% 12.19% 14.08% 13.01% 19.00% 15.41% 14.04% 13.98% Debt Investments Where Fair Value Approximates Cost 9,318 Imminent Payoffs 39,867 Debt Investments Maturing in Less than One Year $ 923,906 Total Level Three Debt Investments (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Therapeutic, Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Internet Consumer and Business Services, Media/Content/Info, and Healthcare Services – Other industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology Industry in the Consolidated Schedule of Investments. The weighted averages are calculated based on the fair market value of each investment. The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes. (b) (c) 16323_HER-10K_CS6-r4.indd 138 4/28/15 2:55 PM 138 139 Investment Type - Level Three Debt Investments Pharmaceuticals ................... $ (4) the Audit Committee discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. Medical Devices ................... ASC 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which Technology .......................... Energy Technology .............. Lower Middle Market .......... With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee which incorporates the results of the independent valuation firm as appropriate, and prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. In accordance with ASU 2011-04, the following tables provide quantitative information about the Company’s Level 3 fair value measurements of the Company’s investments as of December 31, 2014 and 2013. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. Fair Value at December 31, 2014 (in thousands) Valuation Techniques/Methodologies Unobservable Input (a) 117,229 Originated Within 6 Months 237,595 Market Comparable Companies Hypothetical Market Yield Origination Yield 60,332 Originated Within 6 Months 60,658 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 12,970 Liquidation(c) 152,645 Originated Within 6 Months 80,835 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 27,159 Liquidation(c) 4,437 Originated Within 6 Months 52,949 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 1,600 Liquidation(c) 2,962 Originated Within 6 Months 59,254 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield 4,096 Liquidation(c) Premium/(Discount) Probability weighting of alternative outcomes Weighted Average (b) 11.76% 10.62% 13.69% 12.19% 14.08% 13.01% 19.00% 15.41% 14.04% 13.98% Range 10.34% - 16.52% 9.75% - 17.73% (0.50%) - 1.00% 12.14% - 16.56% 11.64% - 22.22% 0.00% - 1.00% 50.00% 10.54% - 20.02% 6.95% - 15.50% 0.00% - 0.50% 10.00% - 90.00% 13.85% - 21.57% 13.20% - 16.62% 0.00% - 1.50% 100.00% 14.04% 11.91% - 15.33% 0.00% - 0.50% 45.00% - 55.00% Debt Investments Where Fair Value Approximates Cost 9,318 Imminent Payoffs 39,867 Debt Investments Maturing in Less than One Year $ 923,906 Total Level Three Debt Investments (a) (b) (c) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Therapeutic, Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Internet Consumer and Business Services, Media/Content/Info, and Healthcare Services – Other industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology Industry in the Consolidated Schedule of Investments. The weighted averages are calculated based on the fair market value of each investment. The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes. 138 139 16323_HER-10K_CS6-r4.indd 139 4/28/15 2:55 PM Investment Type - Level Three Debt Investments Pharmaceuticals ................. $ Fair Value at December 31, 2013 (in thousands) Valuation Techniques/Methodologies 25,811 Originated Within 6 Months 250,607 Market Comparable Companies Hypothetical Market Yield Origination Yield Unobservable Input (a) Medical Devices ................. Technology ........................ Energy Technology ............ 46,900 Originated Within 6 Months 34,723 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 18,796 Originated Within 6 Months 98,290 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Origination Yield 1,643 Liquidation 32,597 Originated Within 6 Months 108,238 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Probability weighting of alternative outcomes Origination Yield Premium/(Discount) Lower Middle Market ........ 121,347 Market Comparable Companies Hypothetical Market Yield Range 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% Weighted Average (c) 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% 31,818 Broker Quote (b) 12,576 Liquidation Premium/(Discount) Price Quotes Par Value Probability weighting of alternative outcomes 99.50% - 100.25% of par Debt Investments Where Fair Value Approximates Amortized Cost 15,906 Imminent Payoffs 22,236 Debt Investments Maturing in Less than One Year 500 Convertible Debt at Par $ 821,988 Total Level Three Debt Investments $2.0 - $22.5 million 20.00% - 80.00% 12,198 Market Adjusted OPM Backsolve Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) 10 - 48 Total Level Three Warrant and Equity Investments ......... $ 80,858 (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (b) (c) Weighted averages are calculated based on the fair market value of each investment. 16323_HER-10K_CS6-r4.indd 140 4/28/15 2:55 PM 140 141 Investment Type - Level Three Equity and Warrant Investments Fair Value at December 31, 2014 (in thousands) Valuation Techniques/ Methodologies Equity Investments ................... $ 12,249 Market Comparable Companies 46,686 Market Adjusted OPM Backsolve Average Industry Volatility (d) Warrant Investments ................ 9,725 Market Comparable Companies Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability © Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 5.2x - 23.4x 0.9x - 3.6x 5.67% - 35.45% 48.10% - 95.18% 0.22% - 0.83% 10 - 28 38.95% - 84.30% 0.10% - 1.32% 6 - 43 0.0x - 98.9x 0.3x - 15.7x 12.12% - 35.50% 37.70% - 108.86% 0.22% - 1.34% 10 - 47 32.85% - 99.81% 0.21% - 2.95% Weighted Average (e) 8.5x 2.6x 15.95% 62.78% 0.24% 11 55.04% 0.24% 10 16.6x 4.3x 22.14% 67.23% 0.75% 27 67.58% 0.87% 28 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. Represents the range of average industry volatility used by market participants when pricing the investment. (e) Weighted averages are calculated based on the fair market value of each investment. (b) (c) (d) Investment Type - Level Three December 31, 2013 Equity and Warrant Investments (in thousands) Valuation Techniques/ Methodologies Equity Investments ........................... $ 10,244 Market Comparable Companies Fair Value at 9,289 Market Adjusted OPM Backsolve 18,127 Other 8,913 Market Adjusted OPM Backsolve 9,595 Other Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 8.6x - 17.7x 0.7x - 13.8x 9.1% - 23.6% 43.4% - 110.7% 0.1% - 0.4% 6 - 30 45.6% - 109.7% 0.1% - 0.9% 6 - 42 44.0% 0.1% 12 5.0x - 51.4x 0.5x - 13.8x 6.4% - 36.0% 21.3% - 110.7% 0.1% - 1.0% 6 - 48 35.7% - 109.9% 0.1% - 2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Warrant Investments ........................ 10,200 Market Comparable Companies Total Level Three Warrant and Equity Investments......................... $ 66,368 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) (c) (d) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. Represents the range of industry volatility used by market participants when pricing the investment. Fair Value at Investment Type - Level Three Debt Investments December 31, 2013 (in thousands) Valuation Techniques/Methodologies Unobservable Input (a) Pharmaceuticals ................. $ 25,811 Originated Within 6 Months Origination Yield 250,607 Market Comparable Companies Hypothetical Market Yield Medical Devices ................. 46,900 Originated Within 6 Months Origination Yield 34,723 Market Comparable Companies Hypothetical Market Yield Technology ........................ 18,796 Originated Within 6 Months Origination Yield 98,290 Market Comparable Companies Hypothetical Market Yield Energy Technology ............ 32,597 Originated Within 6 Months Origination Yield 108,238 Market Comparable Companies Hypothetical Market Yield 1,643 Liquidation Premium/(Discount) Probability weighting of alternative outcomes Lower Middle Market ........ 121,347 Market Comparable Companies Hypothetical Market Yield Premium/(Discount) Premium/(Discount) Premium/(Discount) Premium/(Discount) Price Quotes Par Value 31,818 Broker Quote (b) 12,576 Liquidation Probability weighting of alternative outcomes Debt Investments Where Fair Value Approximates Amortized Cost 15,906 Imminent Payoffs 22,236 Debt Investments Maturing in Less than One Year 500 Convertible Debt at Par $ 821,988 Total Level Three Debt Investments Weighted Average (c) 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% Range 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% 99.50% - 100.25% of par $2.0 - $22.5 million 20.00% - 80.00% (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Consolidated Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Consolidated Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Consolidated Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Consolidated Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Consolidated Schedule of Investments. (b) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (c) Weighted averages are calculated based on the fair market value of each investment. Investment Type - Level Three Equity and Warrant Investments Equity Investments ................... $ Fair Value at December 31, 2014 (in thousands) Valuation Techniques/ Methodologies Unobservable Input (a) 12,249 Market Comparable Companies 46,686 Market Adjusted OPM Backsolve Average Industry Volatility (d) Warrant Investments ................ 9,725 Market Comparable Companies EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability © Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 5.2x - 23.4x 0.9x - 3.6x 5.67% - 35.45% 48.10% - 95.18% 0.22% - 0.83% 10 - 28 38.95% - 84.30% 0.10% - 1.32% 6 - 43 0.0x - 98.9x 0.3x - 15.7x 12.12% - 35.50% 37.70% - 108.86% 0.22% - 1.34% 10 - 47 32.85% - 99.81% 0.21% - 2.95% 10 - 48 Weighted Average (e) 8.5x 2.6x 15.95% 62.78% 0.24% 11 55.04% 0.24% 10 16.6x 4.3x 22.14% 67.23% 0.75% 27 67.58% 0.87% 28 Total Level Three Warrant and Equity Investments ......... $ 80,858 Risk-Free Interest Rate Estimated Time to Exit (in months) 12,198 Market Adjusted OPM Backsolve Average Industry Volatility (d) (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. Represents the range of average industry volatility used by market participants when pricing the investment. (b) (c) (d) (e) Weighted averages are calculated based on the fair market value of each investment. Investment Type - Level Three Equity and Warrant Investments Equity Investments ........................... $ Fair Value at December 31, 2013 (in thousands) Valuation Techniques/ Methodologies 10,244 Market Comparable Companies 9,289 Market Adjusted OPM Backsolve 18,127 Other Warrant Investments ........................ 10,200 Market Comparable Companies 8,913 Market Adjusted OPM Backsolve 9,595 Other Unobservable Input (a) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) EBITDA Multiple (b) Revenue Multiple (b) Discount for Lack of Marketability (c) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility (d) Risk-Free Interest Rate Estimated Time to Exit (in months) Range 8.6x - 17.7x 0.7x - 13.8x 9.1% - 23.6% 43.4% - 110.7% 0.1% - 0.4% 6 - 30 45.6% - 109.7% 0.1% - 0.9% 6 - 42 44.0% 0.1% 12 5.0x - 51.4x 0.5x - 13.8x 6.4% - 36.0% 21.3% - 110.7% 0.1% - 1.0% 6 - 48 35.7% - 109.9% 0.1% - 2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Total Level Three Warrant and Equity Investments......................... $ 66,368 (a) (b) (c) (d) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. Represents the range of industry volatility used by market participants when pricing the investment. 140 141 16323_HER-10K_CS6-r4.indd 141 4/28/15 2:55 PM Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology- related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of the Company’s investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. The Company determines the yield at inception for each debt investment. The Company then uses senior secured, leveraged loan yields provided by third party providers to determine the change in market yields between inception of the debt security and the measurement date. Industry specific indices are used to benchmark/assess market based movements. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security is less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security is greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment. Equity-Related Securities and Warrants Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Company has a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of December 31, 2014 and as of December 31, 2013. The Company transfers investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the year ended December 31, 2014, there were no transfers between Levels 1 or 2. (in thousands) Description (in thousands) Description Quoted Prices In Balance Active Markets For Significant Other Significant December 31, Identical Assets Observable Inputs Unobservable Inputs 2014 (Level 1) (Level 2) (Level 3) Senior secured debt......................................................... $ 923,906 $ Preferred stock ................................................................ $ Common stock ................................................................ $ Warrants ......................................................................... $ 57,548 14,185 25,098 Total ............................................................................... $ 1,020,737 $ — $ — 12,798 — 12,798 $ — $ — — 3,175 3,175 $ 923,906 57,548 1,387 21,923 1,004,764 Quoted Prices In Balance Active Markets For Significant Other Significant December 31, Identical Assets Observable Inputs Unobservable Inputs 2013 (Level 1) (Level 2) (Level 3) Senior secured debt......................................................... $ 821,988 $ Preferred stock ................................................................ Common stock ................................................................ Warrants ......................................................................... 35,554 17,116 35,637 Total ............................................................................... $ 910,295 $ — $ — 15,009 — 15,009 $ — $ — — 6,930 6,930 $ 821,988 35,554 2,107 28,707 888,356 The table below presents a reconciliation for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and December 31, 2013. (in thousands) Net Balance, January 1, 2014 Realized (Losses) (1) Senior Debt ....... $ 821,988 $ (14,182) $ 615,596 $ — $ (497,258) $ (Depreciation) (2) Purchases (5) Sales Repayments (6) Net Change in Unrealized Appreciation — $ (750 ) (130 ) (48 ) (928 ) $ 15,779 601 (10,553) (8,355) $ Gross Transfers into Gross Transfers out of Level 3 (3) Level 3 (3) — — — — $ 2,007 — — (2,238) $ (1,636) (2) (2,276) (6,152) $ Balance, December 31, 2014 923,906 57,548 1,387 21,923 1,004,764 7,097 — 8,596 (503) (1,189) (2,503) 631,289 $ (4,195) $ (497,258) $ 2,007 $ Preferred Stock .. Common Stock . Warrants ............ 35,554 2,107 28,707 Total .................. $ 888,356 $ Balance, Net Realized Gains Net Change in Unrealized Appreciation Gross Transfers into Gross Transfers out of Balance, (in thousands) January 1, 2013 (Losses) (1) (Depreciation) (2) Purchases (5) Sales Repayments (6) Level 3 (4) Level 3 (4) December 31, 2013 Senior Debt ......... $ 827,540 $ (9,536 ) $ 484,367 $ (8 ) $ (469,780) $ 769 $ (3,156) $ Preferred Stock ... Common Stock ... Warrants .............. 33,178 7,968 2,367 — 22,140 5,257 6,198 (18,572) 750 — 6,524 (10,350) — — — 776 (1,676) 93 — — (1,037) Total ................... $ 885,225 $ 3,689 $ 497,839 $ (28,930) $ (469,780) $ 1,638 $ (5,869) $ (8,208) $ 7,682 (1,103) 6,173 4,544 $ 821,988 35,554 2,107 28,707 888,356 (1) (2) (3) Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations. Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations. Transfers in/out of Level 3 during the year ended December 31, 2014 relate to the conversion of Paratek Pharmaceuticals, Inc., SCI Energy, Inc., Oraya Therapeutics, Inc., and Neuralstem, Inc. debt to equity, the exercise of warrants in Box, Inc and WildTangent, Inc. to equity, the conversion of warrants in Glori Energy, Inc. to equity in the company’s reverse public merger, the public merger of Paratek Pharmaceuticals, Inc. with Transcept Pharmaceuticals, Inc. and the initial public offerings of Concert Pharmaceuticals, Inc., Dicerna Pharmaceuticals, Inc., Everyday Health, Inc., Neothetics, Inc., Revance Therapeutics, Inc., and UniQure BV. (4) Transfers in/out of Level 3 during the year ended December 31, 2013 relate to the conversion of Optiscan BioMedical, Inc., Gynesonics, Inc., Philotic, Inc., and Tethys BioScience, Inc. debt to equity, the conversion of OCZ Technology warrants to principal and the initial public offerings of Portola Pharmaceuticals, Inc., (5) Amounts listed above are inclusive of loan origination fees received at the inception of the loan which are deferred and amortized into fee income as well as the Acceleron Pharma, Inc., Bind, Inc., and ADMA Biologics, Inc. accretion of existing loan discounts and fees during the period. (6) Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures. 16323_HER-10K_CS6-r4.indd 142 4/28/15 2:55 PM 142 143 Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology- related industries, including technology, biotechnology, life science and energy and renewables technology. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of the Company’s investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. The Company determines the yield at inception for each debt investment. The Company then uses senior secured, leveraged loan yields provided by third party providers to determine the change in market yields between inception of the debt security and the measurement date. Industry specific indices are used to benchmark/assess market based movements. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security is less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security is greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment. Equity-Related Securities and Warrants Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Company has a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of December 31, 2014 and as of December 31, 2013. The Company transfers investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the year ended December 31, 2014, there were no transfers between Levels 1 or 2. Quoted Prices In (in thousands) Description Senior secured debt......................................................... $ Preferred stock ................................................................ $ Common stock ................................................................ $ Warrants ......................................................................... $ Total ............................................................................... $ Balance December 31, 2014 923,906 $ 57,548 14,185 25,098 1,020,737 $ Active Markets For Significant Other Significant Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) — $ — 12,798 — 12,798 $ — $ — — 3,175 3,175 $ 923,906 57,548 1,387 21,923 1,004,764 Quoted Prices In (in thousands) Description Senior secured debt......................................................... $ Preferred stock ................................................................ Common stock ................................................................ Warrants ......................................................................... Total ............................................................................... $ Balance December 31, 2013 821,988 $ 35,554 17,116 35,637 910,295 $ Active Markets For Significant Other Significant Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) — $ — 15,009 — 15,009 $ — $ — — 6,930 6,930 $ 821,988 35,554 2,107 28,707 888,356 The table below presents a reconciliation for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and December 31, 2013. Balance, January 1, 2014 Net Change in Unrealized Appreciation Net Realized (Losses) (1) (Depreciation) (2) Purchases (5) — $ (750 ) (130 ) (48 ) (928 ) $ (14,182) $ 15,779 601 (10,553) (8,355) $ 821,988 $ 35,554 2,107 28,707 888,356 $ (in thousands) Senior Debt ....... $ Preferred Stock .. Common Stock . Warrants ............ Total .................. $ Sales Repayments (6) Gross Transfers into Level 3 (3) Gross Transfers out of Level 3 (3) 615,596 $ 7,097 — 8,596 — $ (503) (1,189) (2,503) 631,289 $ (4,195) $ (497,258) $ — — — (497,258) $ — $ 2,007 — — 2,007 $ Balance, December 31, 2014 923,906 57,548 1,387 21,923 1,004,764 (2,238) $ (1,636) (2) (2,276) (6,152) $ Balance, January 1, 2013 Net Realized Gains (Losses) (1) Net Change in Unrealized Appreciation (in thousands) Senior Debt ......... $ Preferred Stock ... Common Stock ... Warrants .............. Total ................... $ 827,540 $ 33,178 2,367 22,140 885,225 $ (Depreciation) (2) Purchases (5) (8,208) $ 7,682 (1,103) 6,173 4,544 $ 484,367 $ 6,198 750 6,524 (8 ) $ (18,572) — (10,350) 497,839 $ (28,930) $ (9,536 ) $ 7,968 — 5,257 3,689 $ Sales Repayments (6) (469,780) $ Gross Transfers into Level 3 (4) 769 $ 776 93 — 1,638 $ Gross Transfers out of Level 3 (4) Balance, December 31, 2013 821,988 35,554 2,107 28,707 888,356 (3,156) $ (1,676) — (1,037) (5,869) $ — — — (469,780) $ (1) (2) (3) (4) (5) (6) Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations. Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations. Transfers in/out of Level 3 during the year ended December 31, 2014 relate to the conversion of Paratek Pharmaceuticals, Inc., SCI Energy, Inc., Oraya Therapeutics, Inc., and Neuralstem, Inc. debt to equity, the exercise of warrants in Box, Inc and WildTangent, Inc. to equity, the conversion of warrants in Glori Energy, Inc. to equity in the company’s reverse public merger, the public merger of Paratek Pharmaceuticals, Inc. with Transcept Pharmaceuticals, Inc. and the initial public offerings of Concert Pharmaceuticals, Inc., Dicerna Pharmaceuticals, Inc., Everyday Health, Inc., Neothetics, Inc., Revance Therapeutics, Inc., and UniQure BV. Transfers in/out of Level 3 during the year ended December 31, 2013 relate to the conversion of Optiscan BioMedical, Inc., Gynesonics, Inc., Philotic, Inc., and Tethys BioScience, Inc. debt to equity, the conversion of OCZ Technology warrants to principal and the initial public offerings of Portola Pharmaceuticals, Inc., Acceleron Pharma, Inc., Bind, Inc., and ADMA Biologics, Inc. Amounts listed above are inclusive of loan origination fees received at the inception of the loan which are deferred and amortized into fee income as well as the accretion of existing loan discounts and fees during the period. Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures. 142 143 16323_HER-10K_CS6-r4.indd 143 4/28/15 2:55 PM For the year ended December 31, 2014, approximately $15.0 million and $555,000 in net unrealized appreciation was recorded for preferred stock and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $14.2 million and $2.8 million in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the year ended December 31, 2013, approximately $4.4 million and $4.1 million in net unrealized appreciation was recorded for preferred stock and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $8.2 million and $1.1 million in net unrealized depreciation was recorded for debt and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Generally, under the 1940 Act, the Company is deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. The following table summarizes the Company’s realized and unrealized gain and loss and changes in the Company’s unrealized (in thousands) appreciation and depreciation on control and affiliate investments for the years ended December 31, 2014, 2013, and 2012. The Company did not hold any Control Investments at December 31, 2014, 2013 or 2012. (in thousands) Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2014 327 $ $ 6,072 1,600 7,999 $ $ (in thousands) Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2013 473 $ $ 4,784 5,724 10,981 $ $ (in thousands) Portfolio Company E-Band Communiations, Corp. ................................... Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Total ........................................................................... Type Affiliate Affiliate Affiliate $ $ — $ 1,665 10,207 11,872 $ Fair Value at December 31, 2012 Investment Income Investment Income Year ended December 31, 2014 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation)/ Appreciation (146 ) $ (24 ) (3,112 ) (3,282 ) $ — $ — — — $ Realized Gain/(Loss) — — — — — $ — 1,876 1,876 $ Investment Income Year ended December 31, 2013 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation)/ Appreciation (1,193 ) $ (225 ) 593 (825 ) $ — $ — — — $ Realized Gain/(Loss) — — — — — $ 1,933 462 2,395 $ Year ended December 31, 2012 Reversal of Unrealized (Depreciation)/ Appreciation Unrealized (Depreciation) /Appreciation (18 ) $ 672 (2,722 ) (2,068 ) $ Realized Gain/(Loss) — — — — — $ — — — $ 4 $ 712 1,649 2,365 $ During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. The Company’s investment in E- Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. 16323_HER-10K_CS6-r4.indd 144 4/28/15 2:55 PM 144 145 A summary of the composition of the Company’s investment portfolio as of December 31, 2014 and December 31, 2013 at fair value is shown as follows: December 31, 2014 December 31, 2013 Percentage of Investments at Fair Value Total Portfolio Investments at Percentage of Fair Value Total Portfolio (in thousands) Senior secured debt with warrants .......................................... $ Senior secured debt ................................................................. Preferred stock ........................................................................ Common Stock ....................................................................... 740,659 208,345 57,548 14,185 72.6% $ 20.4% 5.6% 1.4% 634,820 222,805 35,554 17,116 69.7% 24.5% 3.9% 1.9% Total ....................................................................................... $ 1,020,737 100.0% $ 910,295 100.0% A summary of the Company’s investment portfolio, at value, by geographic location as of December 31, 2014 and December 31, 2013 is shown as follows: December 31, 2014 December 31, 2013 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio United States ................................... $ 967,803 94.8% $ 864,003 India................................................. Netherlands ..................................... Israel ................................................ Canada ............................................. England ........................................... 24,175 19,913 6,498 2,314 34 2.4% 2.0% 0.6% 0.2% 0.0% — 10,131 9,863 25,798 500 Total ................................................ $ 1,020,737 100.0% $ 910,295 The following table shows the fair value the Company’s portfolio by industry sector at December 31, 2014 and December 31, 2013: December 31, 2014 December 31, 2013 Investments at Fair Percentage of Total Investments at Fair Percentage of Total Value Portfolio Value Portfolio (in thousands) Drug Discovery & Development ........... $ Medical Devices & Equipment ............. Software ................................................ Drug Delivery ........................................ Internet Consumer & Business Services ... Energy Technology ............................... Consumer & Business Products ............ Communications & Networking............ Specialty Pharmaceuticals ..................... Media/Content/Info ............................... Information Services ............................. Healthcare Services, Other .................... Surgical Devices .................................... Semiconductors ..................................... Biotechnology Tools ............................. Diagnostic ............................................. Electronics & Computer Hardware ....... 267,618 138,046 125,412 88,491 69,655 68,280 63,225 61,433 51,536 29,219 27,016 10,527 9,915 5,126 3,721 825 692 26.2% $ 13.5% 12.3% 8.7% 6.8% 6.7% 6.2% 6.0% 5.0% 2.9% 2.6% 1.0% 1.0% 0.5% 0.4% 0.1% 0.1% 219,169 103,614 65,218 62,022 122,073 164,466 2,995 35,979 20,055 8,679 46,565 29,080 10,307 4,685 5,275 902 9,211 94.9% — 1.1% 1.1% 2.8% 0.1% 100.0% 24.1% 11.4% 7.2% 6.8% 13.4% 18.1% 0.3% 4.0% 2.2% 1.0% 5.1% 3.2% 1.0% 0.5% 0.6% 0.1% 1.0% Total ...................................................... $ 1,020,737 100.0% $ 910,295 100.0% During the year ended December 31, 2014, the Company funded investments in debt securities and equity investments totaling approximately $611.0 million and $10.3 million, respectively. The Company converted approximately $2.2 million of debt to equity in four portfolio companies in the year ended December 31, 2014. For the year ended December 31, 2014, approximately $15.0 million and $555,000 in net unrealized appreciation was recorded A summary of the composition of the Company’s investment portfolio as of December 31, 2014 and December 31, 2013 at fair for preferred stock and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. For the same value is shown as follows: period, approximately $14.2 million and $2.8 million in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. December 31, 2014 December 31, 2013 (in thousands) 740,659 Senior secured debt with warrants .......................................... $ 208,345 Senior secured debt ................................................................. 57,548 Preferred stock ........................................................................ Common Stock ....................................................................... 14,185 Total ....................................................................................... $ 1,020,737 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio 69.7% 24.5% 3.9% 1.9% 100.0% 634,820 222,805 35,554 17,116 910,295 72.6% $ 20.4% 5.6% 1.4% 100.0% $ A summary of the Company’s investment portfolio, at value, by geographic location as of December 31, 2014 and December 31, 2013 is shown as follows: (in thousands) United States ................................... $ India................................................. Netherlands ..................................... Israel ................................................ Canada ............................................. England ........................................... Total ................................................ $ December 31, 2014 December 31, 2013 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio 967,803 24,175 19,913 6,498 2,314 34 1,020,737 94.8% $ 2.4% 2.0% 0.6% 0.2% 0.0% 100.0% $ 864,003 — 10,131 9,863 25,798 500 910,295 94.9% — 1.1% 1.1% 2.8% 0.1% 100.0% The following table shows the fair value the Company’s portfolio by industry sector at December 31, 2014 and December 31, 2013: December 31, 2014 December 31, 2013 For the year ended December 31, 2013, approximately $4.4 million and $4.1 million in net unrealized appreciation was recorded for preferred stock and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $8.2 million and $1.1 million in net unrealized depreciation was recorded for debt and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Generally, under the 1940 Act, the Company is deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. The following table summarizes the Company’s realized and unrealized gain and loss and changes in the Company’s unrealized appreciation and depreciation on control and affiliate investments for the years ended December 31, 2014, 2013, and 2012. The Company did not hold any Control Investments at December 31, 2014, 2013 or 2012. Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2014 Investment Income Year ended December 31, 2014 Reversal of Unrealized Unrealized (Depreciation)/ Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) 327 $ 6,072 1,600 7,999 $ — $ — 1,876 1,876 $ (146 ) $ (24 ) (3,112 ) (3,282 ) $ — $ — — — $ Year ended December 31, 2013 Reversal of Unrealized Unrealized (Depreciation)/ Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) Year ended December 31, 2012 Unrealized Reversal of Unrealized — — — — — — — — — — — — — $ — — — $ — $ — — — $ Portfolio Company Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Stion Corporation ........................................................ Total ........................................................................... Type Affiliate Affiliate Affiliate Fair Value at December 31, 2013 Investment Income 473 $ 4,784 5,724 10,981 $ — $ 1,933 462 2,395 $ (1,193 ) $ (225 ) 593 (825 ) $ Portfolio Company E-Band Communiations, Corp. ................................... Gelesis, Inc. ................................................................. Optiscan BioMedical, Corp. ........................................ Total ........................................................................... Type Affiliate Affiliate Affiliate — $ 1,665 10,207 11,872 $ 4 $ 712 1,649 2,365 $ (18 ) $ 672 (2,722 ) (2,068 ) $ Fair Value at Investment December 31, 2012 Income (Depreciation) /Appreciation (Depreciation)/ Realized Appreciation Gain/(Loss) During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. The Company’s investment in E- Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. (in thousands) (in thousands) (in thousands) $ $ $ $ $ $ 267,618 138,046 125,412 88,491 69,655 68,280 63,225 61,433 51,536 29,219 27,016 10,527 9,915 5,126 3,721 825 692 1,020,737 26.2% $ 13.5% 12.3% 8.7% 6.8% 6.7% 6.2% 6.0% 5.0% 2.9% 2.6% 1.0% 1.0% 0.5% 0.4% 0.1% 0.1% 100.0% $ 219,169 103,614 65,218 62,022 122,073 164,466 2,995 35,979 20,055 8,679 46,565 29,080 10,307 4,685 5,275 902 9,211 910,295 24.1% 11.4% 7.2% 6.8% 13.4% 18.1% 0.3% 4.0% 2.2% 1.0% 5.1% 3.2% 1.0% 0.5% 0.6% 0.1% 1.0% 100.0% (in thousands) Drug Discovery & Development ........... $ Medical Devices & Equipment ............. Software ................................................ Drug Delivery ........................................ Internet Consumer & Business Services ... Energy Technology ............................... Consumer & Business Products ............ Communications & Networking............ Specialty Pharmaceuticals ..................... Media/Content/Info ............................... Information Services ............................. Healthcare Services, Other .................... Surgical Devices .................................... Semiconductors ..................................... Biotechnology Tools ............................. Diagnostic ............................................. Electronics & Computer Hardware ....... Total ...................................................... $ Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio During the year ended December 31, 2014, the Company funded investments in debt securities and equity investments totaling approximately $611.0 million and $10.3 million, respectively. The Company converted approximately $2.2 million of debt to equity in four portfolio companies in the year ended December 31, 2014. 144 145 16323_HER-10K_CS6-r4.indd 145 4/28/15 2:55 PM During the year ended December 31, 2013, the Company funded investments in debt securities and equity investments totaling approximately $491.1 million and $3.9 million, respectively. The Company converted approximately $3.2 million of debt to equity in four portfolio companies in the year ended December 31, 2013. Paid-In-Kind and End of Term Income No single portfolio investment represents more than 10% of the fair value of the investments as of December 31, 2014 and December 31, 2013. During the year ended December 31, 2014, the Company recognized net realized gains of approximately $20.1 million on the portfolio. These net realized gains included gross realized gains of approximately $24.0 million primarily from the sale of investments in seven portfolio companies including Acceleron Pharma, Inc., ($7.9 million), Merrimack Pharaceuticals, Inc., ($4.3 million), Neuralstem, Inc., ($2.7 million), IPA Holdings, LLC., ($1.5 million), Cell Therapeutics, Inc., ($1.3 million), Trulia, Inc. ($1.0 million), and Portola Pharmaceuticals, Inc. ($700,000). These gains were partially offset by gross realized losses of approximately $3.9 million primarily from the liquidation of the Company’s investments in fifteen portfolio companies. During the year ended December 31, 2013, the Company recognized net realized gains of approximately $14.8 million on the portfolio. These net realized gains included gross realized gains of approximately $32.6 million primarily from the sale of investments in nine portfolio companies, partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of the Company’s investments in five portfolio companies. 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. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. The Company had approximately $4.5 million and $4.0 million of unamortized fees at December 31, 2014 and December 31, 2013, respectively, and approximately $19.3 million and $14.4 million in exit fees receivable at December 31, 2014 and December 31, 2013, respectively. The Company has debt investments in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $3.3 million and $3.5 million in PIK income in the years ended December 31, 2014 and 2013, respectively. In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction closes. The Company had no income from advisory services in the years ended December 31, 2014 and December 31, 2013. In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At December 31, 2014, approximately 54.2% of the Company’s portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of portfolio company debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014, the Company had no equipment only liens on any of the Company’s portfolio companies. Income Recognition The Company records interest income on the accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2014, the Company had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively, compared to two debt investments on non-accrual at December 31, 2013 with a cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively. Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. In addition, the Company may also be entitled to an end-of-term payment that is amortized into income over the life of the loan. To maintain the Company’s status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though the cash has not yet been collected. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. Fee Income Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and deal structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The Company recognizes nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. The Company’s offering costs are charged against the proceeds from equity offerings when received. Equity Offering Expenses Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method as applicable, or the straight line method, which closely approximates the effective yield method. Prepaid financing costs, net of accumulated amortization, were as follows as of December 31, 2014 and December 31, 2013. (in thousands) December 31, 2014 December 31, 2013 SBA Debentures ................................................................ $ 2019 Notes ......................................................................... 2024 Notes ......................................................................... 2017 Asset-Backed Notes .................................................. 2021 Asset-Backed Notes .................................................. Convertible Senior Notes ................................................... Wells Facility ..................................................................... Union Bank Facility ........................................................... 4,038 $ 4,352 3,205 506 3,207 175 794 156 5,074 5,319 — 2,686 — 1,323 398 — Total .................................................................................. $ 16,433 $ 14,800 Cash Equivalents to be cash equivalents. The Company considers money market funds and other highly liquid short-term investments with a maturity of less than 90 days 16323_HER-10K_CS6-r4.indd 146 4/28/15 2:55 PM 146 147 During the year ended December 31, 2013, the Company funded investments in debt securities and equity investments totaling Paid-In-Kind and End of Term Income Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. In addition, the Company may also be entitled to an end-of-term payment that is amortized into income over the life of the loan. To maintain the Company’s status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though the cash has not yet been collected. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. Fee Income Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and deal structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The Company recognizes nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. Equity Offering Expenses The Company’s offering costs are charged against the proceeds from equity offerings when received. Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method as applicable, or the straight line method, which closely approximates the effective yield method. Prepaid financing costs, net of accumulated amortization, were as follows as of December 31, 2014 and December 31, 2013. approximately $491.1 million and $3.9 million, respectively. The Company converted approximately $3.2 million of debt to equity in four portfolio companies in the year ended December 31, 2013. No single portfolio investment represents more than 10% of the fair value of the investments as of December 31, 2014 and December 31, 2013. During the year ended December 31, 2014, the Company recognized net realized gains of approximately $20.1 million on the portfolio. These net realized gains included gross realized gains of approximately $24.0 million primarily from the sale of investments in seven portfolio companies including Acceleron Pharma, Inc., ($7.9 million), Merrimack Pharaceuticals, Inc., ($4.3 million), Neuralstem, Inc., ($2.7 million), IPA Holdings, LLC., ($1.5 million), Cell Therapeutics, Inc., ($1.3 million), Trulia, Inc. ($1.0 million), and Portola Pharmaceuticals, Inc. ($700,000). These gains were partially offset by gross realized losses of approximately $3.9 million primarily from the liquidation of the Company’s investments in fifteen portfolio companies. During the year ended December 31, 2013, the Company recognized net realized gains of approximately $14.8 million on the portfolio. These net realized gains included gross realized gains of approximately $32.6 million primarily from the sale of investments in nine portfolio companies, partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of the Company’s investments in five portfolio companies. 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. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. The Company had approximately $4.5 million and $4.0 million of unamortized fees at December 31, 2014 and December 31, 2013, respectively, and approximately $19.3 million and $14.4 million in exit fees receivable at December 31, 2014 and December 31, 2013, respectively. The Company has debt investments in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $3.3 million and $3.5 million in PIK income in the years ended December 31, 2014 and 2013, respectively. In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction closes. The Company had no income from advisory services in the years ended December 31, 2014 and December 31, 2013. In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At December 31, 2014, approximately 54.2% of the Company’s portfolio company debt investments were secured by a first priority security in all of the assets of the portfolio company, including their intellectual property, and 45.8% of portfolio company debt investments were to portfolio companies that were prohibited from pledging or encumbering their intellectual property, or subject to a negative pledge. At December 31, 2014, the Company had no equipment only liens on any of the Company’s portfolio companies. Income Recognition The Company records interest income on the accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2014, the Company had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $28.9 million and $10.6 million, respectively, compared to two debt investments on non-accrual at December 31, 2013 with a cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively. Cash Equivalents The Company considers money market funds and other highly liquid short-term investments with a maturity of less than 90 days to be cash equivalents. 146 147 16323_HER-10K_CS6-r4.indd 147 4/28/15 2:55 PM (in thousands) SBA Debentures ................................................................ $ 2019 Notes ......................................................................... 2024 Notes ......................................................................... 2017 Asset-Backed Notes .................................................. 2021 Asset-Backed Notes .................................................. Convertible Senior Notes ................................................... Wells Facility ..................................................................... Union Bank Facility ........................................................... Total .................................................................................. $ December 31, 2014 December 31, 2013 5,074 5,319 — 2,686 — 1,323 398 — 14,800 4,038 $ 4,352 3,205 506 3,207 175 794 156 16,433 $ Stock Based Compensation Comprehensive Income The Company has issued and may, from time to time, issue additional stock options and restricted stock to employees under the The Company reports all changes in comprehensive income in the Consolidated Statement of Operations. Comprehensive Company’s 2004 Equity Incentive Plan and Board members under the Company’s 2006 Equity Incentive Plan. Management follows ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock based compensation for stock options and restricted stock granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date may require judgment, including estimating stock price volatility, forfeiture rate and expected option life. Earnings Per Share (EPS) Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future service is required as a condition to the delivery of the underlying common stock. Income Taxes The Company operates to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes the Company’s taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of the Company’s election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in- kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non- cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of the Company’s ordinary income for each calendar year, (2) 98.2% of the Company’s capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). The Company will not be subject to excise taxes on amounts on which the Company is required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, the Company may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent the Company chooses to carry over taxable income into the next tax year, dividends declared and paid by the Company in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. The Company intends to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to the Company’s shareholders in 2015. The Company distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to the Company’s shareholders in 2014. Because federal income tax regulations differ from accounting principles generally accepted in the United States, 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 tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. income is equal to net increase in net assets resulting from operations. Dividends and distributions to common stockholders are approved by the Board of Directors on a quarterly basis and the dividend payable is recorded on the ex-dividend date. The Company maintains an “opt out” dividend reinvestment plan that provides for reinvestment of the Company’s distribution on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s Board of Directors authorizes, and the Company declares a cash dividend, then the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividends. During 2014, 2013, and 2012, the Company issued approximately 96,976, 159,000, and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. Dividends Segments The Company lends to and invests in portfolio companies in various technology-related companies, including energy technology, life science, and special opportunity lower middle market companies. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so the Company has concluded there is no impact from adopting this standard on the Company’s statement of assets and liabilities or results of operations. The Company has adopted this standard for the fiscal year ending December 31, 2014. 3. Fair Value of Financial Instruments Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities, approximate the fair values of such items due to the short maturity of such instruments. The Convertible Senior Notes, the April 2019 Notes, the September 2019 Notes (together with the April 2019 Notes, the “2019 Notes”), the 2024 Notes, the 2017 Asset-Backed Notes, the 2021 Asset-Backed Notes and the SBA debentures, as each term is defined herein, as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. At December 31, 2014, the April 2019 Notes were trading on the New York Stock Exchange for $25.58 per dollar at par value, the September 2019 Notes were trading on the New York Stock Exchange for $25.64 per dollar at par value and the 2024 Notes were trading on the New York Stock Exchange for $25.26 per dollar at par value. Based on market quotations on or around December 31, 2014, the Convertible Senior Notes were trading for 1.290 per dollar at par value, the 2017 Asset-Backed Notes were trading for 1.375 per dollar at par value and the 2021 Asset-Backed Notes were trading for 1.000 per dollar at par value. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of the SBA debentures would be approximately $191.8 million, compared to the carrying amount of $190.2 million as of December 31, 2014. See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in Note 2. 16323_HER-10K_CS6-r4.indd 148 4/28/15 2:55 PM 148 149 Stock Based Compensation Comprehensive Income The Company has issued and may, from time to time, issue additional stock options and restricted stock to employees under the The Company reports all changes in comprehensive income in the Consolidated Statement of Operations. Comprehensive Company’s 2004 Equity Incentive Plan and Board members under the Company’s 2006 Equity Incentive Plan. Management follows income is equal to net increase in net assets resulting from operations. ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock based compensation for stock options and restricted stock granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date may require judgment, including estimating stock price volatility, forfeiture rate and expected option life. Earnings Per Share (EPS) Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future service is required as a condition to the delivery of the underlying common stock. Income Taxes The Company operates to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes the Company’s taxable interest, dividend and fee income, as well as taxable net capital 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 gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of the Company’s election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in- kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non- cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of the Company’s ordinary income for each calendar year, (2) 98.2% of the Company’s capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). The Company will not be subject to excise taxes on amounts on which the Company is required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, the Company may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent the Company chooses to carry over taxable income into the next tax year, dividends declared and paid by the Company in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. The Company intends to distribute approximately $16.7 million of spillover earnings from the year ended December 31, 2014 to the Company’s shareholders in 2015. The Company distributed approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to the Company’s shareholders in 2014. Because federal income tax regulations differ from accounting principles generally accepted in the United States, 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 tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Dividends Dividends and distributions to common stockholders are approved by the Board of Directors on a quarterly basis and the dividend payable is recorded on the ex-dividend date. The Company maintains an “opt out” dividend reinvestment plan that provides for reinvestment of the Company’s distribution on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s Board of Directors authorizes, and the Company declares a cash dividend, then the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividends. During 2014, 2013, and 2012, the Company issued approximately 96,976, 159,000, and 219,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. Segments The Company lends to and invests in portfolio companies in various technology-related companies, including energy technology, life science, and special opportunity lower middle market companies. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so the Company has concluded there is no impact from adopting this standard on the Company’s statement of assets and liabilities or results of operations. The Company has adopted this standard for the fiscal year ending December 31, 2014. 3. Fair Value of Financial Instruments Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities, approximate the fair values of such items due to the short maturity of such instruments. The Convertible Senior Notes, the April 2019 Notes, the September 2019 Notes (together with the April 2019 Notes, the “2019 Notes”), the 2024 Notes, the 2017 Asset-Backed Notes, the 2021 Asset-Backed Notes and the SBA debentures, as each term is defined herein, as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. At December 31, 2014, the April 2019 Notes were trading on the New York Stock Exchange for $25.58 per dollar at par value, the September 2019 Notes were trading on the New York Stock Exchange for $25.64 per dollar at par value and the 2024 Notes were trading on the New York Stock Exchange for $25.26 per dollar at par value. Based on market quotations on or around December 31, 2014, the Convertible Senior Notes were trading for 1.290 per dollar at par value, the 2017 Asset-Backed Notes were trading for 1.375 per dollar at par value and the 2021 Asset-Backed Notes were trading for 1.000 per dollar at par value. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of the SBA debentures would be approximately $191.8 million, compared to the carrying amount of $190.2 million as of December 31, 2014. See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in Note 2. 148 149 16323_HER-10K_CS6-r4.indd 149 4/28/15 2:55 PM The liabilities of the Company below are recorded at amortized cost and not at fair value on the Consolidated Statement of LongTerm SBA Debentures Assets and Liabilities. The following table provides additional information about the level in the fair value hierarchy of the Company’s liabilities at December 31, 2014. (in thousands) Description Convertible Senior Notes ........................... $ 2017 Asset-Backed Notes .......................... $ 2021 Asset-Backed Notes .......................... $ April 2019 Notes ........................................ $ September 2019 Notes................................ $ 2024 Notes ................................................. $ SBA Debentures ......................................... $ Total ........................................................... $ December 31, 2014 Identical Assets (Level 1) Observable Inputs (Level 2) Unobservable Inputs (Level 3) 22,799 $ 22,068 $ 129,300 $ 86,450 $ 88,073 $ 104,071 $ 191,779 $ 644,540 $ — $ — $ — $ — $ — $ — $ — $ — $ 22,799 $ — $ 129,300 $ 86,450 $ 88,073 $ 104,071 $ — $ 430,693 $ — 22,068 — — — — 191,779 213,847 The following table provides information about the level in the fair value hierarchy of the Company’s liabilities at December 31, total portfolio. 2013. (in thousands) Description Convertible Senior Notes ........................... $ 2017 Asset-Backed Notes .......................... $ April 2019 Notes ........................................ $ September 2019 Notes................................ $ SBA Debentures ......................................... $ Total ........................................................... $ December 31, 2013 Identical Assets (Level 1) Observable Inputs (Level 2) Unobservable Inputs (Level 3) 105,206 $ 89,893 $ 86,281 $ 87,248 $ 222,742 $ 591,370 $ — $ — $ — $ — $ — $ — $ 105,206 $ — $ 86,281 $ 87,248 $ — $ 278,735 $ — 89,893 — — 222,742 312,635 4. Borrowings Outstanding Borrowings At December 31, 2014 and December 31, 2013, the Company had the following available borrowings and outstanding borrowings: December 31, 2014 December 31, 2013 Total Available Carrying Value (1) Total Available (in thousands) SBA Debentures (2) ..................................... $ 2019 Notes ................................................. 2024 Notes ................................................. 2017 Asset-Backed Notes .......................... 2021 Asset-Backed Notes .......................... Convertible Senior Notes (3) ....................... Wells Facility ............................................. Union Bank Facility ................................... Total ........................................................... $ 190,200 $ 170,364 103,000 16,049 129,300 17,674 75,000 75,000 776,587 $ 190,200 $ 170,364 103,000 16,049 129,300 17,345 — — 626,258 $ Carrying Value (1) 225,000 170,364 — 89,557 — 72,519 — — 557,440 225,000 $ 170,364 — 89,557 — 75,000 75,000 30,000 664,921 $ (1) (2) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0 million was available in HT III. At December 31, 2013, the total available borrowings under the SBA debentures were $225.0 million, of which $76.0 million was available in HT II and $149.0 million was available in HT III. (3) During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. The balance at December 31, 2014 represents the remaining aggregate principal amount outstanding of the Convertible Senior Notes less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was approximately $329,000 at December 31, 2014 and $2.5 million at December 31, 2013. 16323_HER-10K_CS6-r4.indd 150 4/28/15 2:55 PM 150 151 On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With the Company’s net investment of $38.0 million in HT II as of December 31, 2014, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of December 31, 2014. As of December 31, 2014, HT II has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, the Company held investments in HT II in 38 companies with a fair value of approximately $109.5 million, accounting for approximately 10.7% of the Company’s total portfolio. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. With the Company’s net investment of $74.5 million in HT III as of December 31, 2014, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of December 31, 2014. As of December 31, 2014, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, the Company held investments in HT III in 39 companies with a fair value of approximately $229.9 million, accounting for approximately 22.5% of the Company’s SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through the Company’s wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and HT III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in March 2009 are set semiannually in March and September and range from 2.25% to 4.62%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of March 2009, the initial maturity of SBA debentures will occur in March 2019. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013, were 0.804%. The annual fees on other debentures have been set at 0.515%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT II was approximately $46.7 million with an average interest rate of approximately 4.75%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT III was approximately $149.0 million with an average interest rate of approximately 3.43%. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of the Company’s total assets prior to consolidation at December 31, 2014. The liabilities of the Company below are recorded at amortized cost and not at fair value on the Consolidated Statement of LongTerm SBA Debentures Assets and Liabilities. The following table provides additional information about the level in the fair value hierarchy of the Company’s liabilities at December 31, 2014. (in thousands) Description December 31, 2014 (Level 1) (Level 2) Identical Assets Observable Inputs Convertible Senior Notes ........................... $ 2017 Asset-Backed Notes .......................... $ 2021 Asset-Backed Notes .......................... $ April 2019 Notes ........................................ $ September 2019 Notes................................ $ 2024 Notes ................................................. $ SBA Debentures ......................................... $ Total ........................................................... $ 22,799 $ 22,068 $ 129,300 $ 86,450 $ 88,073 $ 104,071 $ 191,779 $ 644,540 $ The following table provides information about the level in the fair value hierarchy of the Company’s liabilities at December 31, 2013. Unobservable Inputs (Level 3) 22,068 — — — — — 191,779 213,847 22,799 $ — $ 129,300 $ 86,450 $ 88,073 $ 104,071 $ — $ 430,693 $ Unobservable Inputs (Level 3) 105,206 $ — $ 86,281 $ 87,248 $ — $ 278,735 $ 89,893 — — — 222,742 312,635 — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ (in thousands) Description December 31, 2013 (Level 1) (Level 2) Identical Assets Observable Inputs Convertible Senior Notes ........................... $ 2017 Asset-Backed Notes .......................... $ April 2019 Notes ........................................ $ September 2019 Notes................................ $ SBA Debentures ......................................... $ Total ........................................................... $ 105,206 $ 89,893 $ 86,281 $ 87,248 $ 222,742 $ 591,370 $ 4. Borrowings Outstanding Borrowings borrowings: At December 31, 2014 and December 31, 2013, the Company had the following available borrowings and outstanding (in thousands) SBA Debentures (2) ..................................... $ 2019 Notes ................................................. 2024 Notes ................................................. 2017 Asset-Backed Notes .......................... 2021 Asset-Backed Notes .......................... Convertible Senior Notes (3) ....................... Wells Facility ............................................. Union Bank Facility ................................... December 31, 2014 December 31, 2013 Total Available Carrying Value (1) Total Available Carrying Value (1) 190,200 $ 170,364 103,000 16,049 129,300 17,674 75,000 75,000 190,200 $ 170,364 103,000 16,049 129,300 17,345 — — 225,000 $ 170,364 — 89,557 — 75,000 75,000 30,000 225,000 170,364 89,557 72,519 — — — — Total ........................................................... $ 776,587 $ 626,258 $ 664,921 $ 557,440 (1) (2) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0 million was available in HT III. At December 31, 2013, the total available borrowings under the SBA debentures were $225.0 million, of which $76.0 million was available in HT II and $149.0 million was available in HT III. (3) During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. The balance at December 31, 2014 represents the remaining aggregate principal amount outstanding of the Convertible Senior Notes less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was approximately $329,000 at December 31, 2014 and $2.5 million at December 31, 2013. On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With the Company’s net investment of $38.0 million in HT II as of December 31, 2014, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of December 31, 2014. As of December 31, 2014, HT II has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, the Company held investments in HT II in 38 companies with a fair value of approximately $109.5 million, accounting for approximately 10.7% of the Company’s total portfolio. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. With the Company’s net investment of $74.5 million in HT III as of December 31, 2014, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of December 31, 2014. As of December 31, 2014, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2014, the Company held investments in HT III in 39 companies with a fair value of approximately $229.9 million, accounting for approximately 22.5% of the Company’s total portfolio. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through the Company’s wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and HT III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2014 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in March 2009 are set semiannually in March and September and range from 2.25% to 4.62%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of March 2009, the initial maturity of SBA debentures will occur in March 2019. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013, were 0.804%. The annual fees on other debentures have been set at 0.515%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT II was approximately $46.7 million with an average interest rate of approximately 4.75%. The average amount of debentures outstanding for the year ended December 31, 2014 for HT III was approximately $149.0 million with an average interest rate of approximately 3.43%. HT II and HT III hold approximately $150.5 million and $314.8 million in assets, respectively, and accounted for approximately 9.1% and 19.1% of the Company’s total assets prior to consolidation at December 31, 2014. 150 151 16323_HER-10K_CS6-r4.indd 151 4/28/15 2:55 PM As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with the Company’s net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the Company has issued $190.2 million in SBA-guaranteed debentures in the Company’s SBIC subsidiaries. The Company reported the following SBA debentures outstanding on its Consolidated Statement of Assets and Liabilities as of December 31, 2014 and December 31, 2013: Subsequent Events.” Maturity Date (in thousands) Issuance/Pooling Date SBA Debentures: March 26, 2008 ......................................... March 1, 2018 March 25, 2009 ......................................... March 1, 2019 September 23, 2009 ................................... September 1, 2019 September 22, 2010 ................................... September 1, 2020 September 22, 2010 ................................... September 1, 2020 March 29, 2011 ......................................... March 1, 2021 September 21, 2011 ................................... September 1, 2021 March 21, 2012 ......................................... March 1, 2022 March 21, 2012 ......................................... March 1, 2022 September 19, 2012 ................................... September 1, 2022 March 27, 2013 ......................................... March 1, 2023 Total SBA Debentures............................. Interest Rate (1) December 31, 2014 December 31, 2013 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ $ — $ 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 190,200 $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 225,000 (1) Interest rate includes annual charge 2019 Notes On March 6, 2012, the Company and U.S. Bank National Association (the “2019 Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, the Company and the Trustee entered into the First Supplemental Indenture to the Base Indenture (the “First Supplemental Indenture”), dated April 17, 2012, relating to the Company’s issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. In July 2012, the Company reopened the April 2019 Notes and issued an additional $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. On September 24, 2012, the Company and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture (the “Second Supplemental Indenture”), dated as of September 24, 2012, relating to the Company’s issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. obligations of any of the Company’s subsidiaries. As of December 31, 2014 and December 31, 2013, the 2019 Notes payable is comprised of: April 2019 Notes The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the NYSE under the trading symbol “HTGZ.” See “— The April 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring the Company’s compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the First Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the NYSE under the trading symbol “HTGY.” The September 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. (in thousands) April 2019 Notes ...................................................................... $ September 2019 Notes ............................................................. Carrying Value of 2019 Notes .......................................... $ December 31, 2014 December 31, 2013 84,490 85,874 170,364 84,490 $ 85,874 170,364 $ 16323_HER-10K_CS6-r4.indd 152 4/28/15 2:55 PM 152 153 As of December 31, 2014, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed April 2019 Notes debentures is $225.0 million, subject to periodic adjustments by the SBA. In aggregate, at December 31, 2014, with the Company’s net investment of $112.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. In March 2014, the Company repaid $34.8 million of SBA debentures under HT II, priced at approximately 6.38%, including annual fees. At December 31, 2014, the Company has issued $190.2 million in SBA-guaranteed debentures in the Company’s SBIC subsidiaries. The Company reported the following SBA debentures outstanding on its Consolidated Statement of Assets and Liabilities as of December 31, 2014 and December 31, 2013: (in thousands) Issuance/Pooling Date SBA Debentures: Maturity Date Interest Rate (1) December 31, 2014 December 31, 2013 March 26, 2008 ......................................... March 1, 2018 March 25, 2009 ......................................... March 1, 2019 September 23, 2009 ................................... September 1, 2019 September 22, 2010 ................................... September 1, 2020 September 22, 2010 ................................... September 1, 2020 March 29, 2011 ......................................... March 1, 2021 September 21, 2011 ................................... September 1, 2021 March 21, 2012 ......................................... March 1, 2022 March 21, 2012 ......................................... March 1, 2022 September 19, 2012 ................................... September 1, 2022 March 27, 2013 ......................................... March 1, 2023 Total SBA Debentures............................. 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ — $ 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 $ 190,200 $ 225,000 (1) Interest rate includes annual charge 2019 Notes On March 6, 2012, the Company and U.S. Bank National Association (the “2019 Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, the Company and the Trustee entered into the First Supplemental Indenture to the Base Indenture (the “First Supplemental Indenture”), dated April 17, 2012, relating to the Company’s issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. In July 2012, the Company reopened the April 2019 Notes and issued an additional $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. On September 24, 2012, the Company and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture (the “Second Supplemental Indenture”), dated as of September 24, 2012, relating to the Company’s issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. As of December 31, 2014 and December 31, 2013, the 2019 Notes payable is comprised of: (in thousands) December 31, 2014 December 31, 2013 April 2019 Notes ...................................................................... $ September 2019 Notes ............................................................. Carrying Value of 2019 Notes .......................................... $ 84,490 $ 85,874 170,364 $ 84,490 85,874 170,364 The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the NYSE under the trading symbol “HTGZ.” See “— Subsequent Events.” The April 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring the Company’s compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the First Supplemental Indenture. The Base Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the NYSE under the trading symbol “HTGY.” The September 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. 152 153 16323_HER-10K_CS6-r4.indd 153 4/28/15 2:55 PM The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. expense and fees for the 2024 Notes are as follows: For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 Notes and September 2019 Notes are as follows: (in thousands) December 31, 2014 2013 (in thousands) Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ Year Ended December 31, 2013 2014 11,926 $ 967 12,893 $ 11,926 $ 11,926 967 12,893 11,926 As of December 31, 2014, the Company is in compliance with the terms of the indenture, and respective supplemental of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “2017 Asset- indenture, governing the April 2019 Notes and September 2019 Notes. 2024 Notes On July 14, 2014, the Company and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the Base Indenture between the Company and the 2024 Trustee, dated July 14, 2014, relating to the Company’s issuance, offer and sale of $100.0 million aggregate principal amount of 2024 Notes. On August 6, 2014, the underwriters issued notification to exercise their over-allotment option for an additional $3.0 million in aggregate principal amount of the 2024 Notes. The sale of the 2024 Notes generated net proceeds of approximately $99.9 million. The 2024 Notes will mature on July 30, 2024 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after July 30, 2017, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2014, and trade on the NYSE under the trading symbol “HTGX.” The 2024 Notes will be the Company’s direct unsecured obligations and will rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Third Supplemental Indenture. The Base Indenture, as supplemented by the Third Supplemental Indenture, also contains certain reporting requirements, including a requirement that the Company provide financial information to the holders of the 2024 Notes and the 2024 Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. The Base Indenture provides for customary events of default and further provides that the 2024 Trustee or the holders of 25% in aggregate principal amount of the outstanding 2024 Notes in a series may declare such 2024 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. As of December 31, 2014, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture. At December 31, 2014, the 2024 Notes had an outstanding principal balance of $103.0 million. customary representations, warranties and covenants. 16323_HER-10K_CS6-r4.indd 154 4/28/15 2:55 PM 154 155 Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ 2,955 $ 153 3,108 $ 1,887 $ — — — — 2017 Asset-Backed Notes On December 19, 2012, the Company completed a $230.7 million term debt securitization in connection with which an affiliate Backed Notes”), which 2017 Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The 2017 Asset-Backed Notes were sold by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among the Company, Hercules Capital Funding 2012-1, LLC as trust depositor (the “2012 Trust Depositor”), Hercules Capital Funding Trust 2012-1 as issuer (the “2012 Securitization Issuer”), and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2017 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The 2017 Asset-Backed Notes have a stated maturity of December 16, 2017. See “—Subsequent Events.” As part of this transaction, the Company entered into a sale and contribution agreement with the 2012 Trust Depositor under which the Company has agreed to sell or have contributed to the 2012 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2012 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2012 Loans as of the date of their transfer to the 2012 Trust Depositor. In connection with the sale of the 2017 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2017 Asset-Backed Notes are secured obligations of the 2012 Securitization Issuer and are non-recourse to the Company. The 2012 Securitization Issuer also entered into an indenture governing the 2017Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2017 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2017 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2012 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c) (7) thereof. In addition, the 2012 Trust Depositor entered into an amended and restated trust agreement in respect of the 2012 Securitization Issuer, which includes customary representation, warranties and covenants. The 2012 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2012 Loans. The Company is entitled to receive a monthly fee from the 2012 Securitization Issuer for servicing the 2012 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the 2012 Loans plus the amount of collections on deposit in the 2012 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). The Company also serves as administrator to the 2012 Securitization Issuer under an administration agreement, which includes At December 31, 2014 and December 31, 2013, the 2017 Asset-Backed Notes had an outstanding principal balance of $16.0 million and $89.6 million, respectively. The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among the Company For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. expense and fees for the 2024 Notes are as follows: For the years ended December 31, 2014 and 2013, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 Notes and September 2019 Notes are as follows: (in thousands) Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ Year Ended December 31, 2014 2013 11,926 $ 967 12,893 $ 11,926 $ 11,926 967 12,893 11,926 As of December 31, 2014, the Company is in compliance with the terms of the indenture, and respective supplemental indenture, governing the April 2019 Notes and September 2019 Notes. 2024 Notes On July 14, 2014, the Company and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the Base Indenture between the Company and the 2024 Trustee, dated July 14, 2014, relating to the Company’s issuance, offer and sale of $100.0 million aggregate principal amount of 2024 Notes. On August 6, 2014, the underwriters issued notification to exercise their over-allotment option for an additional $3.0 million in aggregate principal amount of the 2024 Notes. The sale of the 2024 Notes generated net proceeds of approximately $99.9 million. The 2024 Notes will mature on July 30, 2024 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after July 30, 2017, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2014, and trade on the NYSE under the trading symbol “HTGX.” The 2024 Notes will be the Company’s direct unsecured obligations and will rank: (i) pari passu with the Company’s other outstanding and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as supplemented by the Third Supplemental Indenture. The Base Indenture, as supplemented by the Third Supplemental Indenture, also contains certain reporting requirements, including a requirement that the Company provide financial information to the holders of the 2024 Notes and the 2024 Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. The Base Indenture provides for customary events of default and further provides that the 2024 Trustee or the holders of 25% in aggregate principal amount of the outstanding 2024 Notes in a series may declare such 2024 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. As of December 31, 2014, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture. (in thousands) Stated interest expense ............................................................. $ Amortization of debt issuance cost........................................... Total interest expense and fees ........................................ $ Cash paid for interest expense and fees .................................... $ December 31, 2014 2013 2,955 $ 153 3,108 $ $ 1,887 — — — — 2017 Asset-Backed Notes On December 19, 2012, the Company completed a $230.7 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “2017 Asset- Backed Notes”), which 2017 Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The 2017 Asset-Backed Notes were sold by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among the Company, Hercules Capital Funding 2012-1, LLC as trust depositor (the “2012 Trust Depositor”), Hercules Capital Funding Trust 2012-1 as issuer (the “2012 Securitization Issuer”), and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2017 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The 2017 Asset-Backed Notes have a stated maturity of December 16, 2017. See “—Subsequent Events.” As part of this transaction, the Company entered into a sale and contribution agreement with the 2012 Trust Depositor under which the Company has agreed to sell or have contributed to the 2012 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2012 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2012 Loans as of the date of their transfer to the 2012 Trust Depositor. In connection with the sale of the 2017 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2017 Asset-Backed Notes are secured obligations of the 2012 Securitization Issuer and are non-recourse to the Company. The 2012 Securitization Issuer also entered into an indenture governing the 2017Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2017 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2017 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2012 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c) (7) thereof. In addition, the 2012 Trust Depositor entered into an amended and restated trust agreement in respect of the 2012 Securitization Issuer, which includes customary representation, warranties and covenants. The 2012 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2012 Loans. The Company is entitled to receive a monthly fee from the 2012 Securitization Issuer for servicing the 2012 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the 2012 Loans plus the amount of collections on deposit in the 2012 Securitization Issuer’s collection account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). The Company also serves as administrator to the 2012 Securitization Issuer under an administration agreement, which includes At December 31, 2014, the 2024 Notes had an outstanding principal balance of $103.0 million. customary representations, warranties and covenants. At December 31, 2014 and December 31, 2013, the 2017 Asset-Backed Notes had an outstanding principal balance of $16.0 million and $89.6 million, respectively. 154 155 16323_HER-10K_CS6-r4.indd 155 4/28/15 2:55 PM Under the terms of the 2017 Asset Backed Notes, the Company is required to maintain a reserve cash balance, funded through Convertible Senior Notes interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2017Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. There was approximately $1.2 million and $6.3 million of restricted cash as of December 31, 2014 and December 31, 2013, respectively, funded through interest collections. 2021 Asset-Backed Notes On November 13, 2014, the Company completed a $237.4 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “2021 Asset- Backed Notes”), which 2021 Asset-Backed Notes were rated A(sf) by Kroll Bond Rating Agency, Inc. (“KBRA”). The 2021 Asset- Backed Notes were sold by Hercules Capital Funding Trust 2014-1 pursuant to a note purchase agreement, dated as of November 13, 2014, by and among the Company, Hercules Capital Funding 2014-1, LLC as trust depositor (the “2014 Trust Depositor”), Hercules Capital Funding Trust 2014-1 as issuer (the “2014 Securitization Issuer”), and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has an 18-month reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have a stated maturity of April 16, 2021. As part of this transaction, the Company entered into a sale and contribution agreement with the 2014 Trust Depositor under which the Company has agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2014 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor. In connection with the issuance and sale of the 2021 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to the Company. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2014 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c) (7) thereof and Rule 3A-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants. The 2014 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2014 Loans. The Company is entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). The Company also serves as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2014, the 2021 Asset-Backed Notes had an outstanding principal balance of $129.3 million. Under the terms of the 2021 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2021 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. There was approximately $11.5 million of restricted cash as of December 31, 2014, funded through interest collections. In April 2011, the Company issued $75.0 million in aggregate principal amount of its 6.00% convertible senior notes due 2016 (the “Convertible Senior Notes”). During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015, until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of December 31, 2014, the conversion rate is 88.0615 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an adjusted conversion price of approximately $11.36 per share of common stock). The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, the Company estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, the Company recorded interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 8.1%. Upon meeting the stock trading price conversion requirement during the three-month periods ended June 30, 2014 and September 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, approximately $57.3 million of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the Company’s common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “— Subsequent Events.” The Company recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt the Company recorded for the year ended December 31, 2014 was approximately $1.6 million and was classified as a component of net investment income in the Company’s Consolidated Statements of Operations. 16323_HER-10K_CS6-r4.indd 156 4/28/15 2:55 PM 156 157 Under the terms of the 2017 Asset Backed Notes, the Company is required to maintain a reserve cash balance, funded through Convertible Senior Notes interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2017Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. There was approximately $1.2 million and $6.3 million of restricted cash as of December 31, 2014 and December 31, 2013, respectively, funded through interest collections. 2021 Asset-Backed Notes On November 13, 2014, the Company completed a $237.4 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “2021 Asset- Backed Notes”), which 2021 Asset-Backed Notes were rated A(sf) by Kroll Bond Rating Agency, Inc. (“KBRA”). The 2021 Asset- Backed Notes were sold by Hercules Capital Funding Trust 2014-1 pursuant to a note purchase agreement, dated as of November 13, 2014, by and among the Company, Hercules Capital Funding 2014-1, LLC as trust depositor (the “2014 Trust Depositor”), Hercules Capital Funding Trust 2014-1 as issuer (the “2014 Securitization Issuer”), and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has an 18-month reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have a stated maturity of April 16, 2021. As part of this transaction, the Company entered into a sale and contribution agreement with the 2014 Trust Depositor under which the Company has agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2014 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor. In connection with the issuance and sale of the 2021 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to the Company. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Sec. 2(A)(51) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S of the Securities Act. The 2014 Securitization Issuer will not be registered under the 1940 Act in reliance on an exemption provide by Section 3(c) (7) thereof and Rule 3A-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants. The 2014 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2014 Loans. The Company is entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). The Company also serves as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2014, the 2021 Asset-Backed Notes had an outstanding principal balance of $129.3 million. Under the terms of the 2021 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2021 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. There was approximately $11.5 million of restricted cash as of December 31, 2014, funded through interest collections. In April 2011, the Company issued $75.0 million in aggregate principal amount of its 6.00% convertible senior notes due 2016 (the “Convertible Senior Notes”). During the year ended December 31, 2014, holders of approximately $57.3 million of the Company’s Convertible Senior Notes exercised their conversion rights. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015, until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of December 31, 2014, the conversion rate is 88.0615 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an adjusted conversion price of approximately $11.36 per share of common stock). The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, the Company estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, the Company recorded interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 8.1%. Upon meeting the stock trading price conversion requirement during the three-month periods ended June 30, 2014 and September 30, 2014, the Convertible Senior Notes became convertible on July 1, 2014 and continued to be convertible through December 31, 2014. As of December 31, 2014, approximately $57.3 million of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.5 million shares of the Company’s common stock, or $24.3 million. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. See “— Subsequent Events.” The Company recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and original issue discount. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt the Company recorded for the year ended December 31, 2014 was approximately $1.6 million and was classified as a component of net investment income in the Company’s Consolidated Statements of Operations. 156 157 16323_HER-10K_CS6-r4.indd 157 4/28/15 2:55 PM December 31, 2013 December 31, 2014 17,674 $ (329 ) 17,345 $ 75,000 (2,481) 72,519 As of December 31, 2014 and December 31, 2013, the components of the carrying value of the Convertible Senior Notes were The Wells Facility includes various financial and operating covenants applicable to the Company and the Company’s as follows: (in thousands) Principal amount of debt ....................................................................... $ Original issue discount, net of accretion ............................................... Carrying value of Convertible Senior Debt ................................. $ For the years ended December 31, 2014 and 2013, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows: Union Bank Facility (in thousands) Stated interest expense ............................................................. $ Accretion of original issue discount ......................................... Amortization of debt issuance cost........................................... Total interest expense ....................................................... $ Cash paid for interest expense .................................................. $ Year Ended December 31, 2013 2014 2,753 $ 843 450 4,046 $ 3,465 $ 4,500 1,083 577 6,160 4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2014 and December 31, 2013. Interest expense decreased by approximately $1.7 million during the year ended December 31, 2014 from the year ended December 31, 2013, due to Convertible Senior Notes settled in the period. As of December 31, 2014, the Company is in compliance with the terms of the indentures governing the Convertible Senior Notes. Wells Facility In August 2008, the Company entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, the Company renewed the Wells Facility, and the Wells Facility was further amended on August 1, 2012, December 17, 2012 and August 8, 2014. Under this senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, the Company entered into an amendment to the Wells Facility that reduced the interest rate floor by 75 basis points to 4.25% and extended the maturity date by one year to August 2015. Additionally, the August 2012 amendment added an amortization period that commences on the day immediately following the end of the revolving credit availability period and ends one year thereafter on the maturity date. The August 2012 amendment also reduced the unused line fee, as further discussed below. On August 8, 2014, the Company entered into a further amendment to the Wells Facility to set the interest rate floor at 4.00% and to extend the revolving credit availability period to August 2017. As amended, borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.00% and an advance rate of 50% against eligible debt investments. The Wells Facility is secured by debt investments in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $380,000 and $380,000, respectively. On June 20, 2011 the Company paid an additional $1.1 million in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. In connection with the August 2014 amendments, the Company paid an additional $750,000 in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. 16323_HER-10K_CS6-r4.indd 158 4/28/15 2:55 PM 158 159 subsidiaries, in addition to those applicable to Hercules Funding II, LLC. As amended, these covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after June 30, 2014. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2014. At December 31, 2014 there were no borrowings outstanding on this facility. The Company has a $75.0 million revolving senior secured credit facility (the “Union Bank Facility”) with MUFG Union Bank, N.A. (“MUFG Union Bank”). The Company originally entered into the Union Bank Facility on February 10, 2010 but, following several amendments, amended and restated the Union Bank Facility on August 14, 2014. The amendment and restatement extends the maturity date of the Union Bank Facility to August 1, 2017, increases the size of the Union Bank Facility to $75.0 million from $30.0 million, and adjusts the interest rate for LIBOR borrowings under the Union Bank Facility. LIBOR-based borrowings by the Company under the Union Bank Facility will bear interest at a rate per annum equal to LIBOR plus 2.25% with no floor, whereas previously the Company paid a per annum interest rate on such borrowings equal to LIBOR plus 2.50% with a floor of 4.00%. Other borrowings by the Company under the Union Bank Facility, which are based on a reference rate instead of LIBOR, will continue to bear interest at a rate per annum equal to the reference rate (which is the greater of the federal funds rate plus 1.00% and a periodically announced MUFG Union Bank index rate) plus the greater of (i) 4.00% minus the reference rate and (ii) 1.00%. The Company continues to have the option of determining which type of borrowing to request under the Union Bank Facility. Subject to certain conditions, the amendment also removes a previous ceiling on the amount of certain unsecured indebtedness that the Company may incur. MUFG Union Bank has made commitments to lend up to $75.0 million in aggregate principal amount. The Union Bank Facility contains an accordion feature, pursuant to which the Company may increase the size of the Union Bank Facility to an aggregate principal amount of $300.0 million by bringing in additional lenders, subject to the approval of MUFG Union Bank and other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility to increase available borrowings. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $240,000 and $152,000, respectively. The amount that the Company may borrow under the Union Bank Facility is determined by applying an advance rate to eligible loans. The Union Bank Facility generally requires payment of monthly interest on loans based on a reference rate and at the end of a one, two, or three-month period, as applicable, for loans based on LIBOR. All outstanding principal is due upon maturity. The Union Bank Facility is collateralized by debt investments in the Company’s portfolio companies, and includes an advance rate equal to 50.0% of eligible debt investments placed in the collateral pool. The Company has various financial and operating covenants required by the Union Bank Facility. These covenants require, among other things, that the Company maintain certain financial ratios, including liquidity, asset coverage, and debt service coverage, and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $550.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after June 30, 2014. The Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2014. At December 31, 2014 there were no borrowings outstanding on this facility. Citibank Credit Facility The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. (“Citigroup”), which expired under normal terms. During the first quarter of 2009, the Company paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of debt investments and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. for the Convertible Senior Notes were as follows: (in thousands) Stated interest expense ............................................................. $ Accretion of original issue discount ......................................... Amortization of debt issuance cost........................................... Total interest expense ....................................................... $ Cash paid for interest expense .................................................. $ Year Ended December 31, 2014 2013 2,753 $ 843 450 4,046 $ 3,465 $ 4,500 1,083 577 6,160 4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2014 and December 31, 2013. Interest expense decreased by approximately $1.7 million during the year ended December 31, 2014 from the year ended December 31, 2013, due to Convertible Senior Notes settled in the period. As of December 31, 2014, the Company is in compliance with the terms of the indentures governing the Convertible Senior Notes. Wells Facility In August 2008, the Company entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, the Company renewed the Wells Facility, and the Wells Facility was further amended on August 1, 2012, December 17, 2012 and August 8, 2014. Under this senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, the Company entered into an amendment to the Wells Facility that reduced the interest rate floor by 75 basis points to 4.25% and extended the maturity date by one year to August 2015. Additionally, the August 2012 amendment added an amortization period that commences on the day immediately following the end of the revolving credit availability period and ends one year thereafter on the maturity date. The August 2012 amendment also reduced the unused line fee, as further discussed below. On August 8, 2014, the Company entered into a further amendment to the Wells Facility to set the interest rate floor at 4.00% and to extend the revolving credit availability period to August 2017. As amended, borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.00% and an advance rate of 50% against eligible debt investments. The Wells Facility is secured by debt investments in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $380,000 and $380,000, respectively. On June 20, 2011 the Company paid an additional $1.1 million in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. In connection with the August 2014 amendments, the Company paid an additional $750,000 in structuring fees in connection with the Wells Facility which are being amortized through the end of the term of the Wells Facility. As of December 31, 2014 and December 31, 2013, the components of the carrying value of the Convertible Senior Notes were as follows: (in thousands) Principal amount of debt ....................................................................... $ Original issue discount, net of accretion ............................................... Carrying value of Convertible Senior Debt ................................. $ 17,674 $ (329 ) 17,345 $ 75,000 (2,481) 72,519 December 31, December 31, 2014 2013 The Wells Facility includes various financial and operating covenants applicable to the Company and the Company’s subsidiaries, in addition to those applicable to Hercules Funding II, LLC. As amended, these covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after June 30, 2014. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2014. At December 31, 2014 there were no borrowings outstanding on this facility. For the years ended December 31, 2014 and 2013, the components of interest expense, fees and cash paid for interest expense Union Bank Facility The Company has a $75.0 million revolving senior secured credit facility (the “Union Bank Facility”) with MUFG Union Bank, N.A. (“MUFG Union Bank”). The Company originally entered into the Union Bank Facility on February 10, 2010 but, following several amendments, amended and restated the Union Bank Facility on August 14, 2014. The amendment and restatement extends the maturity date of the Union Bank Facility to August 1, 2017, increases the size of the Union Bank Facility to $75.0 million from $30.0 million, and adjusts the interest rate for LIBOR borrowings under the Union Bank Facility. LIBOR-based borrowings by the Company under the Union Bank Facility will bear interest at a rate per annum equal to LIBOR plus 2.25% with no floor, whereas previously the Company paid a per annum interest rate on such borrowings equal to LIBOR plus 2.50% with a floor of 4.00%. Other borrowings by the Company under the Union Bank Facility, which are based on a reference rate instead of LIBOR, will continue to bear interest at a rate per annum equal to the reference rate (which is the greater of the federal funds rate plus 1.00% and a periodically announced MUFG Union Bank index rate) plus the greater of (i) 4.00% minus the reference rate and (ii) 1.00%. The Company continues to have the option of determining which type of borrowing to request under the Union Bank Facility. Subject to certain conditions, the amendment also removes a previous ceiling on the amount of certain unsecured indebtedness that the Company may incur. MUFG Union Bank has made commitments to lend up to $75.0 million in aggregate principal amount. The Union Bank Facility contains an accordion feature, pursuant to which the Company may increase the size of the Union Bank Facility to an aggregate principal amount of $300.0 million by bringing in additional lenders, subject to the approval of MUFG Union Bank and other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility to increase available borrowings. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the years ended December 31, 2014 and 2013, this non-use fee was approximately $240,000 and $152,000, respectively. The amount that the Company may borrow under the Union Bank Facility is determined by applying an advance rate to eligible loans. The Union Bank Facility generally requires payment of monthly interest on loans based on a reference rate and at the end of a one, two, or three-month period, as applicable, for loans based on LIBOR. All outstanding principal is due upon maturity. The Union Bank Facility is collateralized by debt investments in the Company’s portfolio companies, and includes an advance rate equal to 50.0% of eligible debt investments placed in the collateral pool. The Company has various financial and operating covenants required by the Union Bank Facility. These covenants require, among other things, that the Company maintain certain financial ratios, including liquidity, asset coverage, and debt service coverage, and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $550.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after June 30, 2014. The Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2014. At December 31, 2014 there were no borrowings outstanding on this facility. Citibank Credit Facility The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. (“Citigroup”), which expired under normal terms. During the first quarter of 2009, the Company paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of debt investments and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. 158 159 16323_HER-10K_CS6-r4.indd 159 4/28/15 2:55 PM Based on an analysis of the Company’s tax position, there are no uncertain tax positions that met the recognition or measurement criteria. The Company is currently not undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2011- 2013 federal tax years for the Company remain subject to examination by the IRS. The 2010-2013 state tax years for the Company remain subject to examination by On August 16, 2013, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with JMP Securities LLC (“JMP”). The equity distribution agreement provides that the Company may offer and sell up to 8.0 million shares of its common stock from time to time through JMP, as its sales agent. Sales of the Company’s 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 During the year ended December 31, 2014, the Company reduced its realized gain by approximately $465,000 for Citigroup’s The Company will classify interest and penalties, if any, related to unrecognized tax benefits as a component of provision for participation in the realized gain on sale of equity securities obtained from exercising portfolio company warrants which were included in the collateral pool. The Company recorded a decrease in participation liability and a decrease in unrealized appreciation by a net amount of approximately $270,000 primarily due to depreciation of fair value on the pool of warrants collateralized under the warrant participation agreement as a result of the sale of shares in Acceleron Pharma, Inc, Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments is approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $2.1 million under the warrant participation agreement thereby reducing realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between February 2016 and January 2017. income taxes. the state taxing authorities. 6. Shareholders’ Equity. 5. Income Taxes The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be exchange, at prices related to the prevailing market prices or at negotiated prices. subject to federal income tax on the portion of taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at proceeds of approximately $9.5 million, all of which is accretive to net asset value. The Company generally uses the net proceeds During the year ended December 31, 2014, the Company sold 650,000 shares of common stock for total accumulated net least 90% of its investment company taxable income, as defined by the Code. Because federal income tax regulations differ from accounting principles generally accepted in the United States, 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 in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the year ended December 31, 2014 and 2013, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to accelerated revenue recognition for income tax purposes, respectively, as follows: from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of December 31, 2014, approximately 7.35 million shares remained available for issuance and sale under the equity distribution agreement. The Company has issued stock options for common stock subject to future issuance, of which 695,672 and 833,923 were outstanding at December 31, 2014 and December 31, 2013, respectively. (in thousands) Distributions in excess of investment income ........................... $ Accumulated realized gains (losses).......................................... Additional paid-in capital .......................................................... For the Year Ended December 31, 2014 2013 6,382 $ 9,207 (15,589 ) 2,112 6,840 (8,952) For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital gains or a combination thereof. The tax character of distributions paid for the years ended December 31, 2014 and 2013 was ordinary income in the amounts of $73.2 million and $66.5 million, respectively. The aggregate gross unrealized appreciation of the Company’s investments over cost for federal income tax purposes was $46.1 2007. million and $48.8 million as of December 31, 2014 and 2013, respectively. The aggregate gross unrealized depreciation of the Company’s investments under cost for federal income tax purposes was $63.4 million and $44.5 million as of December 31, 2014 and 2013, respectively. The net unrealized depreciation over cost for federal income tax purposes was $17.3 million and $4.3 million as of December 31, 2014 and 2013, respectively. The aggregate cost of securities for federal income tax purposes was $1.0 billion and $906.2 million as of December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary book/tax differences primarily arising from the treatment of loan related yield enhancements. (in thousands) Accumulated Capital Gains (Losses) ........................................ $ Other Temporary Differences ................................................... Undistributed Ordinary Income ................................................. Unrealized Appreciation (Depreciation) ................................... Components of Distributable Earnings ................................. $ For the Year Ended December 31, 2014 2013 16,663 $ 1,795 - (16,891) 1,567 $ (6,417) 1,134 3,764 (5,132) (6,651) 7. Equity Incentive Plan The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7.0 million shares of common stock. On June 1, 2011, stockholders approved an amended and restated plan and provided an increase of 1.0 million shares, authorizing the Company to issue 8.0 million shares of common stock under the 2004 Plan. The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1.0 million shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, On June 21, 2007, the stockholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock issued or delivered by the Company during the terms of the Plans. The amendments further specify that no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants, options and rights issued to the Company’s directors, officers and employees, together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of the Company’s outstanding voting securities. 16323_HER-10K_CS6-r4.indd 160 4/28/15 2:55 PM 160 161 During the year ended December 31, 2014, the Company reduced its realized gain by approximately $465,000 for Citigroup’s The Company will classify interest and penalties, if any, related to unrecognized tax benefits as a component of provision for participation in the realized gain on sale of equity securities obtained from exercising portfolio company warrants which were income taxes. included in the collateral pool. The Company recorded a decrease in participation liability and a decrease in unrealized appreciation by a net amount of approximately $270,000 primarily due to depreciation of fair value on the pool of warrants collateralized under the warrant participation agreement as a result of the sale of shares in Acceleron Pharma, Inc, Merrimack Pharmaceuticals, Inc., Portola Pharmaceuticals, Inc. and Everyday Health, Inc. that were subject to the agreement. The remaining value of their participation right on unrealized gains in the related equity investments is approximately $101,000 as of December 31, 2014 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $2.1 million under the warrant participation agreement thereby reducing realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between February 2016 and January 2017. 5. Income Taxes The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as defined by the Code. Because federal income tax regulations differ from accounting principles generally accepted in the United States, 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 in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the year ended December 31, 2014 and 2013, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to accelerated revenue recognition for income tax purposes, respectively, as follows: (in thousands) Distributions in excess of investment income ........................... $ Accumulated realized gains (losses).......................................... Additional paid-in capital .......................................................... 6,382 $ 9,207 (15,589 ) 2,112 6,840 (8,952) For the Year Ended December 31, 2014 2013 For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital gains or a combination thereof. The tax character of distributions paid for the years ended December 31, 2014 and 2013 was ordinary income in the amounts of $73.2 million and $66.5 million, respectively. The aggregate gross unrealized appreciation of the Company’s investments over cost for federal income tax purposes was $46.1 million and $48.8 million as of December 31, 2014 and 2013, respectively. The aggregate gross unrealized depreciation of the Company’s investments under cost for federal income tax purposes was $63.4 million and $44.5 million as of December 31, 2014 and 2013, respectively. The net unrealized depreciation over cost for federal income tax purposes was $17.3 million and $4.3 million as of December 31, 2014 and 2013, respectively. The aggregate cost of securities for federal income tax purposes was $1.0 billion and $906.2 million as of December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary book/tax differences primarily arising from the treatment of loan related yield enhancements. (in thousands) Accumulated Capital Gains (Losses) ........................................ $ Other Temporary Differences ................................................... Undistributed Ordinary Income ................................................. Unrealized Appreciation (Depreciation) ................................... Components of Distributable Earnings ................................. $ 16,663 $ 1,795 - (16,891) 1,567 $ (6,417) 1,134 3,764 (5,132) (6,651) For the Year Ended December 31, 2014 2013 Based on an analysis of the Company’s tax position, there are no uncertain tax positions that met the recognition or measurement criteria. The Company is currently not undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2011- 2013 federal tax years for the Company remain subject to examination by the IRS. The 2010-2013 state tax years for the Company remain subject to examination by the state taxing authorities. 6. Shareholders’ Equity. On August 16, 2013, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with JMP Securities LLC (“JMP”). The equity distribution agreement provides that the Company may offer and sell up to 8.0 million shares of its common stock from time to time through JMP, as its sales agent. Sales of the Company’s 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, 2014, the Company sold 650,000 shares of common stock for total accumulated net proceeds of approximately $9.5 million, all of which is accretive to net asset value. The Company generally uses the net proceeds from these offerings to make investments, to repurchase or pay down liabilities and for general corporate purposes. As of December 31, 2014, approximately 7.35 million shares remained available for issuance and sale under the equity distribution agreement. The Company has issued stock options for common stock subject to future issuance, of which 695,672 and 833,923 were outstanding at December 31, 2014 and December 31, 2013, respectively. 7. Equity Incentive Plan The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7.0 million shares of common stock. On June 1, 2011, stockholders approved an amended and restated plan and provided an increase of 1.0 million shares, authorizing the Company to issue 8.0 million shares of common stock under the 2004 Plan. The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1.0 million shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007. On June 21, 2007, the stockholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock issued or delivered by the Company during the terms of the Plans. The amendments further specify that no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants, options and rights issued to the Company’s directors, officers and employees, together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of the Company’s outstanding voting securities. 160 161 16323_HER-10K_CS6-r4.indd 161 4/28/15 2:55 PM A summary of the restricted stock activity under the Company’s 2006 and 2004 Plans for each of the three periods ended The following table summarizes the common stock options activities under the Company’s 2006 and 2004 Plans for each of the December 31 2014, 2013, and 2012 is as follows: three periods ended December 31 2014, 2013, and 2012: Outstanding at December 31, 2011................................. Granted ......................................................................... Cancelled ...................................................................... Outstanding at December 31, 2012................................. Granted ......................................................................... Cancelled ...................................................................... Outstanding at December 31, 2013................................. Granted ......................................................................... Cancelled ...................................................................... Outstanding at December 31, 2014................................. 2006 Plan 2004 Plan 31,668 5,000 — 36,668 — — 36,668 8,333 — 45,001 1,191,201 686,859 (59,019 ) 1,819,041 607,001 (30,264 ) 2,395,778 981,550 (152,277 ) 3,225,051 In 2014, 2013, and 2012, the Company granted approximately 989,883, 607,001 and 691,859 shares, respectively, of restricted stock pursuant to the Plans. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 will continue to vest on a monthly basis following their one year anniversary over the succeeding 36 months. During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short and long-term awards. Under the 2004 Plan, restricted stock awarded subsequent to March 3, 2013 will vest subject to continued employment based on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. No restricted stock was granted pursuant to the 2004 Plan prior to 2009. The Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the years ended December 31, 2014, 2013, and 2012 was approximately $13.7 million, $7.7 million and $7.5 million, respectively. During the years ended December 31, 2014, 2013, and 2012 the Company expensed approximately $9.2 million, $5.6 million and $3.9 million of compensation expense related to restricted stock, respectively. As of December 31, 2014, there was approximately $12.5 million of total unrecognized compensation costs related to restricted stock. These costs are expected to be recognized over a weighted average period of 1.43 years. The following table summarizes the activities for the Company’s unvested restricted stock for the years ended December 31, December 31, 2014, 2013, and 2012, approximately $395,000, $422,000 and $416,000, of share-based cost due to stock option grants 2014, 2013, and 2012: Unvested Restricted Stock Units Restricted Stock Units Weighted Average Issuance Price Unvested at December 31, 2011 ...................................... Granted ......................................................................... Vested ........................................................................... Forfeited ....................................................................... Unvested at December 31, 2012 ...................................... Granted ......................................................................... Vested ........................................................................... Forfeited ....................................................................... Unvested at December 31, 2013 ...................................... Granted ......................................................................... Vested ........................................................................... Forfeited ....................................................................... Unvested at December 31, 2014 ...................................... 621,509 $ 691,859 $ (354,560) $ (59,019) $ 899,789 $ 607,001 $ (440,629) $ (30,264) $ 1,035,897 $ 989,883 $ (570,723) $ (152,277) $ 1,302,780 $ 10.06 10.83 9.88 9.95 10.73 12.72 10.59 11.24 11.94 13.82 12.00 12.82 13.23 The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make a cash payment at the time of option exercise or to pay taxes on restricted stock. 16323_HER-10K_CS6-r4.indd 162 4/28/15 2:55 PM 162 163 Weighted Common Stock Average Exercise Options Price Shares Outstanding at December 31, 2011 .................... 4,213,604 $ Granted ......................................................................... Exercised ...................................................................... Forfeited ....................................................................... 189,000 $ (564,196) $ (57,229) $ Expired ......................................................................... (1,206,430) $ Shares Outstanding at December 31, 2012 .................... 2,574,749 $ Granted ......................................................................... 443,500 $ Exercised ...................................................................... (2,003,988) $ Forfeited ....................................................................... Expired ......................................................................... Shares Outstanding at December 31, 2013 .................... Granted ......................................................................... Exercised ...................................................................... Forfeited ....................................................................... Expired ......................................................................... Shares Outstanding at December 31, 2014 .................... (115,338) $ (65,000) $ 833,923 $ 426,000 $ (353,547) $ (208,344) $ (2,360) $ 695,672 $ Shares Expected to Vest at December 31, 2014................. 537,296 $ 11.40 10.71 5.56 9.69 12.84 12.00 14.51 12.38 10.38 13.30 12.53 15.54 10.76 14.80 13.78 14.58 14.58 Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be exercised for a period ending seven years after the date of grant. At December 31, 2014, options for approximately 158,000 shares were exercisable at a weighted average exercise price of approximately $13.08 per share with weighted average of remaining contractual term of 4.91 years. The Company determined that the fair value of options granted under the 2006 and 2004 Plans during the years ended December 31, 2014, 2013, and 2012 was approximately $211,000, $1.1 million and $326,000, respectively. During the years ended was expensed, respectively. As of December 31, 2014, there was $562,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.94 years. The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table for each of the three periods ended December 31, 2014, 2013, and 2012 is as follows: Expected Volatility ................................................ Expected Dividends ............................................... Expected term (in years) ........................................ 19.90% 10% 4.5 46.90 % 10 % 4.5 46.39% 10% 4.5 Risk-free rate ......................................................... 1.21% - 1.66% 0.56% - 1.63 % 0.49% - 1.07% Year Ended December 31, 2014 2013 2012 The following table summarizes stock options outstanding and exercisable at December 31, 2014: (Dollars in thousands, except exercise price) Number of shares Range of exercise prices $9.25 - $14.49 .......... 208,172 $14.86 - $16.34 ........ 487,500 $9.25 - $16.34 .......... 695,672 Options outstanding Weighted average remaining contractual life Aggregate intrinsic value Options exercisable Weighted average exercise price Weighted average remaining Number of shares contractual life Aggregate intrinsic value Weighted average exercise price 5.43 $ 6.46 6.15 $ 487,713 $ 12.54 74,440 2,140 $ 15.45 83,936 489,853 $ 14.58 158,376 3.94 $ 305,932 $ 5.77 892 $ 4.91 $ 306,824 $ 10.77 15.14 13.08 A summary of the restricted stock activity under the Company’s 2006 and 2004 Plans for each of the three periods ended The following table summarizes the common stock options activities under the Company’s 2006 and 2004 Plans for each of the December 31 2014, 2013, and 2012 is as follows: three periods ended December 31 2014, 2013, and 2012: Weighted Average Exercise Price 11.40 10.71 5.56 9.69 12.84 12.00 14.51 12.38 10.38 13.30 12.53 15.54 10.76 14.80 13.78 14.58 14.58 Common Stock Options 4,213,604 $ 189,000 $ (564,196) $ (57,229) $ (1,206,430) $ 2,574,749 $ 443,500 $ (2,003,988) $ (115,338) $ (65,000) $ 833,923 $ 426,000 $ (353,547) $ (208,344) $ (2,360) $ 695,672 $ 537,296 $ Shares Outstanding at December 31, 2011 .................... Granted ......................................................................... Exercised ...................................................................... Forfeited ....................................................................... Expired ......................................................................... Shares Outstanding at December 31, 2012 .................... Granted ......................................................................... Exercised ...................................................................... Forfeited ....................................................................... Expired ......................................................................... Shares Outstanding at December 31, 2013 .................... Granted ......................................................................... Exercised ...................................................................... Forfeited ....................................................................... Expired ......................................................................... Shares Outstanding at December 31, 2014 .................... Shares Expected to Vest at December 31, 2014................. Outstanding at December 31, 2012................................. 36,668 1,819,041 Outstanding at December 31, 2011................................. Granted ......................................................................... Cancelled ...................................................................... Granted ......................................................................... Cancelled ...................................................................... Outstanding at December 31, 2013................................. Granted ......................................................................... Cancelled ...................................................................... Outstanding at December 31, 2014................................. 2006 Plan 2004 Plan 31,668 5,000 — — — 36,668 8,333 — 45,001 1,191,201 686,859 (59,019 ) 607,001 (30,264 ) 2,395,778 981,550 (152,277 ) 3,225,051 In 2014, 2013, and 2012, the Company granted approximately 989,883, 607,001 and 691,859 shares, respectively, of restricted stock pursuant to the Plans. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 will continue to vest on a monthly basis following their one year anniversary over the succeeding 36 months. During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short and long-term awards. Under the 2004 Plan, restricted stock awarded subsequent to March 3, 2013 will vest subject to continued employment based on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. No restricted stock was granted pursuant to the 2004 Plan prior to 2009. December 31, 2014, 2013, and 2012 was approximately $13.7 million, $7.7 million and $7.5 million, respectively. During the years ended December 31, 2014, 2013, and 2012 the Company expensed approximately $9.2 million, $5.6 million and $3.9 million of compensation expense related to restricted stock, respectively. As of December 31, 2014, there was approximately $12.5 million of total unrecognized compensation costs related to restricted stock. These costs are expected to be recognized over a weighted average The following table summarizes the activities for the Company’s unvested restricted stock for the years ended December 31, period of 1.43 years. 2014, 2013, and 2012: Unvested Restricted Stock Units Restricted Stock Units Weighted Average Issuance Price Unvested at December 31, 2011 ...................................... Granted ......................................................................... 621,509 $ 691,859 $ Vested ........................................................................... (354,560) $ Forfeited ....................................................................... Unvested at December 31, 2012 ...................................... Granted ......................................................................... Vested ........................................................................... Forfeited ....................................................................... (59,019) $ 899,789 $ 607,001 $ (440,629) $ (30,264) $ Unvested at December 31, 2013 ...................................... 1,035,897 $ Granted ......................................................................... Vested ........................................................................... Forfeited ....................................................................... 989,883 $ (570,723) $ (152,277) $ Unvested at December 31, 2014 ...................................... 1,302,780 $ 10.06 10.83 9.88 9.95 10.73 12.72 10.59 11.24 11.94 13.82 12.00 12.82 13.23 The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make a cash payment at the time of option exercise or to pay taxes on restricted stock. The Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the years ended Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be exercised for a period ending seven years after the date of grant. At December 31, 2014, options for approximately 158,000 shares were exercisable at a weighted average exercise price of approximately $13.08 per share with weighted average of remaining contractual term of 4.91 years. The Company determined that the fair value of options granted under the 2006 and 2004 Plans during the years ended December 31, 2014, 2013, and 2012 was approximately $211,000, $1.1 million and $326,000, respectively. During the years ended December 31, 2014, 2013, and 2012, approximately $395,000, $422,000 and $416,000, of share-based cost due to stock option grants was expensed, respectively. As of December 31, 2014, there was $562,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.94 years. The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table for each of the three periods ended December 31, 2014, 2013, and 2012 is as follows: Expected Volatility ................................................ Expected Dividends ............................................... Expected term (in years) ........................................ Risk-free rate ......................................................... 1.21% - 1.66% 19.90% 10% 4.5 46.90 % 10 % 4.5 46.39% 10% 4.5 0.56% - 1.63 % 0.49% - 1.07% 2014 Year Ended December 31, 2013 2012 The following table summarizes stock options outstanding and exercisable at December 31, 2014: (Dollars in thousands, except exercise price) Options outstanding Number of shares Range of exercise prices $9.25 - $14.49 .......... 208,172 $14.86 - $16.34 ........ 487,500 $9.25 - $16.34 .......... 695,672 Weighted average remaining contractual life Aggregate intrinsic value 487,713 $ 2,140 $ 489,853 $ 5.43 $ 6.46 6.15 $ Weighted average exercise price Options exercisable Weighted average remaining contractual life Aggregate intrinsic value Weighted average exercise price Number of shares 12.54 74,440 15.45 83,936 14.58 158,376 3.94 $ 305,932 $ 5.77 892 $ 4.91 $ 306,824 $ 10.77 15.14 13.08 162 163 16323_HER-10K_CS6-r4.indd 163 4/28/15 2:55 PM 8. Earnings per Share 9. Financial Highlights Shares used in the computation of the Company’s basic and diluted earnings per share are as follows: Following is a schedule of financial highlights for the three years ended December 31, 2014. (in thousands, except per share data) Numerator 2014 Year Ended December 31, 2013 2012 Net increase in net assets resulting from operations ................................... $ Less: Dividends declared-common and restricted shares ........................... Undistributed earnings ................................................................................ Undistributed earnings-common shares ...................................................... Add: Dividend declared-common shares .................................................... Numerator for basic and diluted change in net assets per common share... $ Denominator Basic weighted average common shares outstanding.................................. Common shares issuable .................................................................................. Weighted average common shares outstanding assuming dilution ........... Change in net assets per common share Basic ................................................................................................................. $ Diluted ............................................................................................................. $ $ 71,188 (78,562) (7,374) (7,374) 76,953 69,579 $ 61,862 1,363 63,225 99,446 $ (66,454 ) 32,992 32,992 65,123 98,115 $ 58,838 1,454 60,292 1.12 $ 1.10 $ 1.67 $ 1.63 $ 46,759 (47,983) (1,224) (1,224) 46,967 45,743 49,068 88 49,156 0.93 0.93 In the table above, unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents are treated as participating securities for calculating earnings per share. For the purpose of calculating diluted earnings per share for year ended December 31, 2014, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because the Company’s share price was greater than the conversion price in effect ($11.36 as of December 31, 2014 and $11.63 as of December 31, 2013) for the Convertible Senior Notes for such period. The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti- dilutive shares. For the years ended December 31, 2014, 2013, and 2012, the number of anti-dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, was approximately 727,733, 1,835,880 and 2,574,749 shares, respectively. At December 31, 2014, the Company was authorized to issue 100,000,000 shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote. Per share data(1): Net asset value at beginning of period ......................................................... $ 10.51 $ Net investment income ........................................................................... Net realized gain on investments ............................................................ Net unrealized appreciation (depreciation) on investments .................... Total from investment operations ....................................................... Net increase (decrease) in net assets from capital share transactions ..... Distributions of net investment income .................................................. Stock-based compensation expense included in investment income(2) ... Net asset value at end of period ................................................................... $ 10.18 $ Ratios and supplemental data: Per share market value at end of period .......................................................... $ Total return(3)................................................................................................... Shares outstanding at end of period ................................................................ Weighted average number of common shares outstanding ............................. Net assets at end of period .............................................................................. $ Ratio of operating expense to average net assets(4)(5) ...................................... Ratio of net investment income before investment gains and losses to average net assets(4) ...................................................................................... Average debt outstanding ................................................................................ $ Weighted average debt per common share ..................................................... $ Year Ended December 31, 2014 2013 2012 1.16 0.32 (0.33) 1.15 (0.37) (1.27) 0.16 14.88 $ -1.75% 64,715 61,862 658,864 $ 10.72% 10.94% 535,127 $ 8.65 $ 9.75 $ 1.24 0.25 0.20 1.69 0.10 (1.13 ) 0.10 10.51 $ 16.40 $ 58.49 % 61,837 58,838 650,007 $ 11.06 % 12.12 % 580,053 $ 9.86 $ 9.83 0.98 0.06 (0.09) 0.95 (0.14) (0.98) 0.09 9.75 11.13 28.28% 52,925 49,068 515,968 10.28% 10.01% 360,857 7.35 (2) (3) (4) (5) (1) All per share activity is calculated based on the weighted average shares outstanding for the relevant period. Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment income includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital. The total return for the years ended December 31, 2014, 2013 and 2012 equals the change in the ending market value over the beginning of the period price per share plus dividends paid per share during the period, divided by the beginning price assuming the dividend is reinvested on the date of the distribution. All ratios are calculated based on weighted average net assets for the relevant period. Operating expense as used in the ratio of operating expense to average net assets does not include loss on debt extinguishment (long-term liabilities - convertible senior notes). If loss on debt extinguishment (long-term liabilities - convertible senior notes) were included in total expense, the ratio for the year ended December 31, 2014 would be 10.97%. There was no loss on debt extinguishment (long-term liabilities - convertible senior notes) in the years ended December 31, 2013 or 2012, so the ratio for that period would not change. 10. Commitments and Contingencies The Company’s commitments and contingencies consist primarily of unused commitments to extend credit in the form of loans to the Company’s portfolio companies. The balance of unfunded contractual commitments to extend credit at December 31, 2014 totaled approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments as of December 31, 2014 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Since a portion of these commitments may expire without being drawn, unfunded contractual commitments do not necessarily represent future cash requirements. In addition, the Company had approximately $108.2 million of non-binding term sheets outstanding at December 31, 2014. Non-binding outstanding term sheets are subject to completion of the Company’s 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. Not all non-binding term sheets are expected to close and do not necessarily represent the Company’s future cash requirements. 16323_HER-10K_CS6-r4.indd 164 4/28/15 2:55 PM 164 165 8. Earnings per Share 9. Financial Highlights Shares used in the computation of the Company’s basic and diluted earnings per share are as follows: Following is a schedule of financial highlights for the three years ended December 31, 2014. Per share data(1): Net asset value at beginning of period ......................................................... $ Net investment income ........................................................................... Net realized gain on investments ............................................................ Net unrealized appreciation (depreciation) on investments .................... Total from investment operations ....................................................... Net increase (decrease) in net assets from capital share transactions ..... Distributions of net investment income .................................................. Stock-based compensation expense included in investment income(2) ... Net asset value at end of period ................................................................... $ Ratios and supplemental data: Per share market value at end of period .......................................................... $ Total return(3)................................................................................................... Shares outstanding at end of period ................................................................ Weighted average number of common shares outstanding ............................. Net assets at end of period .............................................................................. $ Ratio of operating expense to average net assets(4)(5) ...................................... Ratio of net investment income before investment gains and losses to average net assets(4) ...................................................................................... Average debt outstanding ................................................................................ $ Weighted average debt per common share ..................................................... $ Year Ended December 31, 2014 2013 2012 10.51 $ 1.16 0.32 (0.33) 1.15 (0.37) (1.27) 0.16 10.18 $ 14.88 $ -1.75% 64,715 61,862 658,864 $ 10.72% 10.94% 535,127 $ 8.65 $ 9.75 $ 1.24 0.25 0.20 1.69 0.10 (1.13 ) 0.10 10.51 $ 16.40 $ 58.49 % 61,837 58,838 650,007 $ 11.06 % 12.12 % 580,053 $ 9.86 $ 9.83 0.98 0.06 (0.09) 0.95 (0.14) (0.98) 0.09 9.75 11.13 28.28% 52,925 49,068 515,968 10.28% 10.01% 360,857 7.35 (in thousands, except per share data) Numerator Net increase in net assets resulting from operations ................................... $ Less: Dividends declared-common and restricted shares ........................... Undistributed earnings ................................................................................ Undistributed earnings-common shares ...................................................... Add: Dividend declared-common shares .................................................... Numerator for basic and diluted change in net assets per common share... $ Denominator Basic weighted average common shares outstanding.................................. Common shares issuable .................................................................................. Weighted average common shares outstanding assuming dilution ........... Change in net assets per common share Year Ended December 31, 2014 2013 2012 71,188 $ (78,562) (7,374) (7,374) 76,953 69,579 $ 61,862 1,363 63,225 99,446 $ (66,454 ) 32,992 32,992 65,123 98,115 $ 58,838 1,454 60,292 46,759 (47,983) (1,224) (1,224) 46,967 45,743 49,068 88 49,156 0.93 0.93 Basic ................................................................................................................. $ Diluted ............................................................................................................. $ 1.12 $ 1.10 $ 1.67 $ 1.63 $ In the table above, unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents are treated as participating securities for calculating earnings per share. For the purpose of calculating diluted earnings per share for year ended December 31, 2014, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because the Company’s share price was greater than the conversion price in effect ($11.36 as of December 31, 2014 and $11.63 as of December 31, 2013) for the Convertible Senior Notes for such period. The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti- dilutive shares. For the years ended December 31, 2014, 2013, and 2012, the number of anti-dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, was approximately 727,733, 1,835,880 and 2,574,749 shares, respectively. At December 31, 2014, the Company was authorized to issue 100,000,000 shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote. Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment income includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital. The total return for the years ended December 31, 2014, 2013 and 2012 equals the change in the ending market value over the beginning of the period price per share plus dividends paid per share during the period, divided by the beginning price assuming the dividend is reinvested on the date of the distribution. All ratios are calculated based on weighted average net assets for the relevant period. Operating expense as used in the ratio of operating expense to average net assets does not include loss on debt extinguishment (long-term liabilities - convertible senior notes). If loss on debt extinguishment (long-term liabilities - convertible senior notes) were included in total expense, the ratio for the year ended December 31, 2014 would be 10.97%. There was no loss on debt extinguishment (long-term liabilities - convertible senior notes) in the years ended December 31, 2013 or 2012, so the ratio for that period would not change. (1) All per share activity is calculated based on the weighted average shares outstanding for the relevant period. (2) (3) (4) (5) 10. Commitments and Contingencies The Company’s commitments and contingencies consist primarily of unused commitments to extend credit in the form of loans to the Company’s portfolio companies. The balance of unfunded contractual commitments to extend credit at December 31, 2014 totaled approximately $339.0 million. Approximately $191.3 million of these unfunded contractual commitments as of December 31, 2014 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Since a portion of these commitments may expire without being drawn, unfunded contractual commitments do not necessarily represent future cash requirements. In addition, the Company had approximately $108.2 million of non-binding term sheets outstanding at December 31, 2014. Non-binding outstanding term sheets are subject to completion of the Company’s 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. Not all non-binding term sheets are expected to close and do not necessarily represent the Company’s future cash requirements. 164 165 16323_HER-10K_CS6-r4.indd 165 4/28/15 2:55 PM Total 3 - 5 years Less than 1 year Payments due by period (in thousands) 1 - 3 years After 5 years 271,400 59 271,459 Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted 13. Selected Quarterly Data (Unaudited) to approximately $1.6 million, $1.1 million and $1.2 million, during the years ended December 31, 2014, 2013, and 2012, respectively. Future commitments under the credit facility and operating leases were as follows at December 31, 2014: Contractual Obligations(1)(2) Borrowings (3) (4) ............................ $ Operating Lease Obligations (5) ..... Total ............................................. $ 626,258 $ 6,258 $ 632,516 16,081 $ 1,554 $ 17,635 17,313 $ 3,055 $ 20,368 321,464 $ 1,590 $ 323,054 (1) (2) (3) (4) (5) Excludes commitments to extend credit to the Company’s portfolio companies. The Company also has a warrant participation agreement with Citigroup. See Note 4 to the Company’s consolidated financial statements. Includes $190.2 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $103.0 million of the 2024 Notes, $16.0 million in aggregate principal amount of the 2017 Asset-Backed Notes, $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes and $17.3 million of the Convertible Senior Notes. Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $17.7 million less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was $329,000 at December 31, 2014. Long-Term facility leases. The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition or results of operations in any future reporting period. 11. Indemnification The Company and its executives are covered by Directors and Officers Insurance, with the directors and officers being indemnified by the Company to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act. Convertible Senior Notes 12. Concentrations of Credit Risk The Company’s customers are primarily privately held companies and public companies which are active in the drug discovery and development, energy technology, internet consumer and business services, medical devices and equipment, software, drug delivery, information services, communications and networking, healthcare services, specialty pharmaceuticals, surgical devices, electronics and computer hardware, media/content/info, biotechnology tools, semiconductors, consumer and business products and diagnostic industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. For the years ended December 31, 2014 and December 31, 2013, the Company’s ten largest portfolio companies represented approximately 28.6% and 29.3% of the total fair value of the Company’s investments in portfolio companies, respectively. At December 31, 2014 and December 31, 2013, we had three and one investment, respectively, that represented 5% or more of the Company’s net assets. At December 31, 2014, we had three equity investments representing approximately 61.5% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity investments. At December 31, 2013, the Company had six equity investments which represented approximately 75.7% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments. 16323_HER-10K_CS6-r4.indd 166 4/28/15 2:55 PM 166 167 The following tables set forth certain quarterly financial information for each of the last eight quarters ended December 31, 2014. This information was derived from the Company’s unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any further quarter. (in thousands, except per share data) 3/31/2014 6/30/2014 9/30/2014 12/31/2014 Total investment income ............................................................ $ Net investment income before investment gains and losses ...... Net increase (decrease) in net assets resulting from operations .... Change in net assets per common share (basic) ......................... 35,770 $ 18,304 22,185 0.36 34,001 $ 18,551 13,191 0.21 37,019 $ 18,995 15,177 0.24 Quarter Ended Total investment income ............................................................ $ 30,957 $ 34,525 $ 41,021 $ Net investment income before investment gains and losses ...... Net increase (decrease) in net assets resulting from operations .... 15,032 16,689 17,610 20,879 21,560 36,981 Change in net assets per common share (basic) ......................... 0.30 0.34 0.61 3/31/2013 6/30/2013 9/30/2013 12/31/2013 Quarter Ended 36,875 15,899 20,635 0.32 33,210 18,864 24,897 0.40 14. Subsequent Events Dividend Declaration On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent the Company’s thirty-eighth consecutive dividend declaration since the Company’s initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. In April 2011, the Company issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes, or the Convertible Senior Notes, due 2016. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes are convertible into shares of the Company’s common stock beginning October 15, 2015, or, under certain circumstances, earlier. Upon conversion of the Convertible Senior Notes, the Company has the choice to pay or deliver, as the case may be, at the Company’s election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. Subsequent to December 31, 2014 and as of February 26, 2015, approximately $32,000 of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 613 shares of the Company’s common stock in January 2015. April 2019 Notes – Redemption On February 24, 2015, the Board of Directors approved a redemption of $20.0 million of the $84.5 million in issued and outstanding aggregate principal amount of April 2019 Notes, and notice for such redemption has been provided. The Company intends to make additional redemptions on the April 2019 Notes throughout the 2015 calendar year, depending on the Company’s anticipated cash needs. The Company will provide notice for and complete all redemptions in compliance with the terms of the Base Indenture, as supplemented by the First Supplemental Indenture. 2017 Asset-Backed Notes – Contractual Amortization In February 2015, changes in the payment schedule of obligors in the 2017 Asset-Backed Notes collateral pool triggered a Rapid Amortization Event in accordance with the sale and servicing agreement for the 2017 Asset-Backed Notes. Due to this Event, the 2017 Asset-Backed Notes are expected to fully amortize within the first half of 2015. to approximately $1.6 million, $1.1 million and $1.2 million, during the years ended December 31, 2014, 2013, and 2012, respectively. Future commitments under the credit facility and operating leases were as follows at December 31, 2014: Contractual Obligations(1)(2) Borrowings (3) (4) ............................ $ Operating Lease Obligations (5) ..... Total ............................................. $ Total Less than 1 year 1 - 3 years 3 - 5 years After 5 years 626,258 $ 6,258 632,516 $ 16,081 $ 1,554 17,635 $ 17,313 $ 3,055 20,368 $ 321,464 $ 1,590 323,054 $ 271,400 59 271,459 Payments due by period (in thousands) (1) (2) (3) Excludes commitments to extend credit to the Company’s portfolio companies. The Company also has a warrant participation agreement with Citigroup. See Note 4 to the Company’s consolidated financial statements. Includes $190.2 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $103.0 million of the 2024 Notes, $16.0 million in aggregate principal amount of the 2017 Asset-Backed Notes, $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes and $17.3 million of (4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $17.7 million less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total remaining unaccreted discount for the Convertible Senior Notes was $329,000 at December 31, 2014. the Convertible Senior Notes. (5) Long-Term facility leases. The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition or results of operations in any future reporting period. 11. Indemnification 12. Concentrations of Credit Risk The Company’s customers are primarily privately held companies and public companies which are active in the drug discovery and development, energy technology, internet consumer and business services, medical devices and equipment, software, drug delivery, information services, communications and networking, healthcare services, specialty pharmaceuticals, surgical devices, electronics and computer hardware, media/content/info, biotechnology tools, semiconductors, consumer and business products and diagnostic industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. For the years ended December 31, 2014 and December 31, 2013, the Company’s ten largest portfolio companies represented approximately 28.6% and 29.3% of the total fair value of the Company’s investments in portfolio companies, respectively. At December 31, 2014 and December 31, 2013, we had three and one investment, respectively, that represented 5% or more of the Company’s net assets. At December 31, 2014, we had three equity investments representing approximately 61.5% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity investments. At December 31, 2013, the Company had six equity investments which represented approximately 75.7% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments. Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted 13. Selected Quarterly Data (Unaudited) The following tables set forth certain quarterly financial information for each of the last eight quarters ended December 31, 2014. This information was derived from the Company’s unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any further quarter. (in thousands, except per share data) Total investment income ............................................................ $ Net investment income before investment gains and losses ...... Net increase (decrease) in net assets resulting from operations .... Change in net assets per common share (basic) ......................... 3/31/2014 6/30/2014 9/30/2014 12/31/2014 35,770 $ 18,304 22,185 0.36 34,001 $ 18,551 13,191 0.21 37,019 $ 18,995 15,177 0.24 36,875 15,899 20,635 0.32 Quarter Ended Total investment income ............................................................ $ Net investment income before investment gains and losses ...... Net increase (decrease) in net assets resulting from operations .... Change in net assets per common share (basic) ......................... 30,957 $ 15,032 16,689 0.30 $ 34,525 17,610 20,879 0.34 41,021 $ 21,560 36,981 0.61 33,210 18,864 24,897 0.40 3/31/2013 6/30/2013 9/30/2013 12/31/2013 Quarter Ended 14. Subsequent Events Dividend Declaration On February 24, 2015 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent the Company’s thirty-eighth consecutive dividend declaration since the Company’s initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. The Company and its executives are covered by Directors and Officers Insurance, with the directors and officers being indemnified by the Company to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act. Convertible Senior Notes In April 2011, the Company issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes, or the Convertible Senior Notes, due 2016. As of December 31, 2014, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the remaining unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $17.3 million. The Convertible Senior Notes are convertible into shares of the Company’s common stock beginning October 15, 2015, or, under certain circumstances, earlier. Upon conversion of the Convertible Senior Notes, the Company has the choice to pay or deliver, as the case may be, at the Company’s election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.36 per share of common stock, in each case subject to adjustment in certain circumstances. Upon meeting the stock trading price conversion requirement during the three months ended December 31, 2014, the Convertible Senior Notes continue to be convertible through March 31, 2015. Subsequent to December 31, 2014 and as of February 26, 2015, approximately $32,000 of the Convertible Senior Notes were converted and were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 613 shares of the Company’s common stock in January 2015. April 2019 Notes – Redemption On February 24, 2015, the Board of Directors approved a redemption of $20.0 million of the $84.5 million in issued and outstanding aggregate principal amount of April 2019 Notes, and notice for such redemption has been provided. The Company intends to make additional redemptions on the April 2019 Notes throughout the 2015 calendar year, depending on the Company’s anticipated cash needs. The Company will provide notice for and complete all redemptions in compliance with the terms of the Base Indenture, as supplemented by the First Supplemental Indenture. 2017 Asset-Backed Notes – Contractual Amortization In February 2015, changes in the payment schedule of obligors in the 2017 Asset-Backed Notes collateral pool triggered a Rapid Amortization Event in accordance with the sale and servicing agreement for the 2017 Asset-Backed Notes. Due to this Event, the 2017 Asset-Backed Notes are expected to fully amortize within the first half of 2015. 166 167 16323_HER-10K_CS6-r4.indd 167 4/28/15 2:55 PM Share Repurchase Program Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On February 24, 2015, the Company’s Board of Directors approved a $50.0 million open market share repurchase program. The Not Applicable. Company may repurchase shares of its common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in our then most recently published financial statements. The Company anticipates that the manner, timing, and amount of any share purchases will be determined by Company management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, the Company is required to notify shareholders program when such a program is initiated or implemented. The repurchase program does not require the Company to acquire any specific number of shares and may be extended, modified, or discontinued at any time. Portfolio Company Developments As of February 26, 2015, the Company held warrants or equity positions in six companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Good Technology Corp., ViewRay, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2014 the following current and former portfolio companies completed initial public offerings or were acquired: 1. 2. 3. 4. In January 2015, the company’s portfolio company Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares the Company holds in Box, Inc. are subject to certain restrictions that govern the timing of the Company’s divestment and may thus impact the Company’s ultimate gain or (loss). In the case of Box, Inc., the Company is subject to a customary IPO lockup period and is obligated not to sell the shares of common stock that it owns for six months from the date of the initial public offering. The potential gain depends on the price of the shares when the Company exits the investment. In January 2015, the company’s portfolio company Zosano Pharma, Inc. completed its initial public offering of 4,500,000 shares of its common stock at $11.00 per share. with U.S. generally accepted accounting principles. In February 2015, the Company’s portfolio company Inotek Pharmaceuticals, Inc. completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. In February 2015, Zillow, Inc. completed its acquisition of the Company’s former portfolio company Trulia, Inc. for $2.5 billion in a stock-for-stock transaction and formed Zillow Group, Inc. The Company no longer holds investments in the portfolio company. Item 9a. Controls and Procedures 1. Disclosure Controls and Procedures The Company’s chief executive and chief financial officers, under the supervision and with the participation of the Company’s management, conducted an evaluation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d- 15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this annual report on Form 10-K, the Company’s chief executive and chief financial officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Company’s chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. 2. Internal Control Over Financial Reporting a. Management’s Annual Report on Internal Control Over Financial Reporting The Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial and accounting officer, approved and monitored by the Company’s Board of Directors, and implemented by management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014. Report of the Independent Registered Public Accounting Firm The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm who also audited the Company’s consolidated financial statements, as stated in their report, which is included in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting in 2014 There have been no changes in the Company’s internal control over financing reporting, as defined in Rules 13a-15(f) and 15d- 15(f) of the Securities Exchange Act of 1934, that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 16323_HER-10K_CS6-r4.indd 168 4/28/15 2:55 PM 168 169 Share Repurchase Program Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On February 24, 2015, the Company’s Board of Directors approved a $50.0 million open market share repurchase program. The Not Applicable. Company may repurchase shares of its common stock in the open market, including block purchases, at prices that may be above or below the net asset value as reported in our then most recently published financial statements. The Company anticipates that the manner, timing, and amount of any share purchases will be determined by Company management based upon the evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company, the Company is required to notify shareholders program when such a program is initiated or implemented. The repurchase program does not require the Company to acquire any specific number of shares and may be extended, modified, or discontinued at any time. Portfolio Company Developments As of February 26, 2015, the Company held warrants or equity positions in six companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Good Technology Corp., ViewRay, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2014 the following current and former portfolio companies completed initial public offerings or were acquired: 1. 2. 3. 4. In January 2015, the company’s portfolio company Box, Inc. completed its initial public offering of 12,500,000 shares of its common stock at $14.00 per share. The shares the Company holds in Box, Inc. are subject to certain restrictions that govern the timing of the Company’s divestment and may thus impact the Company’s ultimate gain or (loss). In the case of Box, Inc., the Company is subject to a customary IPO lockup period and is obligated not to sell the shares of common stock that it owns for six months from the date of the initial public offering. The potential gain depends on the price of the shares when the Company exits the investment. shares of its common stock at $11.00 per share. In January 2015, the company’s portfolio company Zosano Pharma, Inc. completed its initial public offering of 4,500,000 In February 2015, the Company’s portfolio company Inotek Pharmaceuticals, Inc. completed its initial public offering of 6,667,000 shares of its common stock at a price to the public of $6.00 per share. In February 2015, Zillow, Inc. completed its acquisition of the Company’s former portfolio company Trulia, Inc. for $2.5 billion in a stock-for-stock transaction and formed Zillow Group, Inc. The Company no longer holds investments in the portfolio company. Item 9a. Controls and Procedures 1. Disclosure Controls and Procedures The Company’s chief executive and chief financial officers, under the supervision and with the participation of the Company’s management, conducted an evaluation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d- 15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this annual report on Form 10-K, the Company’s chief executive and chief financial officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the Company’s chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. 2. Internal Control Over Financial Reporting a. Management’s Annual Report on Internal Control Over Financial Reporting The Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial and accounting officer, approved and monitored by the Company’s Board of Directors, and implemented by management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014. Report of the Independent Registered Public Accounting Firm The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm who also audited the Company’s consolidated financial statements, as stated in their report, which is included in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting in 2014 There have been no changes in the Company’s internal control over financing reporting, as defined in Rules 13a-15(f) and 15d- 15(f) of the Securities Exchange Act of 1934, that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 168 169 16323_HER-10K_CS6-r4.indd 169 4/28/15 2:55 PM Item 9B. Other Information Dividends Our Board of Directors has declared a fourth quarter cash dividend of $0.31 per share that will be payable on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent the Company’s thirty-eighth consecutive dividend declaration since its initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90 to 100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the year ended December 31, 2014, 100% were distributions of ordinary income and spillover earnings. The Company intends to distribute approximately $16.7 million of spillover earnings from 2014 to its shareholders in 2015. Notice of Redemption On February 26, 2015, in accordance with the Base Indenture, as supplemented by the First Supplemental Indenture, we provided notice to U.S. Bank National Association (“U.S. Bank”) of our election to exercise our potion to redeem $20.0 million of the $84.5 million in issued and outstanding April 2019 Notes and instructed U.S. Bank to deliver, on our behalf, notice to the holders of the April 2019 Notes. The notice sent to U.S. Bank is included as Exhibit 99.1 to this Annual Report on Form 10-K and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and shall not be deemed incorporated by reference into any filing made under the Securities Act of 1933, except as expressly set forth by specific reference in such filing. PART III Item 10. Directors, Executive Officers and Corporate Governance Information in response to this Item is incorporated herein by reference to the information provided in the Company’s definitive Proxy Statement for the Company’s 2015 Annual Meeting of Shareholders (the “2015 Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 under the headings “Proposal I: Election Of Directors,” “Information About Executive Officers Who Are Not Directors” and “Certain Relationships And Transactions.” The Company has adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available on the Company’s website at http//www.htgc.com. The Company will report any amendments to or waivers of a required provision of the code of business conduct and ethics on the Company’s website or in a Form 8-K. Item 11. Executive Compensation The information with respect to compensation of executives and directors is contained under the caption “Executive Compensation” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information with respect to security ownership of certain beneficial owners and management is contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 13. Certain Relationships and Related Transactions and Director Independence The information with respect to certain relationships and related transactions is contained under the caption “Certain Relationships and Transactions” and the caption “Proposal I: Election of Directors” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 14. Principal Accountant Fees and Services The information with respect to principal accountant fees and services is contained under the captions “Principal Accountant Fees and Services” and “Proposal II: Ratification of Selection of Independent Registered Public Accountants” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference to this item. 16323_HER-10K_CS6-r4.indd 170 4/28/15 2:55 PM 170 171 Item 9B. Other Information Dividends Our Board of Directors has declared a fourth quarter cash dividend of $0.31 per share that will be payable on March 19, 2015 to shareholders of record as of March 12, 2015. This dividend would represent the Company’s thirty-eighth consecutive dividend declaration since its initial public offering, bringing the total cumulative dividend declared to date to $10.30 per share. Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90 to 100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, our Board of Directors may choose to pay an additional special dividend or fifth dividend, so that we may distribute approximately all of our annual taxable income in the year it was earned, or may elect to maintain the option to spill over our excess taxable income into the coming year for future dividend payments. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the year ended December 31, 2014, 100% were distributions of ordinary income and spillover earnings. The Company intends to distribute approximately $16.7 million of spillover earnings from 2014 to its shareholders in 2015. Notice of Redemption On February 26, 2015, in accordance with the Base Indenture, as supplemented by the First Supplemental Indenture, we provided notice to U.S. Bank National Association (“U.S. Bank”) of our election to exercise our potion to redeem $20.0 million of the $84.5 million in issued and outstanding April 2019 Notes and instructed U.S. Bank to deliver, on our behalf, notice to the holders of the April 2019 Notes. The notice sent to U.S. Bank is included as Exhibit 99.1 to this Annual Report on Form 10-K and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and shall not be deemed incorporated by reference into any filing made under the Securities Act of 1933, except as expressly set forth by specific reference in such filing. PART III Item 10. Directors, Executive Officers and Corporate Governance Information in response to this Item is incorporated herein by reference to the information provided in the Company’s definitive Proxy Statement for the Company’s 2015 Annual Meeting of Shareholders (the “2015 Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 under the headings “Proposal I: Election Of Directors,” “Information About Executive Officers Who Are Not Directors” and “Certain Relationships And Transactions.” The Company has adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available on the Company’s website at http//www.htgc.com. The Company will report any amendments to or waivers of a required provision of the code of business conduct and ethics on the Company’s website or in a Form 8-K. Item 11. Executive Compensation The information with respect to compensation of executives and directors is contained under the caption “Executive Compensation” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information with respect to security ownership of certain beneficial owners and management is contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 13. Certain Relationships and Related Transactions and Director Independence The information with respect to certain relationships and related transactions is contained under the caption “Certain Relationships and Transactions” and the caption “Proposal I: Election of Directors” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 14. Principal Accountant Fees and Services The information with respect to principal accountant fees and services is contained under the captions “Principal Accountant Fees and Services” and “Proposal II: Ratification of Selection of Independent Registered Public Accountants” in the Company’s 2015 Proxy Statement and is incorporated in this Annual Report by reference to this item. 170 171 16323_HER-10K_CS6-r4.indd 171 4/28/15 2:55 PM PART IV Schedule 12-14 Item 15. Exhibits and Financial Statement Schedules 1. Financial Statements The following financial statements of Hercules Technology Growth Capital, Inc. (the “Company” or the “Registrant”) are filed herewith: AUDITED FINANCIAL STATEMENTS Consolidated Statements of Assets and Liabilities as of December 31, 2014 and December 31, 2013 ................................................................................................................................................. Consolidated Statements of Operations for the three years ended December 31, 2014 ...................... Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2014 ..... Consolidated Statements of Cash Flows for the three years ended December 31, 2014 ..................... Consolidated Schedule of Investments as of December 31, 2014 ....................................................... Consolidated Schedule of Investments as of December 31, 2013 ....................................................... Notes to Consolidated Financial Statements ....................................................................................... 2. The following financial statement schedule is filed herewith: Schedule 12-14 Investments In and Advances to Affiliates ................................................................ 105 107 107 109 110 124 136 173 3. Exhibits required to be filed by Item 601 of Regulation S-K. (1) Stock and warrants are generally non-income producing and restricted. The principal amount for debt is shown in the Consolidated Schedule of Investments as HERCULES TECHNOLOGY GROWTH CAPITAL, INC. SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES As of and for the year ended December 31, 2014 (in thousands) Amount of As of Interest December 31, Credited to 2013 Gross Gross Investment(1) Income(2) Fair Value Additions (3) Reductions (4) Fair Value Portfolio Company Affiliate Investments Gelesis, Inc. ........................................ Preferred Stock $ Optiscan BioMedical, Corp. ............... Preferred Stock Stion Corporation ............................... Senior Debt Preferred Warrants Preferred Warrants Preferred Warrants — $ — — — 1,842 — 466 $ 7 4,552 232 4,096 1,628 — $ — 1,301 — — — Total Control and Affiliate Investments ......................... $ 1,842 $ 10,981 $ 1,301 $ December 31, As of 2014 (140) $ (6) — (13) (2,496) (1,628) (4,283) $ 326 1 5,853 219 1,600 — 7,999 of December 31, 2014. (2) (3) Represents the total amount of interest or dividends credited to income for the year an investment was an affiliate or control investment. Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increase in unrealized appreciation or net decreases in unrealized depreciation. (4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increase in unrealized depreciation or net decreases in unrealized appreciation. 16323_HER-10K_CS6-r4.indd 172 4/28/15 2:55 PM 172 173 PART IV Item 15. Exhibits and Financial Statement Schedules 1. Financial Statements or the “Registrant”) are filed herewith: AUDITED FINANCIAL STATEMENTS The following financial statements of Hercules Technology Growth Capital, Inc. (the “Company” Consolidated Statements of Assets and Liabilities as of December 31, 2014 and December 31, 2013 ................................................................................................................................................. Consolidated Statements of Operations for the three years ended December 31, 2014 ...................... Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2014 ..... Consolidated Statements of Cash Flows for the three years ended December 31, 2014 ..................... Consolidated Schedule of Investments as of December 31, 2014 ....................................................... Consolidated Schedule of Investments as of December 31, 2013 ....................................................... Notes to Consolidated Financial Statements ....................................................................................... 2. The following financial statement schedule is filed herewith: Schedule 12-14 Investments In and Advances to Affiliates ................................................................ 105 107 107 109 110 124 136 173 3. Exhibits required to be filed by Item 601 of Regulation S-K. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES As of and for the year ended December 31, 2014 (in thousands) Portfolio Company Affiliate Investments Gelesis, Inc. ........................................ Preferred Stock Investment(1) $ Preferred Warrants Optiscan BioMedical, Corp. ............... Preferred Stock Stion Corporation ............................... Senior Debt Preferred Warrants Total Control and Affiliate Investments ......................... $ Preferred Warrants As of December 31, Amount of Interest Credited to Income(2) 2013 Fair Value Gross Gross Additions (3) Reductions (4) 2014 Fair Value — $ — — — 1,842 — 1,842 $ 466 $ 7 4,552 232 4,096 1,628 10,981 $ — $ — 1,301 — — — 1,301 $ (140) $ (6) — (13) (2,496) (1,628) (4,283) $ 326 1 5,853 219 1,600 — 7,999 Schedule 12-14 As of December 31, (1) (2) (3) (4) Stock and warrants are generally non-income producing and restricted. The principal amount for debt is shown in the Consolidated Schedule of Investments as of December 31, 2014. Represents the total amount of interest or dividends credited to income for the year an investment was an affiliate or control investment. Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increase in unrealized appreciation or net decreases in unrealized depreciation. Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increase in unrealized depreciation or net decreases in unrealized appreciation. 172 173 16323_HER-10K_CS6-r4.indd 173 4/28/15 2:55 PM Exhibit Number 10(g) Description Indenture between Hercules Funding Trust I & U.S. Bank National Association, dated as of August 1, 2005.(2) 10(h) Note Purchase Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of August 1, 2005.(2) 10(i) 10(j) Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2011 Amendment and Restatement).(10) Hercules Technology Growth Capital, Inc. 2006 Non-Employee Director Plan (2007 Amendment and Restatement).(11) 10(k) Form of Custody Agreement between the Company and Union Bank of California.(8) 10(l) Form of Restricted Stock Award under the 2004 Equity Incentive Plan.(19) 10(m) Subscription Agreement by and among the Company and the subscribers named therein, dated as of March 2, 2006.(17) 10(n) Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan.(8) 10(o) Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan.(8) 10(p) Form of Registrar Transfer Agency and Service Agreement between the Company and American Stock Transfer & Trust 10(q) Warrant Agreement, dated as of June 22, 2004, between the Company and American Stock Transfer & Trust Company, as Company.(8) warrant agent.(9) 10(r) 10(s) 10(t) Third Amendment to Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc., dated as of July 28, 2006.(5) 10(u) Second Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty 3. Exhibits Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time. Exhibit Number 3(a) Description Articles of Amendment and Restatement.(8) 3(b) 3(c) 3(d) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 4(j) 4(k) 4(l) 4(m) 4(n) 4(o) 4(p) 4(q) 10(a) 10(b) 10(c) Articles of Amendment, dated March 6, 2007.(7) Articles of Amendment, dated April 5, 2011.(22) Amended and Restated Bylaws, as amended by Amendment No. 1 thereto.(37) Specimen certificate of the Company’s common stock, par value $.001 per share.(1) Form of Dividend Reinvestment Plan.(1) Indenture between Hercules Funding Trust I and U.S. Bank National Association, dated as of August 1, 2005.(2) Indenture between Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of April 15, 2011.(23) Form of Note under the Indenture, dated as of April 15, 2011.(23) Subscription Agreement, dated as of February 2, 2004, between the Company and the subscribers named therein.(8) Indenture between the Registrant and U.S. Bank National Association, dated as of March 6, 2012.(26) Lease Agreement, dated as of June 13, 2006, between the Company and 400 Hamilton Associates.(4) First Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of April 17, 2012.(26) Second Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of September 24, 2012.(29) Third Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of July 14, 2014.(39) Form of 7.00% Senior Note due 2019, dated as of April 17, 2012 (Existing April 2019 Note) (included as part of Exhibit 4(g)).(26) Corp., dated as of December 6, 2006.(6) Form of 7.00% Senior Note due 2019, dated as of July 6, 2012 (Additional April 2019 Note).(27) Form of 7.00% Senior Note due 2019, dated as of July 12, 2012 (Over-Allotment April 2019 Note).(28) Form of 7.00% Senior Note due 2019, dated as of September 24, 2012 (September 2019 Note) (included as part of Exhibit 4(h)).(29) Form of 7.00% Senior Note due 2019, dated as of October 2, 2012 (Over-Allotment September 2019 Note).(30) Form of 7.00% Senior Note due 2019, dated as of October 17, 2012 (Over-Allotment II September 2019 Note).(31) Form of 6.25% Note due 2024, dated as of July 14, 2014 (July 2024 Note) (included as part of Exhibit 4(i)).(39) Form of 6.25% Note due 2024, dated as of August 11, 2014 (Over-Allotment July 2024 Note).(40) 10(v) Fifth Amendment to Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I, LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty Corp., dated as of March 30, 2007.(13) 10(w) Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG, dated as of May 2, 2007.(14) 10(x) Fourth Amendment to the Warrant Participation Agreement by and among Hercules Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of May 2, 2007.(15) 10(y) Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 2, 2007.(15) Credit Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of April 12, 2005.(8) 10(z) First Amendment to Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 7, 2008.(16) Pledge and Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of April 12, 2005.(8) 10(aa) Second Amendment to Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global First Amendment to Credit and Pledge Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding L.L.C., dated as of August 1, 2005.(2) 10(d) Second Amendment to Credit and Pledge and Security Agreement by and among Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., as lender and administrative agent for the lenders, dated as of March 6, 2006.(12) 10(e) 10(f) Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc., dated as of August 1, 2005.(2) Fargo Foothill, LLC, dated as of August 25, 2008.(18) 10(dd) Form of SBA Debenture.(19) Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc., dated as of August 1, 2005.(2) 10(ee) First Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Foothill, LLC, dated as of April 30, 2009.(20) 174 175 16323_HER-10K_CS6-r4.indd 174 4/28/15 2:55 PM Markets Inc., and Deutsche Bank AG, dated as of May 7, 2008.(16) 10(bb) Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC, dated as of August 25, 2008.(18) 10(cc) Sale and Servicing Agreement among Hercules Funding II LLC, the Company, Lyon Financial Services, Inc., and Wells 3. Exhibits Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time. Exhibit Number 3(a) Description Articles of Amendment and Restatement.(8) Articles of Amendment, dated March 6, 2007.(7) Articles of Amendment, dated April 5, 2011.(22) 3(b) 3(c) 3(d) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 4(j) 4(k) 4(l) 4(n) 4(o) 4(p) 4(q) Amended and Restated Bylaws, as amended by Amendment No. 1 thereto.(37) Specimen certificate of the Company’s common stock, par value $.001 per share.(1) Form of Dividend Reinvestment Plan.(1) Indenture between Hercules Funding Trust I and U.S. Bank National Association, dated as of August 1, 2005.(2) Indenture between Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of April 15, 2011.(23) Form of Note under the Indenture, dated as of April 15, 2011.(23) Indenture between the Registrant and U.S. Bank National Association, dated as of March 6, 2012.(26) First Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of April 17, 2012.(26) Second Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of September 24, 2012.(29) Third Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of July 14, 2014.(39) Form of 7.00% Senior Note due 2019, dated as of April 17, 2012 (Existing April 2019 Note) (included as part of Exhibit 4(g)).(26) Form of 7.00% Senior Note due 2019, dated as of July 6, 2012 (Additional April 2019 Note).(27) Form of 7.00% Senior Note due 2019, dated as of July 12, 2012 (Over-Allotment April 2019 Note).(28) 4(m) Form of 7.00% Senior Note due 2019, dated as of September 24, 2012 (September 2019 Note) (included as part of Exhibit 4(h)).(29) Form of 7.00% Senior Note due 2019, dated as of October 2, 2012 (Over-Allotment September 2019 Note).(30) Form of 7.00% Senior Note due 2019, dated as of October 17, 2012 (Over-Allotment II September 2019 Note).(31) Form of 6.25% Note due 2024, dated as of July 14, 2014 (July 2024 Note) (included as part of Exhibit 4(i)).(39) Form of 6.25% Note due 2024, dated as of August 11, 2014 (Over-Allotment July 2024 Note).(40) 10(a) Credit Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of April 12, 2005.(8) of April 12, 2005.(8) Exhibit Number 10(g) 10(h) 10(i) 10(j) Description Indenture between Hercules Funding Trust I & U.S. Bank National Association, dated as of August 1, 2005.(2) Note Purchase Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of August 1, 2005.(2) Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2011 Amendment and Restatement).(10) Hercules Technology Growth Capital, Inc. 2006 Non-Employee Director Plan (2007 Amendment and Restatement).(11) 10(k) Form of Custody Agreement between the Company and Union Bank of California.(8) 10(l) Form of Restricted Stock Award under the 2004 Equity Incentive Plan.(19) 10(m) Subscription Agreement by and among the Company and the subscribers named therein, dated as of March 2, 2006.(17) 10(n) Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan.(8) 10(o) 10(p) 10(q) 10(r) 10(s) 10(t) Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan.(8) Form of Registrar Transfer Agency and Service Agreement between the Company and American Stock Transfer & Trust Company.(8) Warrant Agreement, dated as of June 22, 2004, between the Company and American Stock Transfer & Trust Company, as warrant agent.(9) Subscription Agreement, dated as of February 2, 2004, between the Company and the subscribers named therein.(8) Lease Agreement, dated as of June 13, 2006, between the Company and 400 Hamilton Associates.(4) Third Amendment to Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc., dated as of July 28, 2006.(5) 10(u) Second Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty Corp., dated as of December 6, 2006.(6) 10(v) Fifth Amendment to Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I, LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty Corp., dated as of March 30, 2007.(13) 10(w) Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG, dated as of May 2, 2007.(14) 10(x) 10(y) 10(z) Fourth Amendment to the Warrant Participation Agreement by and among Hercules Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of May 2, 2007.(15) Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 2, 2007.(15) First Amendment to Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 7, 2008.(16) 10(b) Pledge and Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as 10(aa) Second Amendment to Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, 10(c) First Amendment to Credit and Pledge Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding L.L.C., dated as of August 1, 2005.(2) 10(d) Second Amendment to Credit and Pledge and Security Agreement by and among Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., as lender and administrative agent for the lenders, dated as of March 6, 2006.(12) 10(e) Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc., dated as of August 1, 2005.(2) Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG, dated as of May 7, 2008.(16) 10(bb) Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC, dated as of August 25, 2008.(18) 10(cc) Sale and Servicing Agreement among Hercules Funding II LLC, the Company, Lyon Financial Services, Inc., and Wells Fargo Foothill, LLC, dated as of August 25, 2008.(18) 10(dd) Form of SBA Debenture.(19) 10(f) Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc., dated as of August 1, 2005.(2) 10(ee) First Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Foothill, LLC, dated as of April 30, 2009.(20) 174 175 16323_HER-10K_CS6-r4.indd 175 4/28/15 2:55 PM Exhibit Number 10(ff) Description Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of February 10, 2010.(21) 10(gg) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) 10(hh) Amended and Restated Loan and Security Agreement between the Company and Union Bank, N.A., dated as of November 2, 2011.(25) Exhibit Number Description 14 Code of Ethics.(8) 21.1* List of Subsidiaries. 10(ii) 10(jj) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) First Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of March 30, 2012.(32) 32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 10(kk) Third Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 1, 2012.(33) 10(ll) Second Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of September 17, 2012.(34) 10(mm) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 17, 2012.(34) 10(nn) First Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I, LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty Corp., dated as of March 6, 2006.(12) 10(oo) Intercreditor Agreement among Hercules Technology Growth Capital, Inc., Alcmene Funding, L.L.C. and Citigroup Global Markets Realty Corp., dated as of March 6, 2006.(12) Company. 10(pp) Warrant Participation Agreement between the Company and Citigroup Global Markets Realty Corp., dated as of August 1, 2005.(35) 10(qq) Indenture by and between Hercules Capital Funding Trust 2012-1 and U.S. Bank National Association, dated as of December 19, 2012.(36) 10(rr) Amended and Restated Trust Agreement by and between Hercules Capital Funding 2012-1 LLC and Wilmington Trust, National Association, dated as of December 19, 2012.(36) 10(ss) Sale and Servicing Agreement by and Among Hercules Capital Funding 2012-1 LLC, Hercules Capital Funding Trust 2012-1 LLC, Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of December 19, 2012.(36) 10(tt) Sale and Contribution Agreement by and between Hercules Technology Growth Capital, Inc. and Hercules Capital Funding 2012-1 LLC, dated as of December 19, 2012.(36) 10(uu) Note Purchase Agreement among the Hercules Technology Growth Capital, Inc., Hercules Capital Funding 2012-1 LLC, as Trust Depositor, Hercules Capital Funding Trust 2012-1, as Issuer, and Guggenheim Securities, LLC, as Initial Purchaser, dated as of December 12, 2012.(36) 10(vv) Administration Agreement between Hercules Capital Funding Trust 2012-1LLC, Hercules Technology Growth Capital, Inc, Wilmington Trust, National Association, and U.S. Bank National Association, dated as of December 19, 2012.(36) 10(ww) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth (28) Previously filed as part of Post-Effective Amendment No. 3, as filed on July 12, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Capital, Inc. and Union Bank, N.A., dated as of December 19, 2012.(36) 10(xx) Fourth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 2, 2013.(37) 10(yy) Fifth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and MUFG Union Bank, N.A., dated as of January 31, 2014.(37) 10(zz) Sixth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Previously filed as part of Post-Effective Amendment No. 4, as filed on September 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 Capital, Inc. and MUFG Union Bank, N.A., dated as of July 8, 2014.(38) 10(aaa) Second Amended and Restated Loan and Security Agreement by and among Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of August 14, 2014.(41) 176 (35) Previously filed as part of the Pre-Effective Amendment No. 1, as filed on October 17, 2006 (File No. 333-136918), to the Registration Statement on Form N-2 (36) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 17, 2012. 177 16323_HER-10K_CS6-r4.indd 176 4/28/15 2:55 PM 10(bbb) Fifth Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 8, 2014.(42) 23.1* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. 31.1* Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2* Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 99.1* Notice of Redemption of 7.00% Note due in 2019. (1) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 8, 2005 (Registration No. 333-122950), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 5, 2005. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 2, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 13, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 28, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 6, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 9, 2007. Previously filed as part of a Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950), to the Registration Statement on Form N-2 of the Previously filed as part of the Registration Statement on Form N-2 of the Company (File No. 333-122950), as filed on February 22, 2005. Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on June 22, 2007 and the Definitive Proxy Statement of the Company, as filed on April 29, 2011. Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on October 10, 2007. Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 3, 2007. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 5, 2007. Previously filed as part of the Pre-Effective Amendment No. 1, as filed on May 15, 2007 (File No. 333-141828), to the Registration Statement on Form N-2 of (16) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 5, 2008 (File No. 333-150403 ), to the Registration Statement on Form N-2 of the (17) Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 27, 2008. Previously filed as part of the Annual Report on Form 10-K of the Company, as filed on March 16, 2009. Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 11, 2009. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 17, 2010. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 18, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 24, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 11, 2011. Previously filed as part of Post-Effective Amendment No. 1, as filed on April 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the (27) Previously filed as part of Post-Effective Amendment No. 2, as filed on July 6, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the (29) Previously filed as part of Post-Effective Amendment No. 5, as filed on September 24, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 (30) Previously filed as part of Post-Effective Amendment No. 7, as filed on October 2, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of (31) Previously filed as part of Post-Effective Amendment No. 8, as filed on October 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 8, 2012. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 2, 2012. (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (18) (19) (20) (21) (22) (23) (24) (25) (26) (32) (33) (34) the Company. the Company. Company. the Company. Company. Company. Company. of the Company. the Company. the Company. of the Company. of the Company. Description Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 8, 2014.(42) Exhibit Number 10(bbb) Fifth Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Capital Exhibit Number 10(ff) Description February 10, 2010.(21) Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of 10(gg) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) 10(hh) Amended and Restated Loan and Security Agreement between the Company and Union Bank, N.A., dated as of November 2, 2011.(25) 10(ii) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) Capital, Inc. and Union Bank, N.A., dated as of September 17, 2012.(34) 10(mm) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 17, 2012.(34) 10(nn) First Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I, LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets Realty Corp., dated as of March 6, 2006.(12) 10(oo) Intercreditor Agreement among Hercules Technology Growth Capital, Inc., Alcmene Funding, L.L.C. and Citigroup Global Markets Realty Corp., dated as of March 6, 2006.(12) 10(pp) Warrant Participation Agreement between the Company and Citigroup Global Markets Realty Corp., dated as of August 1, 10(qq) Indenture by and between Hercules Capital Funding Trust 2012-1 and U.S. Bank National Association, dated as of 2005.(35) December 19, 2012.(36) 10(rr) Amended and Restated Trust Agreement by and between Hercules Capital Funding 2012-1 LLC and Wilmington Trust, National Association, dated as of December 19, 2012.(36) 10(ss) Sale and Servicing Agreement by and Among Hercules Capital Funding 2012-1 LLC, Hercules Capital Funding Trust 2012-1 LLC, Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of December 19, 2012.(36) 10(tt) Sale and Contribution Agreement by and between Hercules Technology Growth Capital, Inc. and Hercules Capital Funding 2012-1 LLC, dated as of December 19, 2012.(36) 10(uu) Note Purchase Agreement among the Hercules Technology Growth Capital, Inc., Hercules Capital Funding 2012-1 LLC, as Trust Depositor, Hercules Capital Funding Trust 2012-1, as Issuer, and Guggenheim Securities, LLC, as Initial Purchaser, dated as of December 12, 2012.(36) 10(vv) Administration Agreement between Hercules Capital Funding Trust 2012-1LLC, Hercules Technology Growth Capital, Inc, Wilmington Trust, National Association, and U.S. Bank National Association, dated as of December 19, 2012.(36) 10(ww) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 19, 2012.(36) 10(xx) Fourth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 2, 2013.(37) 10(yy) Fifth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and MUFG Union Bank, N.A., dated as of January 31, 2014.(37) 10(zz) Sixth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and MUFG Union Bank, N.A., dated as of July 8, 2014.(38) 10(aaa) Second Amended and Restated Loan and Security Agreement by and among Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of August 14, 2014.(41) 176 10(jj) First Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of March 30, 2012.(32) 32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 10(kk) Third Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 1, 2012.(33) 32.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 10(ll) Second Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth 99.1* Notice of Redemption of 7.00% Note due in 2019. 14 Code of Ethics.(8) 21.1* List of Subsidiaries. 23.1* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. 31.1* Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2* Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 8, 2005 (Registration No. 333-122950), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 5, 2005. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 2, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 13, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 28, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 6, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 9, 2007. Previously filed as part of a Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Registration Statement on Form N-2 of the Company (File No. 333-122950), as filed on February 22, 2005. Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on June 22, 2007 and the Definitive Proxy Statement of the Company, as filed on April 29, 2011. Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on October 10, 2007. Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 3, 2007. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 5, 2007. Previously filed as part of the Pre-Effective Amendment No. 1, as filed on May 15, 2007 (File No. 333-141828), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 5, 2008 (File No. 333-150403 ), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 27, 2008. Previously filed as part of the Annual Report on Form 10-K of the Company, as filed on March 16, 2009. Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 11, 2009. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 17, 2010. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 18, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 24, 2011. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 11, 2011. Previously filed as part of Post-Effective Amendment No. 1, as filed on April 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 2, as filed on July 6, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 3, as filed on July 12, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 5, as filed on September 24, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 7, as filed on October 2, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 8, as filed on October 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 8, 2012. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 2, 2012. Previously filed as part of Post-Effective Amendment No. 4, as filed on September 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Pre-Effective Amendment No. 1, as filed on October 17, 2006 (File No. 333-136918), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 17, 2012. 177 16323_HER-10K_CS6-r4.indd 177 4/28/15 2:55 PM (37) (38) (39) Previously filed as part of the Annual report on Form 10-K of the Company, as filed on February 27, 2014. Previously filed as part of Post-Effective Amendment No. 4, as filed on July 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the Company. Previously filed as part of Post-Effective Amendment No. 5, as filed on July 14, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the Company. (40) Previously filed as part of Post-Effective Amendment No. 6, as filed on August 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 14, 2014. Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on November 6, 2014. Filed herewith (41) (42) * SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 2, 2015 By: /S/ MANUEL A. HENRIQUEZ HERCULES TECHNOLOGY GROWTH CAPITAL, INC. Manuel A. Henriquez Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on March 2, 2015. Signature Title /S/ MANUEL A. HENRIQUEZ Chairman of the Board, President and Chief Manuel A. Henriquez Executive Officer (principal executive officer) /S/ JESSICA BARON Vice President of Finance and Chief Financial Jessica Baron Officer (principal accounting officer) /S/ ALLYN C. WOODWARD, JR Director Allyn C. Woodward, Jr. /S/ ROBERT P. BADAVAS Director Robert P. Badavas /S/ THOMAS FALLON Director Thomas Fallon Date March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 16323_HER-10K_CS6-r4.indd 178 4/28/15 2:55 PM 178 179 (37) (38) (41) (42) * Company. Company. the Company. Filed herewith Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 14, 2014. Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on November 6, 2014. Previously filed as part of the Annual report on Form 10-K of the Company, as filed on February 27, 2014. Previously filed as part of Post-Effective Amendment No. 4, as filed on July 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the SIGNATURES (39) Previously filed as part of Post-Effective Amendment No. 5, as filed on July 14, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the (40) Previously filed as part of Post-Effective Amendment No. 6, as filed on August 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. Date: March 2, 2015 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on March 2, 2015. Signature Title /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chairman of the Board, President and Chief Executive Officer (principal executive officer) /S/ JESSICA BARON Jessica Baron Vice President of Finance and Chief Financial Officer (principal accounting officer) /S/ ALLYN C. WOODWARD, JR Allyn C. Woodward, Jr. Director /S/ ROBERT P. BADAVAS Robert P. Badavas /S/ THOMAS FALLON Thomas Fallon Director Director Date March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 178 179 16323_HER-10K_CS6-r4.indd 179 4/28/15 2:55 PM EXHIBIT INDEX Exhibit 21.1 Exhibit Number 21.1 23.1 31.1 Descriptions List of Subsidiaries Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of Hercules Technology Management Co II Inc. 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 99.1 Notice of Redemption of 7.00% Note due in 2019 List of Subsidiaries Hercules Technology SBIC Management, LLC Hercules Technology II, L.P. Hercules Technology III, L.P. Hercules Technology IV, L.P. Hercules Technology Management Co III Inc. Hercules Technology Management Co V Inc. Hercules Funding II, LLC Hydra Ventures LLC Hydra Ventures II LLC Hydra Management LLC Hercules Technology I, LLC Hercules Technology II, LLC Hercules Capital Funding Trust 2012-1 Hercules Capital Funding 2012-1 LLC Hercules Capital Funding Trust 2014-1 Hercules Capital Funding 2014-1 LLC 16323_HER-10K_CS6-r4.indd 180 4/28/15 2:55 PM EXHIBIT INDEX Exhibit 21.1 Descriptions List of Subsidiaries Exhibit Number 21.1 23.1 31.1 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 List of Subsidiaries Hercules Technology SBIC Management, LLC Hercules Technology II, L.P. Hercules Technology III, L.P. Hercules Technology IV, L.P. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of Hercules Technology Management Co II Inc. 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Hercules Technology Management Co III Inc. Hercules Technology Management Co V Inc. Hercules Funding II, LLC Hydra Ventures LLC Hydra Ventures II LLC Hydra Management LLC Hercules Technology I, LLC Hercules Technology II, LLC Hercules Capital Funding Trust 2012-1 Hercules Capital Funding 2012-1 LLC Hercules Capital Funding Trust 2014-1 Hercules Capital Funding 2014-1 LLC 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002 99.1 Notice of Redemption of 7.00% Note due in 2019 16323_HER-10K_CS6-r4.indd 181 4/28/15 2:55 PM CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-144002, 333-146445 and 333-189474) of Hercules Technology Growth Capital, Inc. of our report dated March 2, 2015 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Manuel A. Henriquez, President, Chief Executive Officer and Director of the Company, certify that: Exhibit 23.1 Exhibit 31.1 /s/ PricewaterhouseCoopers LLP San Francisco, CA March 2, 2015 1. I have reviewed this annual report on Form 10-K of Hercules Technology Growth Capital, Inc. (the “registrant”) for the year ended December 31, 2014; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2015 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer 16323_HER-10K_CS6-r4.indd 182 4/28/15 2:55 PM CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-144002, 333-146445 and 333-189474) of Hercules Technology Growth Capital, Inc. of our report dated March 2, 2015 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Manuel A. Henriquez, President, Chief Executive Officer and Director of the Company, certify that: Exhibit 23.1 Exhibit 31.1 /s/ PricewaterhouseCoopers LLP San Francisco, CA March 2, 2015 1. I have reviewed this annual report on Form 10-K of Hercules Technology Growth Capital, Inc. (the “registrant”) for the year ended December 31, 2014; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2015 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer 16323_HER-10K_CS6-r4.indd 183 4/28/15 2:55 PM CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 Exhibit 32.1 In connection with the accompanying Annual Report of Hercules Technology Growth Capital, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Manuel Henriquez, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 2, 2015 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer I, Jessica Baron, Vice President of Finance and Chief Financial Officer (Principal Accounting Officer), certify that: 1. I have reviewed this annual report on Form 10-K of Hercules Technology Growth Capital, Inc. (the “registrant”) for the year ended December 31, 2014; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2015 By: /S/ JESSICA BARON Jessica Baron Vice President of Finance and Chief Financial Officer 16323_HER-10K_CS6-r4.indd 184 4/28/15 2:55 PM Exhibit 31.2 Exhibit 32.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jessica Baron, Vice President of Finance and Chief Financial Officer (Principal Accounting Officer), certify that: 1. I have reviewed this annual report on Form 10-K of Hercules Technology Growth Capital, Inc. (the “registrant”) for the year ended December 31, 2014; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; In connection with the accompanying Annual Report of Hercules Technology Growth Capital, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Manuel Henriquez, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in Date: March 2, 2015 this report. By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2015 By: /S/ JESSICA BARON Jessica Baron Vice President of Finance and Chief Financial Officer 16323_HER-10K_CS6-r4.indd 185 4/28/15 2:55 PM Exhibit 32.2 Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 U.S. Bank National Association, as trustee One Federal Street, Third Floor Boston, MA 02210 February 26, 2015 In connection with the accompanying Annual Report of Hercules Technology Growth Capital, Inc. (the “Company”) on Form Attention: Corporate Trust/CDO Unit 10-K for the year ended December 31, 2014 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Jessica Baron, Principal Financial and Accounting Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: Reference: Hercules Technology Growth Capital, Inc. Ladies and Gentlemen: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 2, 2015 By: /S/ JESSICA BARON Jessica Baron Vice President of Finance and Chief Financial Officer Hercules Technology Growth Capital, Inc., a Maryland corporation (the “Company”), hereby provides notice, pursuant to Section 11.02 of the Indenture, dated as of March 6, 2012 (the “Indenture”), by and between the Company and you, as trustee, relating to the Company’s 7.00% Senior Notes due 2019 (CUSIP No. 427096888) (the “Notes”), that the Company is electing to exercise its option to redeem, in part, the Notes. The Company will redeem $20,000,000 of the $84,489,500 in remaining issued and outstanding Notes on April 30, 2015. The Company hereby instructs U.S. Bank National Association, as trustee, to deliver (or cause to be delivered) on the Company’s behalf the notice attached hereto as Exhibit A to each Holder at such Holder’s address appearing on the Security Register. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Indenture. [Signature Page Follows] 16323_HER-10K_CS6-r4.indd 186 4/28/15 2:55 PM CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report of Hercules Technology Growth Capital, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Jessica Baron, Principal Financial and Accounting Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and operations of the Company. (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of Date: March 2, 2015 By: /S/ JESSICA BARON Jessica Baron Vice President of Finance and Chief Financial Officer Exhibit 32.2 Exhibit 99.1 February 26, 2015 U.S. Bank National Association, as trustee One Federal Street, Third Floor Boston, MA 02210 Attention: Corporate Trust/CDO Unit Reference: Hercules Technology Growth Capital, Inc. Ladies and Gentlemen: Hercules Technology Growth Capital, Inc., a Maryland corporation (the “Company”), hereby provides notice, pursuant to Section 11.02 of the Indenture, dated as of March 6, 2012 (the “Indenture”), by and between the Company and you, as trustee, relating to the Company’s 7.00% Senior Notes due 2019 (CUSIP No. 427096888) (the “Notes”), that the Company is electing to exercise its option to redeem, in part, the Notes. The Company will redeem $20,000,000 of the $84,489,500 in remaining issued and outstanding Notes on April 30, 2015. The Company hereby instructs U.S. Bank National Association, as trustee, to deliver (or cause to be delivered) on the Company’s behalf the notice attached hereto as Exhibit A to each Holder at such Holder’s address appearing on the Security Register. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Indenture. [Signature Page Follows] 16323_HER-10K_CS6-r4.indd 187 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. By: Name: Jessica Baron Title: Chief Financial Officer /S/ JESSICA BARON EXHIBIT A 16323_HER-10K_CS6-r4.indd 188 4/28/15 2:55 PM HERCULES TECHNOLOGY GROWTH CAPITAL, INC. By: /S/ JESSICA BARON Name: Jessica Baron Title: Chief Financial Officer EXHIBIT A 16323_HER-10K_CS6-r4.indd 189 4/28/15 2:55 PM NOTICE OF REDEMPTION TO THE HOLDERS OF THE 7.00% Senior Notes due 2019 of Hercules Technology Growth Capital, Inc. (CUSIP No. 427096888)* Redemption Date: April 30, 2015 NOTICE IS HEREBY GIVEN, pursuant to Section 11.04 of the Indenture dated as of March 6, 2012 (the “Base Indenture”), between Hercules Technology Growth Capital, Inc., a Maryland corporation (the “Company”) and U.S. Bank National Association (the “Trustee), and Section 1.01(h) of the First Supplemental Indenture dated as of April 17, 2012 (the “First Supplemental Indenture,” and together with the Base Indenture, the “Indenture”), that the Company is electing to exercise its option to redeem, in part, the 7.00% Senior Notes due 2019 (the “Notes”). The Company will redeem $20,000,000 of the $84,489,500 in remaining issued and outstanding Notes on April 30, 2015 (the “Redemption Date”). The redemption price for the Notes equals 100% of the $20,000,000 principal amount of the Notes being redeemed, plus the accrued and unpaid interest thereon from January 30, 2015, through, but excluding, the Redemption Date (the “Redemption Payment”). The accrued interest on each $25 principal amount of the Notes payable on the Redemption Date will be the interest that would otherwise be payable for the quarterly interest period ending on April 30 and will be approximately $0.4375. On the Redemption Date, the Redemption Price will become due and payable to the Holders of the Notes. Interest on the $20,000,000 in principal amount of Notes being redeemed will cease to accrue on and after the Redemption Date. Unless the Company defaults in paying the Redemption Price with respect to such Notes, the only remaining right of the Holders with respect to such Notes will be to receive payment of the Redemption Price upon presentation and surrender of such Notes to the Trustee in its capacity as Paying Agent. Notes held in book-entry form will be redeemed and the Redemption Price with respect to such Notes will be paid in accordance with the applicable procedures of The Depository Trust Company. On and after the Redemption Date, upon surrender of the Notes being redeemed, the Holders will receive, without charge, a new Note of authorized denominations for the principal amount thereof remaining unredeemed. Payment of the Redemption Price to the Holders will be made upon presentation and surrender of the Notes in the following manner: If by Mail: U.S. Bank Corporate Trust Services P.O. Box 64111 St. Paul, MN 55164-0111 If by Hand or Overnight Mail: U.S. Bank Corporate Trust Services 60 Livingston Avenue 1st Fl. – Bond Drop Window St. Paul, MN 55107-2292 *The CUSIP number has been assigned to this issue by organizations not affiliated with the Company or the Trustee and is included solely for the convenience of the noteholders. Neither the Company nor the Trustee shall be responsible for the selection or use of this CUSIP number, nor is any representation made as to the correctness or accuracy of the same on the notes or as indicated in this Notice of Redemption. NOTICE Under U.S. federal income tax law, the Trustee or other withholding agent may be required to withhold twenty-eight percent (28%) of any gross payment to a holder who fails to provide a taxpayer identification number and other required certifications. To avoid backup withholding, please complete a Form W-9 or an appropriate Form W-8, as applicable, which should be furnished in connection with the presentment and surrender of the Notes called for redemption. Holders should consult their tax advisors regarding the withholding and other tax consequences of the redemption. Dated: [_______], 2015 Hercules Technology Growth Capital, Inc. By: U.S. Bank National Association, as Trustee and Paying Agent 16323_HER-10K_CS6-r4.indd 190 4/28/15 2:55 PM Corporate Information Corporate Headquarters 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 www.htgc.com Independent Registered Public Accounting Firm PricewaterhouseCoopers, LLP Three Embarcadero Center San Francisco, CA 94111 www.pwc.com/us Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 T +1 800 937 5449 www.amstock.com The transfer agent maintains shareholder records for Hercules Technology Growth Capital, Inc. Please contact American Stock Transfer & Trust Company, LLC, directly for changes of address, transfers of stock, and replacement of lost certificates. Form 10-K Annual Report The company is pleased to provide corporate information without charge upon written request to: Investor Relations Department Hercules Technology Growth Capital, Inc. 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 Stock Listing Common stock traded on the New York Stock Exchange under the symbol: HTGC Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY, HTGX Board of Directors Robert P. Badavas Director Thomas J. Fallon Director Manuel A. Henriquez Chairman, President, and Chief Executive Officer Joseph F. Hoffman Director Susanne D. Lyons Director Allyn C. Woodward, Jr. Director Management Manuel A. Henriquez Chairman, President, and Chief Executive Officer Jessica Baron Chief Financial Officer Scott Bluestein Chief Investment Officer Investor Relations on the Web For more information related to investing in the company, please see the Investor Relations tab on our website at www.htgc.com. This annual report is printed on paper and at a printing facility certified by the Forest Stewardship Council (FSC). From forest management to paper production to printing, FSC certification represents the highest social and environmental standards. The paper contains wood from well-managed forests and controlled sources. This is certified in accordance with the rules of the Forest Stewardship Council. Design by: Michael Patrick Partners www.michaelpatrickpartners.com The statements contained in this Annual Report that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks, uncertainties, including the uncertainties surrounding the current market, and other factors we identify from time to time in our filings with the Securities and Exchange Commission. 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 incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this Annual Report are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events. Our founding mission was to provide investors with the opportunity to invest in some of America’s most innovative, venture capital and private equity-backed companies in technology-related markets. Today we are one of the largest business development companies focused on the venture capital industry that enable investors to engage in these unique opportunities. Our focus is to work with entrepreneurial companies to help them grow their businesses. Our financing solutions offer the flexibility that growing companies require as they evolve and change. We seek to serve our shareholders’ interests through disciplined due diligence processes and the ability to work closely with our portfolio companies. New York Stock Exchange symbol: HTGC. Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY, HTGX. 16323_HER-Cvr_CC.r1.indd 2 4/21/15 4:44 PM Financing the Growth of Tomorrow’s Companies Today™ H e r c u l e s T e c h n o l o g y G r o w t h C a p i t a l 2 0 1 4 A n n u a l R e p o r t Financing the Growth of Tomorrow’s Companies Today™ Palo Alto, CA (Headquarters) 400 Hamilton Avenue Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 McLean, VA 1600 Tysons Boulevard 8th Floor McLean, VA 22102 T +1 703 245 3184 F +1 703 245 3001 Boston, MA 31 St. James Avenue Suite 790 Boston, MA 02116 T +1 617 314 9973 F +1 617 314 9997 New York, NY 100 Park Avenue 34th Floor New York, NY 10017 T +1 212 774 3611 F +1 212 843 3411 Chicago, IL 777 Church Street Elmhurst, IL 60126 T +1 847 542 1858 Radnor, PA Three Radnor Corporate Center Suite 410 100 Matsonford Road Radnor, PA 19807 T +1 610 947 6408 www.htgc.com 2014 Annual Report 16323_HER-Cvr_CC.r1.indd 1 4/21/15 4:44 PM
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