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Section 1: 10-Q (10-Q)

htgc-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-00702

 

HERCULES CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

 

743113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

 

94301

(Zip Code)

 

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

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 periods 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 (§ 232.405 of this Chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

On October 30, 2017, there were 84,162,661 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 

 

 


 

HERCULES CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

3

 

Item 1.

 

 

Consolidated Financial Statements

  

3

 

 

 

Consolidated Statement of Assets and Liabilities as of September 30, 2017 and December 31, 2016 (unaudited)

  

3

 

 

 

Consolidated Statement of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited)

  

5

 

 

 

Consolidated Statement of Changes in Net Assets for the nine months ended September 30, 2017 and 2016 (unaudited)

  

6

 

 

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)

  

7

 

 

 

Consolidated Schedule of Investments as of September 30, 2017 (unaudited)

  

8

 

 

 

Consolidated Schedule of Investments as of December 31, 2016 (unaudited)

  

20

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

34

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

69

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

100

Item 4.

 

 

Controls and Procedures

  

101

 

PART II. OTHER INFORMATION

  

102

 

Item 1.

 

Legal Proceedings

  

102

Item 1A.

 

 

Risk Factors

 

102

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

141

Item 3.

 

 

Defaults Upon Senior Securities

  

141

Item 4.

 

 

Mine Safety Disclosures

  

141

Item 5.

 

 

Other Information

  

141

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

142

 

SIGNATURES

  

145

 

 

 

 

2


 

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts on or after February 25, 2016 and “Hercules Technology Growth Capital, Inc.” and its wholly owned subsidiaries and its affiliated securitization trusts prior to February 25, 2016, unless the context otherwise requires.

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $1,374,173 and $1,475,918 respectively)

 

$

1,360,146

 

 

$

1,414,210

 

Control investments (cost of $25,788 and $22,598, respectively)

 

 

23,382

 

 

 

4,700

 

Affiliate investments (cost of $89,050 and $13,010, respectively)

 

 

33,586

 

 

 

5,032

 

Total investments in securities, at value (cost of $1,489,011 and $1,511,526 respectively)

 

 

1,417,114

 

 

 

1,423,942

 

Cash and cash equivalents

 

 

140,568

 

 

 

13,044

 

Restricted cash

 

 

7,813

 

 

 

8,322

 

Interest receivable

 

 

10,507

 

 

 

11,614

 

Other assets

 

 

6,995

 

 

 

7,282

 

Total assets

 

$

1,582,997

 

 

$

1,464,204

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

19,057

 

 

$

21,463

 

Credit Facilities

 

 

 

 

 

5,016

 

2021 Asset-Backed Notes, net (principal of $65,476 and $109,205, respectively) (1)

 

 

64,860

 

 

 

107,972

 

Convertible Notes, net (principal of $230,000 and $0, respectively) (1)

 

 

223,097

 

 

 

 

2019 Notes, net (principal of $0 and $110,364, respectively) (1)

 

 

 

 

 

108,818

 

2024 Notes, net (principal of $258,510 and $252,873, respectively) (1)

 

 

251,716

 

 

 

245,490

 

SBA Debentures, net (principal of $190,200 and $190,200, respectively) (1)

 

 

187,983

 

 

 

187,501

 

Total liabilities

 

$

746,713

 

 

$

676,260

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

84

 

 

 

80

 

Capital in excess of par value

 

 

904,357

 

 

 

839,657

 

Unrealized depreciation on investments (2)

 

 

(73,388

)

 

 

(89,025

)

Accumulated undistributed realized gains on investments

 

 

10,674

 

 

 

37,603

 

Distributions in excess of net investment income

 

 

(5,443

)

 

 

(371

)

Total net assets

 

$

836,284

 

 

$

787,944

 

Total liabilities and net assets

 

$

1,582,997

 

 

$

1,464,204

 

 

 

 

 

 

 

 

 

 

Shares of common stock outstanding ($0.001 par value, 200,000,000 authorized)

 

 

83,615

 

 

 

79,555

 

Net asset value per share

 

$

10.00

 

 

$

9.90

 

 

(1)

The Company’s 2021 Asset-Backed Notes, Convertible Notes, 2019 Notes, 2024 Notes and SBA Debentures, as each term is defined herein, are presented net of the associated debt issuance costs for each instrument. See “Note 4 – Borrowings”.

(2)

Amounts include $1.5 million and $1.4 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, estimated taxes payable and warrant participation agreement liabilities as of September 30, 2017 and December 31, 2016, respectively.

 

See notes to consolidated financial statements.

3


 

The following table presents the assets and liabilities of our consolidated securitization trust for the 2021 Asset-Backed Notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statement of Assets and Liabilities above.

 

(Dollars in thousands)

 

September 30, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

$

7,813

 

 

$

8,322

 

Total investments in securities, at value (cost of $168,662 and $244,695, respectively)

 

 

166,861

 

 

 

242,349

 

Total assets

 

$

174,674

 

 

$

250,671

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

2021 Asset-Backed Notes, net (principal of $65,476 and $109,205, respectively) (1)

 

$

64,860

 

 

$

107,972

 

Total liabilities

 

$

64,860

 

 

$

107,972

 

 

(1)

The Company’s 2021 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4 – Borrowings”.

See notes to consolidated financial statements.

4


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and PIK interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

$

39,361

 

 

$

37,783

 

 

$

117,388

 

 

$

110,219

 

Control investments

 

321

 

 

 

7

 

 

 

994

 

 

 

7

 

Affiliate investments

 

246

 

 

 

30

 

 

 

248

 

 

 

145

 

Total interest income

 

39,928

 

 

 

37,820

 

 

 

118,630

 

 

 

110,371

 

PIK interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

2,364

 

 

 

2,124

 

 

 

6,661

 

 

 

5,668

 

Control investments

 

143

 

 

 

8

 

 

 

511

 

 

 

8

 

Total PIK interest income

 

2,507

 

 

 

2,132

 

 

 

7,172

 

 

 

5,676

 

Total interest and PIK interest income

 

42,435

 

 

 

39,952

 

 

 

125,802

 

 

 

116,047

 

Fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment, facility and loan fee income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

2,239

 

 

 

3,274

 

 

 

7,613

 

 

 

8,700

 

Control investments

 

1

 

 

 

1

 

 

 

11

 

 

 

1

 

Affiliate investments

 

2

 

 

 

 

 

 

2

 

 

 

 

Total commitment, facility and loan fee income

 

2,242

 

 

 

3,275

 

 

 

7,626

 

 

 

8,701

 

One-time fee income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

1,188

 

 

 

1,875

 

 

 

7,254

 

 

 

2,831

 

Total one-time fee income

 

1,188

 

 

 

1,875

 

 

 

7,254

 

 

 

2,831

 

Total fee income

 

3,430

 

 

 

5,150

 

 

 

14,880

 

 

 

11,532

 

Total investment income

 

45,865

 

 

 

45,102

 

 

 

140,682

 

 

 

127,579

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

9,185

 

 

 

8,717

 

 

 

28,046

 

 

 

23,306

 

Loan fees

 

1,314

 

 

 

1,432

 

 

 

5,500

 

 

 

3,698

 

General and administrative

 

3,548

 

 

 

4,114

 

 

 

12,362

 

 

 

12,095

 

Employee compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

6,014

 

 

 

5,621

 

 

 

17,276

 

 

 

15,637

 

Stock-based compensation

 

1,831

 

 

 

1,442

 

 

 

5,573

 

 

 

5,616

 

Total employee compensation

 

7,845

 

 

 

7,063

 

 

 

22,849

 

 

 

21,253

 

Total operating expenses

 

21,892

 

 

 

21,326

 

 

 

68,757

 

 

 

60,352

 

Net investment income

 

23,973

 

 

 

23,776

 

 

 

71,925

 

 

 

67,227

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

(8,911

)

 

 

7,870

 

 

 

(10,940

)

 

 

3,427

 

Control investments

 

(15,543

)

 

 

 

 

 

(15,989

)

 

 

 

Total net realized gain (loss) on investments

 

(24,454

)

 

 

7,870

 

 

 

(26,929

)

 

 

3,427

 

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

11,320

 

 

 

(1,387

)

 

 

45,420

 

 

 

(11,005

)

Control investments

 

17,624

 

 

 

 

 

 

17,703

 

 

 

(3,421

)

Affiliate investments

 

4,609

 

 

 

553

 

 

 

(47,486

)

 

 

(1,646

)

Total net unrealized appreciation (depreciation) on investments

 

33,553

 

 

 

(834

)

 

 

15,637

 

 

 

(16,072

)

Total net realized and unrealized gain (loss)

 

9,099

 

 

 

7,036

 

 

 

(11,292

)

 

 

(12,645

)

Net increase in net assets resulting from operations

$

33,072

 

 

$

30,812

 

 

$

60,633

 

 

$

54,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income before investment gains and losses per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.29

 

 

$

0.32

 

 

$

0.87

 

 

$

0.91

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.40

 

 

$

0.41

 

 

$

0.73

 

 

$

0.74

 

Diluted

$

0.40

 

 

$

0.41

 

 

$

0.73

 

 

$

0.74

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

82,496

 

 

 

74,122

 

 

 

82,073

 

 

 

72,685

 

Diluted

 

82,607

 

 

 

74,157

 

 

 

82,173

 

 

 

72,702

 

Distributions declared per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.31

 

 

$

0.31

 

 

$

0.93

 

 

$

0.93

 

See notes to consolidated financial statements.

5


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Income/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Undistributed

 

 

(Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Appreciation

 

 

Realized

 

 

in Excess of

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

(Depreciation)

 

 

Gains (Losses)

 

 

Investment

 

 

Net

 

 

Shares

 

 

Par Value

 

 

of par value

 

 

on Investments

 

 

on Investments

 

 

Income)

 

 

Assets

 

Balance at December 31, 2015

 

72,118

 

 

$

73

 

 

$

751,902

 

 

$

(52,808

)

 

$

27,993

 

 

$

(10,026

)

 

$

717,134

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

(16,072

)

 

 

3,427

 

 

 

67,227

 

 

 

54,582

 

Public offering, net of offering expenses

 

4,273

 

 

 

4

 

 

 

50,173

 

 

 

 

 

 

 

 

 

 

 

 

50,177

 

Acquisition of common stock under repurchase plan

 

(450

)

 

 

(1

)

 

 

(4,789

)

 

 

 

 

 

 

 

 

 

 

 

(4,790

)

Issuance of common stock due to stock option exercises

 

42

 

 

 

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

 

426

 

Retired shares from net issuance

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under restricted stock plan

 

552

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(240

)

 

 

 

 

 

(2,560

)

 

 

 

 

 

 

 

 

 

 

 

(2,560

)

Distributions reinvested in common stock

 

111

 

 

 

 

 

 

1,343

 

 

 

 

 

 

 

 

 

 

 

 

1,343

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(68,408

)

 

 

(68,408

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,685

 

 

 

 

 

 

 

 

 

 

 

 

5,685

 

Balance at September 30, 2016

 

76,400

 

 

$

77

 

 

$

802,179

 

 

$

(68,880

)

 

$

31,420

 

 

$

(11,207

)

 

$

753,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

79,555

 

 

$

80

 

 

$

839,657

 

 

$

(89,025

)

 

$

37,603

 

 

$

(371

)

 

$

787,944

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

15,637

 

 

 

(26,929

)

 

 

71,925

 

 

 

60,633

 

Public offering, net of offering expenses

 

4,077

 

 

 

4

 

 

 

56,330

 

 

 

 

 

 

 

 

 

 

 

 

56,334

 

Issuance of common stock due to stock option exercises

 

46

 

 

 

 

 

 

213

 

 

 

 

 

 

 

 

 

 

 

 

213

 

Retired shares from net issuance

 

(18

)

 

 

 

 

 

(172

)

 

 

 

 

 

 

 

 

 

 

 

(172

)

Issuance of common stock under restricted stock plan

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(187

)

 

 

 

 

 

(2,483

)

 

 

 

 

 

 

 

 

 

 

 

(2,483

)

Distributions reinvested in common stock

 

132

 

 

 

 

 

 

1,780

 

 

 

 

 

 

 

 

 

 

 

 

1,780

 

Issuance of Convertible Notes

 

 

 

 

 

 

 

3,413

 

 

 

 

 

 

 

 

 

 

 

 

3,413

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(76,997

)

 

 

(76,997

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,619

 

 

 

 

 

 

 

 

 

 

 

 

5,619

 

Balance at September 30, 2017

 

83,615

 

 

$

84

 

 

$

904,357

 

 

$

(73,388

)

 

$

10,674

 

 

$

(5,443

)

 

$

836,284

 

 

(1)

Stock-based compensation includes $46 and $69 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2017 and 2016, respectively.

 

See notes to consolidated financial statements.

6


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

 

For the Nine Months Ended September 30,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

$

60,633

 

 

$

54,582

 

Adjustments to reconcile net increase in net assets resulting from

operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Purchase of investments

 

(487,321

)

 

 

(461,772

)

Principal and fee payments received on investments

 

486,985

 

 

 

340,584

 

Proceeds from the sale of investments

 

21,945

 

 

 

16,701

 

Net unrealized appreciation (depreciation) on investments

 

(15,637

)

 

 

16,072

 

Net realized loss (gain) on investments

 

26,929

 

 

 

(3,427

)

Accretion of paid-in-kind principal

 

(7,078

)

 

 

(5,317

)

Accretion of loan discounts

 

(5,242

)

 

 

(5,524

)

Accretion of loan discount on Convertible Notes

 

448

 

 

 

82

 

Accretion of loan exit fees

 

(14,413

)

 

 

(16,679

)

Change in deferred loan origination revenue

 

1,083

 

 

 

(253

)

Unearned fees related to unfunded commitments

 

441

 

 

 

(308

)

Amortization of debt fees and issuance costs

 

4,534

 

 

 

2,987

 

Depreciation

 

153

 

 

 

152

 

Stock-based compensation and amortization of restricted stock grants (1)

 

5,619

 

 

 

5,685

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Interest and fees receivable

 

1,107

 

 

 

(1,622

)

Prepaid expenses and other assets

 

(1,100

)

 

 

228

 

Accounts payable

 

 

 

 

56

 

Accrued liabilities

 

(2,457

)

 

 

(729

)

Net cash provided by (used in) operating activities

 

76,629

 

 

 

(58,502

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of capital equipment

 

(127

)

 

 

(227

)

Reduction of restricted cash

 

509

 

 

 

211

 

Net cash provided by (used in) investing activities

 

382

 

 

 

(16

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of common stock, net

 

56,334

 

 

 

50,177

 

Repurchase of common stock, net

 

 

 

 

(4,790

)

Retirement of employee shares

 

(2,442

)

 

 

(2,134

)

Distributions paid

 

(75,217

)

 

 

(67,065

)

Issuance of Convertible Notes

 

230,000

 

 

 

 

Issuance of 2024 Notes Payable

 

5,637

 

 

 

141,945

 

Repayments of 2019 Notes Payable

 

(110,364

)

 

 

 

Repayments of 2021 Asset-Backed Notes

 

(43,729

)

 

 

(12,296

)

Borrowings of credit facilities

 

8,497

 

 

 

193,276