Runway Growth Finance Corp.: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements

This quarterly report on Form 10‑Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

• changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets;
• an economic downturn or recession, as well as the impairment or failure of financial institutions on both a global and domestic scale, could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
• such an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;
• a contraction of available credit and/or an inability to access the equity markets that could impair our lending and investment activities;
• interest rate volatility that could adversely affect our results, particularly to the extent that we use leverage as part of our investment strategy;
• the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies;
• our business prospects and the prospects of our portfolio companies, including the impact of the COVID-19 pandemic thereon;
• our contractual arrangements and relationships with third parties;
• the ability of our portfolio companies to achieve their objectives;
• competition with other entities and our affiliates for investment opportunities;
• the speculative and illiquid nature of our investments;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;
• the loss of key personnel and members of our management team;
• the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID‑19 pandemic thereon;
• the ability of our external investment adviser, Runway Growth Capital LLC, to locate suitable investments for us and to monitor and administer our investments;
• the ability of Runway Growth Capital LLC to attract and retain highly talented professionals;
• our ability to qualify and maintain our qualification as a RIC under Subchapter M of the Code, and as a BDC;
• the occurrence of a disaster, such as a cyber-attack against us or against a third party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster-recovery systems, or consequential employee error;
• the effect of legal, tax, and regulatory changes; and
• the other risks, uncertainties and other factors we identify under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the "SEC") on March 2, 2023 and in this quarterly report on Form 10-Q.

Although we believe the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023.

We have based the forward-looking statements included in this Form 10‑Q on information available to us on the date of this Form 10‑Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including our annual reports on Form 10‑K, quarterly reports on Form 10‑Q and current reports on Form 8‑K.

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10‑Q.

Overview

Runway Growth Finance Corp. ("we," "us," "our," or the "Company"), a Maryland corporation formed on August 31, 2015, is structured as an externally managed, non-diversified closed-end management investment company. On August 18, 2021, we changed our name to "Runway Growth Finance Corp." from "Runway Growth Credit Fund Inc." We are a specialty finance company focused on providing senior secured loans to high growth-potential companies in technology, life sciences, healthcare information and services, business services, select consumer services and products and other high-growth industries. Our goal is to create significant value for our stockholders and the entrepreneurs we support by providing high growth-potential companies with hybrid debt and equity financing that is more flexible than traditional credit and less dilutive than equity. Our investment objective is to maximize our total return to our stockholders primarily through current income on our loan portfolio, and secondarily through capital gains on our warrants and other equity positions. Our offices are in Chicago, Illinois; Menlo Park, California; Dallas, Texas; and New York, New York.

We have elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "1940 Act"). We have also elected to be treated as regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). While we currently qualify and intend to qualify annually to be treated as a RIC, no assurance can be provided that we will be able to maintain our tax treatment as a RIC. If we fail to qualify for tax treatment as a RIC for any taxable year, we will be subject to U.S. federal income tax at corporate rates on any net taxable income for such year. As a BDC and a RIC, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source-of-income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our investment company taxable income and net tax-exempt interest.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of our IPO (December 31, 2026), or until the earliest of (i) the last day of the first fiscal year in which we have total annual gross revenue of $1.235 billion or more, (ii) December 31 of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”), (which would occur if the market value of our common stock held by non-affiliates exceeds $700.0 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months), or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. For so long as we remain an emerging growth company under the JOBS Act, we will be subject to reduced public company reporting requirements.

We are externally managed by Runway Growth Capital LLC ("RGC"), an investment adviser that has registered with the SEC under the Investment Advisers Act of 1940, as amended. The Administrator, a wholly-owned subsidiary of RGC, provides all the administrative services necessary for us to operate.

On August 10, 2020, we, RGC, and certain other funds and accounts sponsored or managed by RGC and/or its affiliates were granted an order (the “Order”), amended on August 30, 2022, that permits us greater flexibility than the 1940 Act permits to negotiate the terms of co-investments if our Board of Directors determines that it would be advantageous for us to co-invest with other accounts sponsored or managed by RGC or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. We believe that the ability to co-invest with similar investment structures and accounts sponsored or managed by RGC or its affiliates will provide additional investment opportunities and the ability to achieve greater diversification. Under the terms of the Order, a majority of our independent directors are required to make certain determinations in connection with a co-investment transaction, including that (1) the terms of the proposed transaction 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 and is consistent with our investment strategies and policies.

On August 30, 2022, we received an amendment to our existing Order to permit us to, subject to the satisfaction of certain conditions, co-invest in our existing portfolio companies with certain affiliates that are private funds even if such other funds had not previously invested in such existing portfolio company. Without this Order, such affiliated funds that are private funds would not be able to participate in such co-investments with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us.

Portfolio Composition and Investment Activity

Portfolio Composition

At September 30, 2023, we had investments in 50 portfolio companies, representing 20 companies in which we held loan and warrant investments, three companies in which we held loan investments and shares of common stock, preferred stock, or a combination with warrants, five companies in which we held a loan investment only, 17 companies in which we held warrant investments only, and five companies in which we held shares of common stock or preferred stock only, or a combination with warrants. At December 31, 2022, we had investments in 49 portfolio companies, representing 28 companies in which we held loan and warrant investments, one companies in which we held loan investments and shares of common, preferred stock, or a combination with warrants, six companies in which we held a loan investment only, nine companies in which we held warrant investments only, and five companies in which we held shares of common or preferred stock only, or a combination with warrants.

The following table shows the fair value of our investments, by asset class, as of September 30, 2023 and December 31, 2022 (in thousands):

For the three and nine months ended September 30, 2023, our debt investment portfolio had a dollar-weighted annualized yield of 18.3% and 16.0%, respectively. For the three and nine months ended September 30, 2022, our debt investment portfolio had a dollar-weighted annualized yield of 14.4% and 13.5%, respectively. We calculate the yield on dollar-weighted debt investments for any period measured as (1) total related investment income during the period divided by (2) the daily average of the fair value of debt investments outstanding during the period. As of September 30, 2023, our debt investments had a dollar-weighted average outstanding term of 57 months at origination and a dollar-weighted average remaining term of 38 months, or approximately 3.2 years. As of September 30, 2023, substantially all of our debt investments had committed principal amounts of between $6.0 million and $85.0 million, repayment terms of between 34 months and 82 months and pay cash interest at annual interest rates of between 7.1% and 15.7%.

The following table shows our dollar-weighted annualized yield by investment type for the three and nine months ended September 30, 2023 and 2022:

(1) We calculate the dollar-weighted annualized yield on average investment type for any period as (a) total related investment income during the period divided by (b) the daily average of the fair value of the investment type outstanding during the period. The dollar-weighted annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.

(2) We calculate the dollar-weighted annualized yield on average investment type for any period as (a) total related investment income during the period divided by (b) the daily average of the investment type outstanding during the period, at amortized cost. The dollar-weighted annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.

Investment Activity

The value of our investment portfolio will change over time due to changes in the fair value of our underlying investments, as well as changes in the composition of our portfolio resulting from purchases of new and follow-on investments as well as repayments and sales of existing investments. During the nine months ended September 30, 2023, the Company funded 19.8 million in one new portfolio company, and $85.7 million in 11 existing portfolio companies, net of upfront loan origination fees. The Company also received $225.7 million in loan prepayments from 10 portfolio companies and $7.0 million in scheduled principal payments from two portfolio companies. There were no proceeds from the termination of warrants, sale of preferred stock, and sale of common stock. During the nine months ended September 30, 2022, the Company funded $210.4 million in eight new portfolio companies and $182.4 million in ten existing portfolio companies, net of upfront loan origination fees. The Company also received $135.9 million in loan prepayments from six portfolio companies and $7.3 million in scheduled principal payments from two portfolio companies. There were $7.2 million in proceeds from the termination of warrants, sale of preferred stock, and sale of common stock.

Portfolio Reconciliation

The following is a reconciliation of our investment portfolio, including U.S. Treasury Bills, for the nine months ended September 30, 2023 and 2022 (in thousands):

52

Asset Quality

In addition to various risk management and monitoring tools, RGC uses an investment rating system to characterize and monitor the quality of our debt investment portfolio. Equity securities and Treasury Bills are not graded. This debt investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:

The following table shows the investment ratings of our debt investments at fair value as of September 30, 2023 and December 31, 2022 (dollars in thousands):

Loans and Debt Securities on Non-Accrual Status

Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. As of September 30, 2023 and December 31, 2022, we have not written off any accrued and uncollected PIK interest. As of September 30, 2023, we had one loan to Pivot3, Inc. on non-accrual status. The loan, with a cost basis of $18.0 million and a fair value of $11.6 million, represents 1.1% of the total investment portfolio. From being placed on non-accrual status through September 30, 2023, cumulative interest of $6.0 million would be receivable and $0.3 million OID would be accreted into the cost basis, for a total of $6.3 million not recorded in Interest income from control investments on the Statements of Operations. As of December 31, 2022, we had one loan to Pivot3, Inc. on non-accrual status. The loan, with a cost basis of $19.2 million and a fair market value of $9.3 million represents 0.8% of the total investment portfolio. From being placed on non-accrual status through December 31, 2022, cumulative interest of $3.6 million would be payable and $0.3 million OID would be accreted into the cost basis, for a total of $3.9 million not recorded in Interest income from control investments on the Statements of Operations.

Results of Operations

An important measure of our financial performance is net increase/(decrease) in net assets resulting from operations, which includes net investment income/(loss), net realized gain/(loss) and net unrealized gain/(loss). Net investment income/(loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain/(loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized gain/(loss) on investments is the net change in the fair value of our investment portfolio.

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

The following table is a comparison of the results of our operations for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):

(1) The basic per share figures noted above are based on weighted averages of 40,509,269 and 40,774,154 shares outstanding for the three months ended September 30, 2023 and 2022, respectively, and 40,509,269 and 41,119,467 shares outstanding for the nine months ended September 30, 2023 and 2022, respectively.

Investment Income

Our investment objective is to maximize total return to our stockholders primarily through current income on our loan portfolio, and secondarily through capital gain on our warrants and other equity positions. We intend to achieve our investment objective by investing in high growth-potential, private companies. We typically invest in senior secured loans that generally fall into two strategies: Sponsored Growth Lending and Non-Sponsored Growth Lending. We generally receive warrants and/or other equity from our investments. We expect our investments in loans will generally range from between $10.0 million to $100.0 million, and the upper end of this range may increase as we raise additional capital.

We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the debt we invest in will generally have stated terms of 36 to 60 months. Interest on debt securities is generally payable monthly, primarily based on a floating rate index, and subject to certain floors determined by market rates at the time the investment is made. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest will become due at the maturity date. Any original issue discount ("OID") or market discount or premium will be capitalized, and we will accrete or amortize such amounts as interest income. We record prepayment fees on debt investments as fee income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.

Investment income for the three months ended September 30, 2023 and 2022 was $43.8 million and $27.0 million, respectively, and includes non-recurring income of $5.6 million and $0.4 million, respectively. Non-recurring income includes, but is not limited to, acceleration of unaccreted OID, prepayment fees and amendment fees. The increase in investment income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to increased interest income driven by our deployment of capital and increased market interest rates.

Investment income for the nine months ended September 30, 2023 and 2022 was $125.0 million and $71.3 million, respectively, and includes non-recurring income of $9.0 million and $2.9 million, respectively. Non-recurring income includes, but is not limited to, acceleration of unaccreted OID, prepayment fees and amendment fees. The increase in investment income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to increased interest income driven by our deployment of capital and increased market interest rates.

Operating Expenses

Our primary operating expenses include the payment of fees to RGC under the Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement, professional fees, and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:

• our pro-rata portion of fees and expenses related an initial public offering in connection with a Spin-Off transaction (as defined in "Note 9 – Net Assets" to our financial statements in Part I, Item 1 of this Form 10-Q);
• fees and expenses related to public and private offerings, sales and repurchases of our securities;
• calculating our net asset value (including the cost and expenses of any independent valuation firm);
• fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for us and in providing administrative services, monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;
• interest payable on debt incurred to finance our investments;
• sales and purchases of our common stock and other securities;
• investment advisory and management fees;
• administration fees payable under the Administration Agreement;
• transfer agent and custodial fees;
• federal and state registration fees;
• all costs of registration and listing our securities on any securities exchange;
• U.S. federal, state and local taxes;
• independent directors’ fees and expenses;
• costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;
• costs of any reports, proxy statements or other notices to stockholders, including printing costs;
• our allocable portion of any fidelity bond, directors’ and officers’ errors and omissions liability insurance, and any other insurance premiums;
• direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and
• all other expenses incurred by us, our Administrator or RGC in connection with administering our business, including payments under the Administration Agreement based on our allocable portion of our Administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

Operating expenses for the three months ended September 30, 2023 and 2022 were $21.7 million and $12.5 million, respectively. Operating expenses increased for the three months ended September 30, 2023 from the three months ended September 30, 2022 primarily due to an increase in interest expense as a result of increased leverage, performance-based incentive fees, and management fees. Operating expenses for the three months ended September 30, 2023 and 2022 were $0.54 and $0.30 per share, respectively.

Operating expenses for the nine months ended September 30, 2023 and 2022 were $65.0 million and $29.9 million, respectively. Operating expenses increased for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 primarily due to an increase in interest expense as a result of increased leverage, performance-based incentive fees, and management fees. Operating expenses for the nine months ended September 30, 2023 and 2022 were $1.61 and $0.72 per share, respectively.

Management fees for the three months ended September 30, 2023 and 2022 were $4.3 million and $3.1 million, respectively. Management fees increased for the three months ended September 30, 2023 from the three months ended September 30, 2022 primarily due to an increase in gross assets, offset by a decrease in the base management rate from 1.6% to 1.5% per annum.

Management fees for the nine months ended September 30, 2023 and 2022 were $12.6 million and $8.5 million, respectively. Management fees increased for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 primarily due to an increase in gross assets, offset by a decrease in the base management rate from 1.6% to 1.5% per annum.

Incentive fees for the three months ended September 30, 2023 and 2022 were $5.5 million and $3.6 million, respectively. Incentive fees increased for the three months ended September 30, 2023 from the three months ended September 30, 2022 primarily due to an increase in net investment income. For the three months ended September 30, 2023, $4.0 million of the incentive fees were payable in cash, and $1.5 million were deferred and accrued. For the three months ended September 30, 2022, $3.2 million of the incentive fees were payable in cash, and $0.4 million were deferred and accrued. Incentive fees related to PIK or deferred interest are accrued and payment is deferred until such interest is collected in cash. Incentive fees for the three months ended September 30, 2023 and 2022 were $0.13 and $0.09 per share, respectively.

Incentive fees for the nine months ended September 30, 2023 and 2022 were $15.0 million and $8.6 million, respectively. Incentive fees increased for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 primarily due to an increase in net investment income. For the nine months ended September 30, 2023, $10.9 million of the incentive fees were payable in cash, and $4.1 million were deferred and accrued. For the nine months ended September 30, 2022, $7.3 million of the incentive fees were payable in cash, and $1.3 million were deferred and accrued. Incentive fees related to PIK or deferred interest are accrued and payment is deferred until such interest is collected in cash. Incentive fees for the nine months ended September 30, 2023 and 2022 were $0.37 and $0.21 per share, respectively.

Net Investment Income

Net investment income for the three months ended September 30, 2023 and 2022 was $22.0 million and $14.5 million, respectively. Net investment income increased for the three months ended September 30, 2023 from the three months ended September 30, 2022 was primarily due to rising interest rates on our investments, partially offset by an increase in interest expense, performance-based incentive fees, and management fees. Net investment income for the three months ended September 30, 2023 and 2022 was $0.54 and $0.36 per share, respectively.

Net investment income for the nine months ended September 30, 2023 and 2022 was $60.0 million and $41.4 million, respectively. Net investment income increased for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 primarily due to rising interest rates partially offset by an increase in performance-based incentive fees, management fees, debt financing fees, and interest expense. Net investment income for the nine months ended September 30, 2023 and 2022 was $1.48 and $1.01 per share, respectively.

Net Realized Gain (Loss) on Investments

There were no net realized gains (losses) on investments for the three months ended September 30, 2023. The net realized gain on investments of $0.4 million for the three months ended September 30, 2022 was primarily due to the gain on a portion of our investment in the common stock of Brilliant Earth Group, Inc and partially offset by a loss on our investment in the warrants in Aspen Group Inc.

Net realized losses on investments of $1.2 million for the nine months ended September 30, 2023 was attributable to our investments in CareCloud, Inc. and Gynesonics, Inc warrants. The net realized gain on investments of $0.9 million for the nine months ended September 30, 2022 was primarily due to the gain on a portion of our investment in the common stock of Brilliant Earth Group, Inc. partially offset by the loss on our investments in the preferred stock and warrants in CareCloud, Inc. and Aspen Group Inc.

Net Change in Unrealized Gain (Loss) on Investments

Net change in unrealized loss on investments of $7.2 million for the three months ended September 30, 2023 was primarily due to a decrease in the fair value of our preferred stock investment in CareCloud, Inc. and our senior secured loans to Snagajob.com, Inc. and Fiscal Note, Inc., as well as a release of unrealized gain on the senior secured loans to Allurion Technologies, Inc. The net change in unrealized loss on investments of $3.2 million for the three months ended September 30, 2022 was primarily due to a release in the unrealized gain on Fiscal Note warrants and decreases in the fair value of our investment in the senior secured loan to Pivot3, Inc.

Net change in unrealized loss on investments of $9.7 million for the nine months ended September 30, 2023 was primarily due to decreases in the fair value of our preferred stock investment in Gynesonics, Inc. and senior secured loans to Gynesonics, Inc. and Snagajob.com, Inc. The net change in unrealized loss on investments of $28.6 million for the nine months ended September 30, 2022 was primarily due to decreases in the fair value of our investments in the senior secured loan to Pivot3, Inc., common stock of Brilliant Earth Group, Inc., and common stock of Coginiti Corp.

Net Increase (Decrease) in Net Assets Resulting from Operations

We had a net increase in net assets resulting from operations of $14.8 million for the three months ended September 30, 2023, as compared to a net decrease in net assets resulting from operations of $11.7 million for the three months ended September 30, 2022. The net increase in net assets resulting from operations for the three months ended September 30, 2023 from the three months ended September 30, 2022 was primarily due to the comparative net change in unrealized gain (loss), as well as an increase in net investment income for the three months ended September 30, 2023.

We had a net increase in net assets resulting from operations of $49.1 million and $13.8 million for the nine months ended September 30, 2023 and 2022, respectively. The net increase in net assets resulting from operations for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 was primarily due to the comparative net change in unrealized gain (loss), as well as an increase in net investment income for the nine months ended September 30, 2023.

Financial Condition, Liquidity, Capital Resources and Obligations

Our liquidity and capital resources are derived from net proceeds from the offering of our securities, debt borrowings and cash flows from operations, including investment sales and repayments, and income earned. We have used, and expect to continue to use, our debt and the proceeds from the turnover of our portfolio and from public and private offerings of securities to finance our investment objectives. We expect that we may also generate cash from any financing arrangements we may enter into in the future and any future offerings of our equity or debt securities. Financing arrangements may come in the form of borrowings from banks or issuances of senior securities, which may be secured or unsecured, through registered offerings or private placements. Our primary use of funds is to make investments in eligible portfolio companies, pay our operating expenses and make distributions to holders of our common stock.

During the nine months ended September 30, 2023, 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 nine months ended September 30, 2023, our operating activities provided $174.1 million of cash and cash equivalents, compared to $164.1 million used during the nine months ended September 30, 2022, respectively. The $338.2 million increase in cash provided by operating activities was primarily due to a $252.3 million decrease in purchases of investments and U.S. Treasury Bills and a $72.3 million increase in sales and repayments of investments and U.S. Treasury Bills.

During the nine months ended September 30, 2023, our financing activities used $164.9 million of cash, compared to $165.2 million provided by financing activities during the nine months ended September 30, 2022 . The $330.1 million increase in cash flows used in financing activities was primarily due to decreased net borrowing activity of $373.5 million and increased dividend distributions of $17.7 million, offset by decreased cash used in reverse repurchase agreements of $44.8 million.

As of September 30, 2023, our net assets totaled $570.5 million, with a net asset value per share of $14.08. We intend to continue to operate in order to generate cash flows from operations, including income earned from investments in our portfolio companies. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock.

Available Liquidity and Capital Resources

As of September 30, 2023, we had $311.9 million in available liquidity, including $14.9 million in cash and cash equivalents, and approximately $297.0 million available under our Credit Facility, subject to borrowing base capacity. As of September 30, 2023, we had $203.0 million of secured debt outstanding under our Credit Facility, which are floating interest rate obligations and $247.3 million of unsecured debt outstanding under 2026 and 2027 Notes, which are all fixed interest rate debt obligations. Refer to "Note 7 – Borrowings" to our financial statements in Part I, Item 1 of this Form 10-Q for additional discussion of our debt obligations.

Pursuant to the 1940 Act, we are permitted to incur borrowings, issue debt securities, or issue preferred stock unless, immediately after the borrowings or issuance, the ratio of total assets (less total liabilities other than indebtedness) to total indebtedness plus preferred stock is at least 150% (at least 200% prior to June 17, 2022). As of September 30, 2023 and December 31, 2022, our asset coverage ratio was 227% and 203%, respectively.

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

Commitments and Obligations

Our significant contractual payment obligations relate to our borrowings and deferred incentive fees. As of September 30, 2023, we had $450.3 million of debt outstanding, none of which was due within the next year, $228.0 million within 1 to 3 years, and $222.3 million beyond 3 years. As of September 30, 2023, we had $8.4 million of deferred incentive fees, $2.6 million of which was due within the next year, $3.1 million within 1 to 3 years, and $2.7 million beyond 3 years.

In addition to our on-balance sheet contractual obligations, in the normal course of business, we have future cash requirements related to our financial instruments with off-balance sheet risk. These consist of unfunded loan commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded loan commitments to provide funds to portfolio companies are not reflected on our balance sheet.

Our unfunded loan commitments may be significant from time to time. As of September 30, 2023, we had $203.5 million in unfunded loan commitments to provide debt financing to its portfolio companies. The availability of unfunded loan commitments are dependent upon the portfolio company reaching certain performance milestones and time-based cancellation provisions before the loan commitment becomes available. Furthermore, our credit agreements generally contain customary lending provisions which allow us relief from funding obligations for previously made unfunded commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We maintain sufficient liquidity (through cash on hand and available borrowings under the Credit Facility) to fund such unfunded loan commitments should the need arise. As of September 30, 2023, we had approximately $75.1 million of available unfunded commitments eligible to be drawn based on achieved milestones. Refer to “Note 8 – Commitments and Contingencies” of our financial statements in Part I, Item 1 of this Form 10-Q for a summary of unfunded loan commitments by portfolio company as of September 30, 2023.

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

Distributions

To the extent that we have funds available, we intend to make quarterly distributions to our stockholders. Our stockholder distributions, if any, will be determined by our Board of Directors. Any distribution to our stockholders will be declared out of assets legally available for distribution. We anticipate that distributions will be paid from income primarily generated by interest and dividend income earned on investments made by us.

During the three and nine months ended September 30, 2023, we declared and paid dividends in the amount of $18.2 million and $54.7 million, respectively, of which $17.5 million and $52.4 million, respectively, were distributed in cash and the remainder distributed in shares to stockholders pursuant to our Dividend Reinvestment Plan. For the three and nine months ended September 30, 2022, we declared dividends in the amount of $13.5 million, and $37.0 million of which $12.8 million and $26.7 million, respectively, were distributed in cash and the remainder distributed in shares to stockholders pursuant to our Dividend Reinvestment Plan.

The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. Refer to "Note 9 – Net Assets" of our financial statements in Part I, Item 1 of this Form 10-Q for a summary of the distributions declared and paid since inception.

Critical Accounting Estimates

The preparation of the financial statements and related disclosures in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reports. Actual results could materially differ from those estimates. For a description of our critical accounting policies, including those related to the valuation of investments and our election to be treated, and intent to qualify annually, as a RIC refer to “Note 2 – Summary of Significant Accounting Policies” to our financial statements in Part I, Item 1 of this Form 10-Q. We consider the most significant accounting policies to be those related to our Fair Value Measurements and Income Taxes.

We commenced investment activities in portfolio securities during the quarter ended June 30, 2017 and commenced investment activities in U.S. Treasury Bills during the quarter ended December 31, 2016.

We are subject to financial market risk, including changes in the valuations of our investment portfolio. Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies we invest in; conditions affecting the general economy; overall market changes; legislative reform; local, regional, national or global political, social or economic instability; and interest rate fluctuations. Uncertainty with respect to the ongoing economic effects of the COVID‑19 pandemic has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks.

Valuation Risk

Our investments may not have a readily available market price, and we value these investments at fair value as determined in good faith by our Board of Directors in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is possible that the difference could be material.

Interest Rate Risk

We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, and cash and cash equivalents. Changes in interest rates can also affect our ability to acquire and originate loans and securities and the value of our investment portfolio. Our net investment income is affected by fluctuations in various interest rates, including SOFR and Prime rates. Increasing interest rates could have the effect of increasing our total investment income once interest rates increase above contractual interest rates floors to which our portfolio companies are subject. Conversely, we would expect the cost of our floating rate Credit Facility and unsecured notes to increase as well, offsetting the positive effect on our net interest income.

As of September 30, 2023, 100.0% of our performing debt portfolio investments bore interest at variable rates, consisting of approximately 65.0% based on SOFR and 35.0% based on Prime. As a policy, any interest above the cash cap, if applicable, as determined on an individual loan basis will accrue to principal and be treated as PIK interest. A hypothetical 200 basis point increase (decrease) in the interest rates on our variable-rate debt investments could increase our investment income by a maximum of $18.7 million and decrease our investment income by a maximum of $17.8 million, due to certain floors, on an annual basis.

Our debt borrowings under the Credit Facility bear interest at a floating rate, all other outstanding debt borrowings bear interest at a fixed rate. Borrowings under the Credit Facility bear interest on a per annum basis equal to the SOFR plus an applicable margin rate that ranges from 2.95% to 3.35% per annum depending on the Company's leverage ratio and number of eligible loans in the collateral pool. For additional information regarding the interest rate associated with each of our debt borrowings, refer to "Note 7 – Borrowings" to our financial statements in Part I, Item 1 of this Form 10-Q.

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income would be 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 our investment portfolio.

We regularly measure exposure to interest rate risk. We assess interest rate risk and manage interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved, and may be exacerbated by the COVID-19 pandemic on foreign financial markets.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a‑15 under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Exchange Act.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the risks described below and all other information contained in this quarterly report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones we may face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, you may lose all or part of your investment. Other than as set forth below, there have been no material changes known to us during the period ended September 30, 2023 to the risk factors discussed in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023.

Our business and our portfolio companies may be susceptible to economic slowdowns or recessions and to risks related to bank impairments or failures

Many of the portfolio companies in which we have invested or expect to make investments are likely to be susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. 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 our investments and harm business, financial condition, operating results and prospects. In March 2023, the Federal Deposit Insurance Corporation (“FDIC”) took control of Silicon Valley Bank and Signature Bank and subsequently in May 2023 of First Republic Bank due to liquidity concerns and concerns that have arisen regarding the stability of other banks and financial institutions. Also, the impairment or failure of one or more banks with whom the Company, its portfolio companies, and/or the Adviser transact may inhibit the ability of the Company or its portfolio companies to access depository accounts. In such cases, we may be forced to delay or forgo investments, resulting in lower performance. In the event of such a failure of a banking institution where we or one or more of our portfolio companies holds depository accounts, access to such accounts could be restricted and FDIC protection may not be available for balances in excess of amounts insured by the FDIC. In such instances, we and our affected portfolio companies would not recover such excess, uninsured amounts. To the extent that we or the portfolio companies are impacted, the ability to access existing cash, cash equivalents and investments, or to access existing or enter into new banking arrangements or facilities to service our portfolio companies, may be threatened. We had no depository relationships with Silicon Valley Bank, Signature Bank, or First Republic Bank, nor did we participate in any credit facilities that were agented by or included these banks as lenders. A number of our portfolio companies had operating relationships with these banks and may have experienced operational disruptions, all of which have since been resolved.

We may borrow money, which would magnify the potential for gain or loss on amounts invested and may increase the risk for investing in us.

The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies and other lenders in the future. Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could also negatively affect our ability to make dividend payments on our common stock, scheduled debt payments or other payments related to our securities.

Leverage is generally considered a speculative investment technique. 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. In addition, our common stockholders will bear the burden of any increase in our expenses, including our interest expense, as a result of leverage.

As a BDC, we are generally required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 150% after each issuance of senior securities. If this ratio declines below 150%, we may not be able to incur additional debt and could be required by law to sell a portion of our investments to repay some debt when it is disadvantageous to do so, which could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on RGC’s and our Board of Director's assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us. In addition, any debt facility into which we may enter would likely impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to qualify as a RIC.

The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on our portfolio as of December 31, 2022, net of expenses. Leverage generally magnifies the return of stockholders when the portfolio return is positive and magnifies their losses when the portfolio return is negative. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.

(1) Assumes (i) $1.1 billion in total assets, (ii) $559.3 million in outstanding indebtedness, (iii) $576.1 million in net assets and (iv) weighted average interest rate, excluding fees (such as fees on undrawn amounts and amortization of financing costs) of 5.02%.