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Section 1: 497 (497)

497
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Index to Financial Statements

Filed Pursuant to Rule 497
Registration No. 333-224281

 

PROSPECTUS SUPPLEMENT

(To prospectus dated June 5, 2018)

 

 

LOGO

Up to 12,000,000 Shares

Common Stock

 

 

We have entered into an equity distribution agreement, dated September 8, 2017, or the Equity Distribution Agreement, with JMP Securities LLC, or JMP Securities, relating to the shares of common stock offered by this prospectus supplement and the accompanying prospectus. Our common stock is listed on the New York Stock Exchange, or NYSE, under the trading symbol “HTGC.” The last reported sale price on the NYSE on November 6, 2018 was $12.65 per share. The net asset value per share of our common stock at September 30, 2018 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $10.38.

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments.

The Equity Distribution Agreement provides that we may offer and sell up to 12,000,000 shares of our common stock from time to time through JMP Securities, as our sales agent. Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus 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 of 1933, as amended, or 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. As of the date of this prospectus supplement, we have sold approximately 6.6 million shares of our common stock under the Equity Distribution Agreement.

JMP Securities will receive a commission from us to be negotiated from time to time, but in no event in excess of 2.0% of the gross sales price of any shares of our common stock sold through JMP Securities under the Equity Distribution Agreement. JMP Securities is not required to sell any specific number or dollar amount of common stock, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the shares of our common stock offered by this prospectus supplement and the accompanying prospectus. See “Plan of Distribution” beginning on page S-25 of this prospectus supplement. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less JMP Securities’ commission, will not be less than the net asset value per share of our common stock at the time of such sale.

Please read this prospectus supplement, and the accompanying prospectus, before investing, and keep it for future reference. The prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our common stock. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or the SEC. This information is available free of charge by contacting us at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, or by telephone by calling collect at (650) 289-3060 or on our website at www.htgc.com. The information on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains such information.

 

 

An investment in our common stock involves risks, including the risk of a total loss of investment. In addition, the companies in which we invest are subject to special risks. See the “Supplementary Risk Factors” section beginning on page S-15 of this prospectus supplement and the “Risk Factors” section beginning on page 14 of the accompanying prospectus to read about risks that you should consider before investing in our common stock, including the risk of leverage.

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

JMP Securities

The date of this prospectus supplement is November 9, 2018.


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Index to Financial Statements

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not, and JMP Securities has not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and JMP Securities is not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus supplement and the accompanying prospectus is accurate only as of the date on the front cover of this prospectus supplement and the accompanying prospectus, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.

This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the heading, “Available Information” before investing in our common stock.

TABLE OF CONTENTS

Prospectus Supplement

 

     Page  

Fees and Expenses

     S-1  

Forward-Looking Statements

     S-3  

Industry and Market Data

     S-4  

Prospectus Supplement Summary

     S-5  

The Offering

     S-11  

Selected Consolidated Financial Data

     S-13  

Supplementary Risk Factors

     S-15  

Use of Proceeds

     S-22  

Price Range of Common Stock

     S-23  

Capitalization

     S-24  

Plan of Distribution

     S-25  

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

     S-27  

Senior Securities

     S-53  

Management

     S-56  

Legal Matters

     S-56  

Experts

     S-56  

Available Information

     S-56  

Index to Financial Statements

     S-57  

Prospectus

 

     Page  

Summary

     1  

Fees and Expenses

     10  

Selected Consolidated Financial Data

     12  

Risk Factors

     14  

Forward-Looking Statements

     63  

Use of Proceeds

     65  

Price Range of Common Stock and Distributions

     66  

Ratio of Earnings to Fixed Charges

     69  

 

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     Page  

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

     70  

Business

     113  

Portfolio Companies

     126  

Senior Securities

     149  

Management

     152  

Corporate Governance

     164  

Executive Compensation

     170  

Control Persons and Principal Stockholders

     192  

Certain Relationships and Related Transactions

     194  

Certain United States Federal Income Tax Considerations

     195  

Regulation

     205  

Determination of Net Asset Value

     211  

Sales of Common Stock Below Net Asset Value

     215  

Dividend Reinvestment Plan

     220  

Description of Capital Stock

     221  

Description of Our Preferred Stock

     228  

Description of Our Subscription Rights

     230  

Description of Warrants

     232  

Description of Our Debt Securities

     234  

Plan of Distribution

     247  

Brokerage Allocation and Other Practices

     249  

Custodian, Transfer and Dividend Paying Agent and Registrar

     249  

Legal Matters

     249  

Experts

     249  

Available Information

     250  

Index to Financial Statements

     F-1  

 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The footnotes to the fee table state which items are estimates. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Hercules Capital, Inc.

 

Stockholder Transaction Expenses (as a percentage of the public offering price):

  

Sales load (as a percentage of offering price)(1)

     2.00

Offering expenses

     0.87 %(2) 

Dividend reinvestment plan fees

     (3)  
  

 

 

 

Total stockholder transaction expenses (as a percentage of the public offering price)

     2.87
  

 

 

 

Annual Expenses (as a percentage of net assets attributable to common stock):(4)

  

Operating expenses

     5.65 %(5)(6) 

Interest and fees paid in connection with borrowed funds

     5.17 %(7) 
  

 

 

 

Total annual expenses

     10.82 %(8) 
  

 

 

 

 

(1)

Represents the estimated commission with respect to the shares of common stock being sold in this offering. JMP Securities will be entitled to compensation up to 2.00% of the gross proceeds of the sale of any shares of our common stock under the Equity Distribution Agreement, with the exact amount of such compensation to be mutually agreed upon by the Company and JMP Securities from time to time. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.

(2)

The percentage reflects estimated offering expenses of approximately $1.3 million, assuming all shares are offered under this prospectus supplement.

(3)

The expenses associated with the administration of our dividend reinvestment plan are included in “Operating expenses.” We pay all brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see “Dividend Reinvestment Plan” in the accompanying prospectus.

(4)

“Net assets attributable to common stock” equals the weighted average net assets for the nine-months ended September 30, 2018, which is approximately $896.5 million.

(5)

“Operating expenses” represents our estimated operating expenses by annualizing our actual operating expenses incurred for the nine-months ended September 30, 2018, including all fees and expenses of our consolidated subsidiaries and excluding interests and fees on indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus supplement and “Management” and “Executive Compensation” in the accompanying prospectus.

(6)

We do not have an investment adviser and are internally managed by our executive officers under the supervision of our Board of Directors. As a result, we do not pay investment advisory fees, but instead we pay the operating costs associated with employing investment management professionals.

(7)

“Interest and fees paid in connection with borrowed funds” represents our estimated interest, fees and credit facility expenses by annualizing our actual interest, fees, and credit facility expenses incurred for the nine-months ended September 30, 2018, including our $75.0 million revolving senior secured credit facility with Wells Fargo Capital Finance, LLC (the “Wells Facility”), $100.0 million revolving senior secured credit facility with MUFG Union Bank, N.A. (the “Union Bank Facility,” and, together with the Wells Facility, the “Credit Facilities”), 4.625% notes due 2022 (the “2022 Notes”), 6.25% notes due 2024 (the “2024 Notes”), 5.25% notes due 2025 (the “2025 Notes”), 6.25% notes due 2033 (the “2033 Notes”), 4.375% convertible notes due 2022 (the “2022 Convertible Notes”), fixed rate asset-backed notes due 2021 (the “2021 Asset-Backed Notes”), and the Small Business Administration (“SBA”) debentures.

(8)

“Total annual expenses” is the sum of “operating expenses,” and “interest and fees paid in connection with borrowed funds.” “Total annual expenses” is presented as a percentage of weighted average net assets attributable to common stockholders because the holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) bear all of our fees and expenses, including the fees and expenses of our wholly-owned consolidated subsidiaries, all of which are included in this fee table presentation.

 

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Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. These amounts are based upon our payment of annual operating expenses at the levels set forth in the table above and assume no additional leverage.

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 common stock investment, assuming a 5% annual return

   $ 131      $ 318      $ 485      $ 825  

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or lesser than those shown. Moreover, while the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or lesser than 5%. In addition, while the example assumes reinvestment of all distributions at net asset value (“NAV”), participants in our dividend reinvestment plan may receive shares valued at the market price in effect at that time. This price may be at, above or below NAV. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.

 

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FORWARD-LOOKING STATEMENTS

The matters discussed in this prospectus supplement and the accompanying prospectus, as well as in future oral and written statements by management of Hercules 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 prospectus supplement and the accompanying prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus include statements as to:

 

   

our current and future management structure;

 

   

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 small business investment company, or SBIC, and a regulated investment company, or 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 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 prospectus supplement and the accompanying prospectus, please see the discussion under “Supplementary Risk Factors” beginning on page S-15 of this prospectus supplement and “Risk Factors” beginning on page 14 of the accompanying prospectus. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus 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 prospectus.

 

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INDUSTRY AND MARKET DATA

We have compiled certain industry estimates presented in this prospectus supplement and the accompanying prospectus from internally generated information and data. While we believe our estimates are reliable, they have not been verified by any independent sources. The estimates are based on a number of assumptions, including increasing investment in venture capital and private equity-backed companies. Actual results may differ from projections and estimates, and this market may not grow at the rates projected, or at all. If this market fails to grow at projected rates, our business and the market price of our securities, including our common stock, could be materially adversely affected.

 

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information in this prospectus supplement and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus supplement and the accompanying prospectus and the documents that are referenced in this prospectus supplement and the accompanying prospectus, together with any accompanying supplements. In this prospectus supplement and the accompanying prospectus, unless the context otherwise requires, the “Company,” “Hercules,” “HTGC,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly-owned subsidiaries and its affiliated securitization trusts.

Our Company

We are a specialty finance company focused on providing senior secured loans to high-growth, innovative venture capital-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments. 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. Effective January 1, 2006, we elected to be treated for tax purposes as a RIC under the Internal Revenue Code of 1986, as amended, or the Code.

As of September 30, 2018, our total assets were approximately $1.8 billion, of which our investments comprised $1.8 billion at fair value and $1.8 billion at cost. Since inception through September 30, 2018, we have made debt and equity commitments of more than $8.2 billion to our portfolio companies.

We also make investments in qualifying small businesses through Hercules Technology III, L.P., or HT III, which is our wholly owned SBIC. HT III holds approximately $300.6 million in assets which accounted for approximately 13.6% of our total assets, prior to consolidation at September 30, 2018. At September 30, 2018, we have issued $149.0 million in SBA-guaranteed debentures in our SBIC subsidiary. See “Regulation—Small Business Administration Regulations” in the accompanying prospectus for additional information regarding our SBIC subsidiary.

As of September 30, 2018, our investment professionals, including Manuel A. Henriquez, our co-founder, Chairman, President and Chief Executive Officer, are currently comprised of 37 professionals who have, on average, more than 10 years of experience in venture capital, structured finance, commercial lending or acquisition finance with the types of technology-related companies that we are targeting. We believe that we can leverage the experience and relationships of our management team to successfully identify attractive investment opportunities, underwrite prospective portfolio companies and structure customized financing solutions.



 

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Organizational Chart

The following chart summarizes our organizational structure as of November 6, 2018. This chart is provided for illustrative purposes only.

 

 

LOGO

Our Market Opportunity

We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S. 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 due to the complexity of evaluating risk in these investments; and

 

   

structured debt with warrants products are less dilutive and complement equity financing from venture capital and private equity funds.



 

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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. 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 products provide 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 many 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 sometimes required prior to liquidity events.

Our Business Strategy

Our strategy to achieve our investment objective includes the following key elements:

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.

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



 

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interest and fee income, as well as capital appreciation from warrant and 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 (typically between 24—48 months), 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.

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.

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.

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.

Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured query language-based database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance.

Recent Developments

Distribution Declaration

On October 24, 2018, our Board of Directors declared a cash distribution of $0.31 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. This distribution represents our fifty-third consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.95 per share.

In addition to the cash distribution, on October 24, 2018, our Board of Directors declared a supplemental distribution of $0.02 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. The total cumulative distribution to date, including the supplemental distribution, is $14.97 per share.

Closed and Pending Commitments

As of November 6, 2018, we have:

 

   

Closed debt and equity commitments of approximately $68.0 million to new and existing portfolio companies and funded approximately $100.0 million subsequent to September 30, 2018.

 

   

Pending commitments (signed non-binding term sheets) of approximately $95.0 million.

The table below summarizes our year-to-date closed and pending commitments as follows:

 

Closed Commitments and Pending Commitments (in millions)

  

January 1—September 30, 2018 Closed Commitments

   $ 963.8  

October 1— November 6, 2018 Closed Commitments(a)

   $ 68.0  

Pending Commitments (as of November 6, 2018)(b)

   $ 95.0  

Closed and Pending Commitments as of November 6, 2018

   $ 1,126.8  


 

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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 they do not necessarily represent any future cash requirements.

ATM Equity Program Issuances

We did not sell any shares subsequent to September 30, 2018 and as of November 6, 2018, under the Equity Distribution Agreement. As of November 6, 2018, approximately 5.4 million shares remain available for issuance and sale under the Equity Distribution Agreement.

2021 Asset-Backed Notes Repayment

In July 2018, changes in the payment schedule of obligors in the 2021 Asset-Backed Notes collateral pool triggered a rapid amortization event in accordance with the sale and servicing agreement for the 2021 Asset-Backed Notes. Due to this event, the 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.

2027 Asset-Backed Notes

On November 1, 2018, we completed a term debt securitization in connection with which an affiliate of ours made an offering of $200,000,000 in aggregate principal amount of fixed-rate asset-backed notes due 2027 (the “2027 Asset-Backed Notes”). The 2027 Asset-Backed Notes were rated A(sf) by KBRA.

The 2027 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2018-1 pursuant to a note purchase agreement, dated as of October 25, 2018, by and among us, Hercules Capital Funding 2018-1 LLC, as Trust Depositor (the “2018 Trust Depositor”), Hercules Capital Funding Trust 2018-1, as Issuer (the “2018 Securitization Issuer”), and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and are to be serviced by us. The outstanding principal balance of the pool of loans as of September 30, 2018 was approximately $284,761,977. Interest on the 2027 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.605% per annum. The 2027 Asset-Backed Notes have a stated maturity of November 22, 2027.

Portfolio Company Developments

As of November 6, 2018, we held warrants or equity positions in two companies that have filed registration statements in contemplation of potential initial public offerings, including:

 

   

Stealth Bio Therapeutics filed a public registration with the Hong Kong Exchange (HKEX) in contemplation of a potential public offering.

 

   

One portfolio company filed confidentially under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all. Subsequent to September 30, 2018 and as of November 6, 2018, there were no companies that announced or completed liquidity events.

General Information

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, Washington,



 

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DC, Hartford, CT, Westport, CT, Chicago, IL, and San Diego, CA. We maintain a website on the Internet at www.htgc.com. We make available, free of charge, on our website our proxy statement, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended, or 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.



 

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THE OFFERING

 

Common stock offered by us

Up to 12,000,000 shares of our common stock. As of the date of this prospectus supplement, approximately 5.4 million shares of common stock remain available for sale under the Equity Distribution Agreement.

 

Common stock outstanding prior to this offering

96,731,791 shares

 

Manner of offering

“At the market” offering that may be made from time to time through JMP Securities, as sales agent, using commercially reasonable efforts. See “Plan of Distribution” in this prospectus supplement.

 

Use of proceeds

We expect to use the net proceeds from this offering to fund investments in debt and equity securities in accordance with our investment objectives, to make acquisitions, to retire certain debt obligations and for other general corporate purposes.

 

  Pending such uses and investments, we will invest a portion of the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. Our ability to achieve our investment objectives may be limited to the extent that the net proceeds of this offering, pending full investment, are held in lower yielding short-term instruments. See “Use of Proceeds” in this prospectus supplement.

 

Distribution

To the extent that we have income available, we intend to distribute quarterly distributions to our stockholders. The amount of our distributions, if any, will be determined by our Board of Directors. Any distributions to our stockholders will be declared out of assets legally available for distribution. See “Price Range of Common Stock” in this prospectus supplement.

 

Taxation

We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as distributions. To maintain our RIC tax status, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Price Range of Common Stock” in this prospectus supplement and “Certain United States Federal Income Tax Considerations” in the accompanying prospectus.

 

New York Stock Exchange symbol

“HTGC”


 

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Index to Financial Statements

Risk factors

An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. See “Supplementary Risk Factors” beginning on page S-15 of this prospectus supplement and “Risk Factors” beginning on page 14 of the accompanying prospectus to read about factors you should consider, including the risk of leverage, before investing in our common stock.


 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Senior Securities” and the consolidated financial statements and related notes included elsewhere herein. The selected balance sheet data as of the end of fiscal year 2017, 2016, 2015, 2014, and 2013 and the financial statement of operations data for fiscal years 2017, 2016, 2015, 2014, and 2013 has been derived from our audited financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, but not all of which are presented in this prospectus supplement. The historical data are not necessarily indicative of results to be expected for any future period. The selected financial and other data for the nine-months ended September 30, 2018 and other quarterly financial information is derived from our unaudited financial statements, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results as of and for the nine-months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

     For the Nine-
Months Ended
September 30,
(unaudited)
    For the Year Ended December 31,  

(in thousands, except per share amounts)

   2018     2017     2017     2016     2015     2014     2013  

Investment income:

              

Interest

   $ 137,949     $ 125,802     $ 172,196     $ 158,727     $ 140,266     $ 126,618     $ 123,671  

Fees

     12,915       14,880       18,684       16,324       16,866       17,047       16,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     150,864       140,682       190,880       175,051       157,132       143,665       139,713  

Operating expenses:

              

Interest

     28,715       28,046       37,857       32,016       30,834       28,041       30,334  

Loan fees

     6,039       5,500       8,728       5,042       6,055       5,919       4,807  

General and administrative:

              

Legal expenses

     1,889       3,792       4,572       4,823       3,079       1,366       1,440  

Other expenses

     9,515       8,570       11,533       11,283       13,579       8,843       7,914  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

     11,404       12,362       16,105       16,106       16,658       10,209       9,354  

Employee Compensation:

              

Compensation and benefits

     18,069       17,276       24,555       22,500       20,713       16,604       16,179  

Stock-based compensation

     8,498       5,573       7,191       7,043       9,370       9,561       5,974  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     26,567       22,849       31,746       29,543       30,083       26,165       22,153  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     72,725       68,757       94,436       82,707       83,630       70,334       66,648  

Other income (loss)

     —         —         —         8,000       (1     (1,581     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     78,139       71,925       96,444       100,344       73,501       71,750       73,065  

Net realized gain (loss) on investments

     (10,481     (26,929     (26,711     4,576       5,147       20,112       14,836  

Net change in unrealized appreciation (depreciation) on investments

     25,976       15,637       9,265       (36,217     (35,732     (20,674     11,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     15,495       (11,292     (17,446     (31,641     (30,585     (562     26,381  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 93,634     $ 60,633     $ 78,998     $ 68,703     $ 42,916     $ 71,188     $ 99,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share (basic)

   $ 1.04     $ 0.73     $ 0.95     $ 0.91     $ 0.60     $ 1.12     $ 1.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

   $ 0.93     $ 0.93     $ 1.24     $ 1.24     $ 1.24     $ 1.24     $ 1.11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Index to Financial Statements

(in thousands,

except per share amounts)

   For the Nine-Months
Ended September 30,
(unaudited)
    For the Year Ended December 31,  
   2018     2017     2017     2016     2015     2014     2013  

Balance sheet data:

              

Investments, at value

   $ 1,760,516     $ 1,417,114     $ 1,542,214     $ 1,423,942     $ 1,200,638     $ 1,020,737     $ 910,295  

Cash and cash equivalents

     43,212       140,568       91,309       13,044       95,196       227,116       268,368  

Total assets

     1,823,054       1,582,997       1,654,715       1,464,204       1,334,761       1,299,223       1,221,715  

Total liabilities

     818,874       746,713       813,748       676,260       617,627       640,359       571,708  

Total net assets

     1,004,180       836,284       840,967       787,944       717,134       658,864       650,007  

Other Data:

              

Total return(3)

     7.59     (2.31 %)      1.47     26.87     (9.70 %)      (1.75 %)      58.49

Total debt investments, at value

     1,603,275       1,300,068       1,415,984       1,328,803       1,110,209       923,906       821,988  

Total warrant investments, at value

     29,843       32,729       36,869       27,485       22,987       25,098       35,637  

Total equity investments, at value

     127,398       84,317       89,361       67,654       67,442       71,733       52,670  

Unfunded Commitments(2)

     171,961       46,302       73,604       59,683       75,402       147,689       69,091  

Net asset value per share(1)

   $ 10.38     $ 10.00     $ 9.96     $ 9.90     $ 9.94     $ 10.18     $ 10.51  

 

(1)

Based on common shares outstanding at period end.

(2)

Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.

(3)

The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the issuance. The total return does not reflect any sales load that must be paid by investors.

The following tables set forth certain quarterly financial information for each of the eight quarters up to and ending December 31, 2017 and the quarters ending March 31, 2018, June 30, 2018, and September 30, 2018. This information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

 

     Quarter Ended  

(in thousands, except per share data)

   March 31,
2018
     June 30,
2018
     September 30,
2018
 

Total investment income

   $ 48,700      $ 49,562      $ 52,602  

Net investment income

     26,063        22,774        29,302  

Net increase (decrease) in net assets resulting from operations

     5,946        52,060        35,629  

Change in net assets resulting from operations per common share (basic)

   $ 0.07      $ 0.59      $ 0.37  

 

     Quarter Ended  

(in thousands, except per share data)

   March 31,
2017
    June 30,
2017
     September 30,
2017
     December 31,
2017
 

Total investment income

   $ 46,365     $ 48,452      $ 45,865      $ 50,198  

Net investment income

     22,678       25,275        23,973        24,518  

Net increase (decrease) in net assets resulting from operations

     (5,588     33,149        33,072        18,365  

Change in net assets resulting from operations per common share (basic)

   $ (0.07   $ 0.40      $ 0.40      $ 0.22  

 

     Quarter Ended  
     March 31,
2016
     June 30,
2016
     September 30,
2016
     December 31,
2016
 

Total investment income

   $ 38,939      $ 43,538      $ 45,102      $ 47,472  

Net investment income

     20,097        23,354        23,776        33,117  

Net increase in net assets resulting from operations

     14,295        9,475        30,812        14,121  

Change in net assets resulting from operations per common share (basic)

   $ 0.20      $ 0.13      $ 0.41      $ 0.18  

 

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Index to Financial Statements

SUPPLEMENTARY RISK FACTORS

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 prospectus supplement. The risks set forth below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our NAV 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

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 NAV 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 NAV 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 Credit Facilities, our 2022 Notes, our 2024 Notes, our 2025 Notes, our 2033 Notes, our 2027 Asset-Backed Notes, and our 2022 Convertible Notes contain financial and operating covenants that could restrict our business activities, including our ability to declare dividend distributions if we default under certain provisions.

As of September 30, 2018, we had $38.5 million of borrowings outstanding on the Wells Facility and $42.4 million of borrowings outstanding on the Union Bank Facility. In addition, as of September 30, 2018, we had approximately $149.0 million of SBA debentures, approximately $150.0 million in aggregate principal amount of 2022 Notes, approximately $83.5 million in aggregate principal amount of 2024 Notes, approximately $75.0 million in aggregate principal amount of 2025 Notes, approximately $40.0 million in aggregate principal amount of 2033 Notes, approximately $3.5 million in aggregate principal amount of 2021 Asset-Backed Notes, and approximately $230.0 million in aggregate principal amount of 2022 Convertible Notes. Additionally, subsequent to September 30, 2018, we repaid the 2021 Asset-Backed Notes in full, and we had approximately $200.0 million in aggregate principal amount of 2027 Asset-Backed Notes.

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, 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). In addition, we may not be

 

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Index to Financial Statements

permitted to declare any cash 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 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. The Small Business Credit Availability Act, or the SBCAA, which was signed into law in March 2018, modifies this section of the 1940 Act and decreases this percentage from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested persons).

On September 4, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act), approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to us will be reduced from 200% to 150%, effective as of September 4, 2019, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. Our Board of Directors also authorized the submission of a proposal for stockholders to accelerate the application of the 150% minimum asset coverage ratio to us at a special meeting of stockholders scheduled to be held on December 6, 2018. As a result of our Board of Director’s approval, effective as of September 4, 2019 (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), we will be able to incur additional indebtedness and, therefore, your risk of an investment in us may increase. Rating agencies have reviewed, and may continue to review, our credit ratings and those of other business development companies in light of this new law as well as any corresponding changes to asset coverage ratios and, in certain cases, downgrade such ratings. Such a downgrade in our credit ratings may adversely affect our securities.

As of September 30, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 251.0% 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 and was 223.3% when including all SBA leverage.

Based on assumed leverage equal to 80.9% of our net assets as of September 30, 2018, our investment portfolio would have been required to experience an annual return of at least 2.6% to cover annual interest payments on our additional indebtedness.

Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming that we employ (1) our actual asset coverage ratio as of September 30, 2018 (excluding our SBA debentures as permitted by our exemptive relief), (2) a hypothetical asset coverage ratio of 200% (excluding our SBA debentures as permitted by our exemptive relief), and (3) a hypothetical asset coverage ratio of 150% (excluding our SBA debentures as permitted by our exemptive relief), each at various annual returns on our portfolio as of September 30, 2018, net of expenses.

The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.

 

     Annual Return on Our Portfolio
(Net of Expenses)
 
     -10%      -5%      0%      5%      10%  

Corresponding return to common stockholder assuming actual asset coverage as of September 30, 2018 (251.0%)(1)

     (22.83%)        (13.75%)        (4.67%)        4.40%        13.48%  

Corresponding return to common stockholder assuming 200% asset coverage(2)

     (28.19%)        (17.41%)        (6.64%)        4.14%        14.91%  

Corresponding return to common stockholder assuming 150% asset coverage(3)

     (43.96%)        (28.19%)        (12.41%)        3.36%        19.13%  

 

(1)

Assumes $1.8 billion in total assets, $811.9 million in debt outstanding, $1.0 billion in stockholders’ equity, and an average cost of funds of 5.8%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended September 30, 2018. Actual interest payments may be different.

 

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(2)

Assumes $2.2 billion in total assets including debt issuance costs on a pro forma basis, $1.2 billion in debt outstanding, $1.0 billion in stockholders’ equity, and an average cost of funds of 5.8%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended September 30, 2018, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 200% asset coverage. Actual interest payments may be different.

(3)

Assumes $3.2 billion in total assets including debt issuance costs on a pro forma basis, $2.2 billion in debt outstanding, $1.0 billion in stockholders’ equity, and an average cost of funds of 5.8%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended September 30, 2018, along with the hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 150% asset coverage. Actual interest payments may be different.

In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, and Credit Facilities contain various covenants which, if not complied with, could require accelerated repayment under the facility or require us to repurchase the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions

The credit agreements governing our 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, and Credit Facilities 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 and could accelerate repayment under the facilities or the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay a sufficient amount of distributions and maintain our ability to be subject to tax as a RIC. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases. See “Note 4 – Borrowings”.

Risks Related to our Securities

Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.

If you are holding debt securities issued by the Company and such securities are redeemable at our option, we may choose to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In addition, if you are holding debt securities issued by the Company and such securities are subject to mandatory redemption, we may be required to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed.

On October 24, 2017, our Board of Directors approved a redemption of $75.0 million of the outstanding aggregate principal amount of the 2024 Notes, which were redeemed on November 23, 2017. Further, on February 9, 2018, our Board of Directors approved a redemption of $100.0 million of the remaining outstanding aggregate principal amount of the 2024 Notes, which were redeemed on April 2, 2018. We may redeem the remaining 2024 Notes at any time prior to maturity, the 2022 Notes after September 23, 2022, the 2025 Notes after April 30, 2021, and the 2033 Notes after October 30, 2033 at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments. If we choose to redeem the 2022 Notes, 2024 Notes, 2025 Notes, or 2033 Notes when the fair market value of the 2022 Notes, 2024 Notes, 2025 Notes, or 2033 Notes is above par value, you would experience a loss of any potential premium.

 

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The 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

The 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, while the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes remain senior in priority to our equity securities, they 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.

The 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are obligations exclusively of Hercules Capital, Inc. and not of any of our subsidiaries. None of our subsidiaries are or act as guarantors of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes and the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are not 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 subsidiary. The assets of any such subsidiary are not directly available to satisfy the claims of our creditors, including holders of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.

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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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 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. As a result of not having a direct claim against any of our subsidiaries, the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.

The respective indentures under which the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes were issued contain limited protections for the holders of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.

The indenture under which 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes were issued offers limited protections to the holders of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes. The terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes. In particular, the terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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 2022 Notes, 2024

 

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Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible 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, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect to any exemptive relief granted to us by the SEC (currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) after such borrowings);

 

   

pay distributions 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes, in each case other than distributions, 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 (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another business development company (or to us if we determine to seek such similar no-action or other relief) permitting the business development company to declare any cash distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the business development company’s status as a regulated investment company under Subchapter M of the Code (currently, 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% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) 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 addition, the indenture and the 2024 Notes, 2025 Notes, and 2033 Notes do not require us to purchase the 2024 Notes, 2025 Notes, or 2033 Notes in connection with a change of control or any other event.

Furthermore, the terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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.

 

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Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes may have important consequences for their holders, including making it more difficult for us to satisfy our obligations with respect to the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes or negatively affecting their trading value.

Certain of our current debt instruments include more protections for their respective holders than the indenture and 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes. See “Risks Related to our Business Structure—In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, and Credit Facilities contain various covenants which, if not complied with, could require accelerated repayment under the facility or require us to repurchase the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.” In addition, other debt we issue or incur in the future could contain more protections for its holders than the respective indentures and the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.

An active trading market for the 2024 Notes, 2025 Notes, or 2033 Notes may not develop or be sustained, which could limit the market price of the 2024 Notes, 2025 Notes, or 2033 Notes or your ability to sell them.

Although the 2024 Notes, 2025 Notes, and 2033 Notes are listed on the NYSE under the symbols “HTGX,” “HCXZ,” and “HCXY,” respectively, we cannot provide any assurances that an active trading market will develop or be sustained for the 2024 Notes, 2025 Notes, or 2033 Notes or that the 2024 Notes, 2025 Notes, or 2033 Notes will be able to be sold. At various times, the 2024 Notes, 2025 Notes, or 2033 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 2024 Notes, 2025 Notes, or 2033 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes.

Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank Facility, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed 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 any of our indebtedness, including the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes or 2027 Asset-Backed Notes and substantially decrease the market value of the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes and 2027 Asset-Backed 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 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, or 2027 Asset-Backed Notes or other debt that we may

 

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incur in the future to avoid being in default. If we breach our covenants under the Wells Facility, Union Bank Facility, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed 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, Union Bank Facility, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed 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 and the Union Bank Facility have, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, Wells Facility, Union Bank Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

 

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USE OF PROCEEDS

Overview

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus 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 sales made to or through a market maker other than on an exchange. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. Assuming the sale of the remaining 5,374,833 shares of common stock offered under this prospectus supplement and the accompanying prospectus, at the last reported sale price of $12.65 per share for our common stock on the NYSE as of November 6, 2018, we estimate that the net proceeds of this offering will be approximately $66.4 million after deducting the estimated sales commission payable to JMP Securities and our estimated offering expenses.

We intend to use the net proceeds from this offering to fund investments in debt and equity securities in accordance with our investment objectives, to make acquisitions, to retire certain debt obligations and for other general corporate purposes.

We intend to seek to invest the net proceeds received in this offering as promptly as practicable after receipt thereof consistent with our investment objective. We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within three to six months, depending on market conditions. We anticipate that the remainder will be used for working capital and general corporate purposes, including potential payments or distributions to shareholders. Pending such uses and investments, we will invest a portion of the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. Our ability to achieve our investment objectives may be limited to the extent that the net proceeds of this offering, pending full investment, are held in lower yielding short-term instruments.

Status of the Offering

On September 8, 2017, we established an at-the-market, or ATM, program to which this prospectus supplement relates and through which we may sell, from time to time and at our sole discretion up to 12,000,000 shares of our common stock. During the period from September 8, 2017 through the date of this prospectus supplement, approximately 6.6 million shares of common stock have been issued and sold pursuant to the Equity Distribution Agreement and approximately 5.4 million shares of common stock remain available for sale. Gross proceeds raised through the date of this prospectus were approximately $84.2 million based on an average sale price of $12.70 per share, offset by related underwriting fees and offering expenses of approximately $1.8 million for net proceeds of approximately $82.4 million.

 

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PRICE RANGE OF COMMON STOCK

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, the sales price as a percentage of NAV and the distributions declared by us for each fiscal quarter. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions.

 

          Price Range     Premium/
Discount of
High Sales
Price to
NAV
    Premium/
Discount of
Low Sales
Price to
NAV
    Cash
Distribution
per Share
 
    NAV(1)     High     Low  

2016

           

First quarter

  $ 9.81     $ 12.39     $ 10.03       26.3     2.2   $ 0.310  

Second quarter

  $ 9.66     $ 12.43     $ 11.74       28.7     21.6   $ 0.310  

Third quarter

  $ 9.86     $ 14.00     $ 12.42       41.9     25.9   $ 0.310  

Fourth quarter

  $ 9.90     $ 14.25     $ 12.90       43.9     30.2   $ 0.310  

2017

           

First quarter

  $ 9.76     $ 15.43     $ 14.12       58.1     44.7   $ 0.310  

Second quarter

  $ 9.87     $ 15.56     $ 12.66       57.6     28.3   $ 0.310  

Third quarter

  $ 10.00     $ 13.50     $ 12.04       35.0     20.4   $ 0.310  

Fourth quarter

  $ 9.96     $ 13.94     $ 12.44       39.9     24.9   $ 0.310  

2018

           

First quarter

  $ 9.72     $ 13.25     $ 11.89       36.3     22.3   $ 0.310  

Second quarter

  $ 10.22     $ 12.97     $ 11.99       26.9     17.3   $ 0.310  

Third quarter

  $ 10.38     $ 13.64     $ 12.71       31.4     22.4   $ 0.330 (2)  

Fourth quarter (through November 6, 2018)

    *     $ 13.28     $ 12.34       *       *       **  

 

(1)

NAV per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.

(2)

Includes a supplemental distribution of $0.02 per share.

*

NAV has not yet been calculated for this period.

**

Cash distribution per share has not yet been determined for this period.

The last reported price for our common stock on November 6, 2018 was $12.65 per share.

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 possibility that our shares of common stock will trade at a discount from NAV or at premiums that are unsustainable over the long term are separate and distinct from the risk that our NAV will decrease. At times, our shares of common stock have traded at a premium to NAV and at times our shares of common stock have traded at a discount to the net assets attributable to those shares. It is not possible to predict whether the shares offered hereby will trade at, above, or below NAV.

 

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CAPITALIZATION

The Equity Distribution Agreement provides that we may offer and sell up to 12,000,000 shares of our common stock from time to time through JMP Securities, as our sales agent for the offer and sale of such common stock. The table below assumes that we will sell the remaining 5,374,833 shares at a price of $12.65 per share (the last reported sale price per share of our common stock on the NYSE on November 6, 2018), but there is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in the table below. In addition, the price per share of any such sale may be greater or less than $12.65 depending on the market price of our common stock at the time of any such sale. The following table sets forth our capitalization as of September 30, 2018:

 

   

on an actual basis; and

 

   

on an as adjusted basis giving effect to the transactions noted above, no additional sale of shares of common stock subsequent to September 30, 2018 and as of November 6, 2018, and the assumed sale of 5,374,833 shares of our common stock at a price of $12.65 per share (the last reported sale price per share of our common stock on the NYSE on November 6, 2018) less commissions and expenses.

This table should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus supplement. The adjusted information is illustrative only.

 

     As of September 30, 2018  
     Actual     As
Adjusted
 
     (in thousands)  

Investments at fair value

   $ 1,760,516     $ 1,760,516  

Cash and cash equivalents

   $ 43,212     $ 109,646  

Debt:

    

Accounts payable and accrued liabilities

   $ 21,473     $ 21,473  

Long-term SBA debentures

     147,527       147,527  

2022 Convertible Notes

     224,660       224,660  

2021 Asset-Backed Notes

     3,423       3,423  

2022 Notes

     147,859       147,859  

2024 Notes

     81,791       81,791  

2025 Notes

     72,495       72,495  

2033 Notes

     38,752       38,752  

Credit Facilities

     80,894       80,894  
  

 

 

   

 

 

 

Total debt

   $ 818,874     $ 818,874  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, par value $0.001 per share; 200,000,000 shares authorized; 96,750,576 shares issued and outstanding, actual, 102,125,409 shares issued and outstanding, as adjusted, respectively

   $ 96     $ 101  

Capital in excess of par value

     1,060,875       1,127,304  

Unrealized depreciation on investments

     (53,784     (53,784

Accumulated realized gains (losses) on investments

     (30,855     (30,855

Undistributed net investment income

     27,848       27,848  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 1,004,180     $ 1,070,614  
  

 

 

   

 

 

 

Total capitalization

   $ 1,823,054     $ 1,889,488  
  

 

 

   

 

 

 

 

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PLAN OF DISTRIBUTION

JMP Securities LLC is acting as our sales agent in connection with the offer and sale of shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Upon written instructions from us, JMP Securities LLC will use its commercially reasonable efforts consistent with its sales and trading practices to sell, as our sales agent, our common stock under the terms and subject to the conditions set forth in the Equity Distribution Agreement. We will instruct JMP Securities LLC as to the amount of common stock to be sold by it. We may instruct JMP Securities LLC not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less JMP Securities LLC’s commission, will not be less than the NAV per share of our common stock at the time of such sale. We or JMP Securities LLC may suspend the offering of shares of common stock upon proper notice and subject to other conditions.

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus 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.

JMP Securities LLC will provide written confirmation of a sale to us no later than the opening of the trading day on the NYSE following each trading day in which shares of our common stock are sold under the Equity Distribution Agreement. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to JMP Securities LLC in connection with the sales.

JMP Securities LLC will receive a commission from us to be negotiated from time to time but in no event in excess of 2.0% of the gross sales price of any shares of our common stock sold through JMP Securities LLC under the Equity Distribution Agreement. We estimate that the total expenses for the offering, excluding compensation payable to JMP Securities LLC under the terms of the Equity Distribution Agreement, will be approximately $1.3 million assuming all shares are offered under this prospectus supplement (including up to $10,000 in reimbursement of the underwriters’ counsel fees in connection with the review of the terms of the offering by the Financial Industry Regulatory Authority, Inc.).

Settlement for sales of shares of common stock will occur on the second trading day following the date on which such sales are made, or on some other date that is agreed upon by us and JMP Securities LLC in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

We will report at least quarterly the number of shares of our common stock sold through JMP Securities LLC under the Equity Distribution Agreement and the net proceeds to us.

In connection with the sale of the common stock on our behalf, JMP Securities LLC may be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of JMP Securities LLC may be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to JMP Securities LLC against certain civil liabilities, including liabilities under the Securities Act.

The offering of our shares of common stock pursuant to the Equity Distribution Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the Equity Distribution Agreement or (ii) the termination of the Equity Distribution Agreement. The Equity Distribution Agreement may be terminated by us in our sole discretion under the circumstances specified in the Equity Distribution Agreement by giving notice to JMP Securities LLC. In addition, JMP Securities LLC may terminate the Equity Distribution Agreement under the circumstances specified in the Equity Distribution Agreement by giving notice to us.

 

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Potential Conflicts of Interest

JMP Securities LLC and its affiliates have provided, or may in the future provide, various investment banking, commercial banking, financial advisory, brokerage and other services to us and our affiliates for which services they have received, and may in the future receive, customary fees and expense reimbursement. JMP Securities LLC and its affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In the ordinary course of their various business activities, JMP Securities LLC and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and such investment and securities activities may involve securities and/or instruments of our company.

The principal business address of JMP Securities LLC is 600 Montgomery Street, San Francisco, CA 94111.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus supplement and the accompanying prospectus. In addition to historical information, the following discussion and other parts of this prospectus supplement and the accompanying prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Forward-Looking Statements” in this prospectus supplement and “Risk Factors” in the accompanying prospectus. Capitalized terms used and not otherwise defined herein have the meaning given in the accompanying prospectus.

Overview

We are a specialty finance company focused on providing senior secured loans to high-growth, innovative venture capital-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries. 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, Washington, DC, Hartford, CT, Westport, CT, Chicago, IL, and San Diego, CA.

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, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable 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 other 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. We also provide “unitranche” loans, which are loans that combine both senior and mezzanine debt, generally in a first lien position.

Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments. Our primary business objectives are to increase our net income, net operating income and NAV 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 HT III, which is our wholly owned SBIC. HT III holds approximately $300.6 million in assets which accounted for approximately 13.6% of our total assets, prior to consolidation at September 30, 2018. At September 30, 2018, with our net investment of $74.5 million, HT III has the capacity to issue $149.0 million of SBA-guaranteed debentures which is subject to SBA approval. At September 30, 2018, we have issued $149.0 million in SBA-guaranteed debentures in our SBIC subsidiary.

 

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We have qualified as and have elected to be treated for tax purposes as a RIC under Subchapter M of the Code. Pursuant to this election, we generally will not be subject to corporate-level taxes on any income and gains that we distribute as dividends for federal income tax purposes to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in Subchapter M of the Code. For example, as a RIC we must earn 90% or more of our gross income during each taxable year from qualified sources, typically referred to as “good income,” as well as satisfy certain quarterly asset diversification and annual 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.

Reduced Asset Coverage Requirements

The SBCAA, which was signed into law in March 2018, decreased the minimum asset coverage ratio in Section 61(a) of the 1940 Act for business development companies from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested persons). On September 4, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act), approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to us will be reduced from 200% to 150%, effective as of September 4, 2019, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. Our Board of Directors also authorized the submission of a proposal for stockholders to accelerate the application of the 150% minimum asset coverage ratio to us at a special meeting of stockholders scheduled to be held on December 6, 2018. As a result of our Board of Director’s approval, effective as of September 4, 2019 (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), we will be able to incur additional indebtedness and, therefore, your risk of an investment in us may increase.

 

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Portfolio and Investment Activity

The total fair value of our investment portfolio was approximately $1.8 billion at September 30, 2018 and $1.5 billion at December 31, 2017. The fair value of our debt investment portfolio at September 30, 2018 was approximately $1.6 billion, compared to a fair value of approximately $1.4 billion December 31, 2017. The fair value of the equity portfolio at September 30, 2018 was approximately $127.4 million, compared to a fair value of approximately $89.4 million at December 31, 2017. The fair value of the warrant portfolio at September 30, 2018 was approximately $29.8 million, compared to a fair value of approximately $36.8 million at December 31, 2017.

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 are 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 future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and thus do not represent 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 nine months ended September 30, 2018 and the year ended December 31, 2017 was comprised of the following:

 

(in millions)    September 30, 2018      December 31, 2017  

Debt Commitments(1)

     

New portfolio company

   $ 823.7      $ 773.2  

Existing portfolio company

     103.0        98.8  
  

 

 

    

 

 

 

Total

   $ 926.7      $ 872.0  
  

 

 

    

 

 

 

Funded and Restructured Debt Investments(2)

     

New portfolio company

   $ 559.7      $ 578.9  

Existing portfolio company

     108.8        175.9  
  

 

 

    

 

 

 

Total

   $ 668.5      $ 754.8  
  

 

 

    

 

 

 

Funded Equity Investments

     

New portfolio company

   $ 32.9        7.1  

Existing portfolio company

     4.8        2.9  
  

 

 

    

 

 

 

Total

   $ 37.7      $ 10.0  
  

 

 

    

 

 

 

Unfunded Contractual Commitments(3)

     

Total

   $ 172.0      $ 73.6  
  

 

 

    

 

 

 

Non-Binding Term Sheets

     

New portfolio company

   $ 42.0      $ 122.0  

Existing portfolio company

     —          —    
  

 

 

    

 

 

 

Total

   $ 42.0      $ 122.0  
  

 

 

    

 

 

 

 

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(1)

Includes restructured loans and renewals in addition to new commitments.

(2)

Funded amounts include borrowings on revolving facilities.

(3)

Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.

We receive principal payments on 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 nine months ended September 30, 2018, we received approximately $489.7 million in aggregate principal repayments. Of the approximately $489.7 million of aggregate principal repayments, approximately $67.0 million were scheduled principal payments and approximately $422.7 million were early principal repayments related to 31 portfolio companies. Of the approximately $422.7 million early principal repayments, approximately $58.9 million were early repayments due to merger and acquisition transactions for four portfolio companies.

Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable, and escrow receivables) as of and for the nine months ended September 30, 2018 and the year ended December 31, 2017 was as follows:

 

(in millions)    September 30,
2018
    December 31,
2017
 

Beginning portfolio

   $ 1,542.2     $ 1,423.9  

New fundings and restructures

     706.1       764.8  

Warrants not related to current period fundings

     0.1       0.6  

Principal payments received on investments

     (67.0     (119.5

Early payoffs

     (422.6     (505.6

Accretion of loan discounts and paid-in-kind principal

     25.7       36.5  

Net acceleration of loan discounts and loan fees due to early payoff or restructure

     (11.8     (8.1

New loan fees

     (9.2     (9.8

Sale of investments

     (4.8     (11.0

Loss on investments due to write offs

     (23.2     (39.6

Net change in unrealized appreciation (depreciation)

     25.0       10.0  
  

 

 

   

 

 

 

Ending portfolio

   $ 1,760.5     $ 1,542.2  
  

 

 

   

 

 

 

As of September 30, 2018, we held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both companies filed confidentially under the JOBS Act. There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all.

Changes in Portfolio

We generate revenue in the form of interest income, primarily from our investments in debt securities, and commitment and facility fees. Interest income is recognized in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. 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 $12.0 million to $40.0 million, although we may make investments in amounts above or below that range. As of September 30, 2018, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from 6.0% to 15.7%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, payment-in-kind, or PIK, provisions or prepayment fees which may be required to be included in income prior to receipt.

 

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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.

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. We had approximately $34.4 million of unamortized fees at September 30, 2018, of which approximately $28.3 million was included as an offset to the cost basis of our current debt investments and approximately $6.1 million was deferred contingent upon the occurrence of a funding or milestone. At December 31, 2017, we had approximately $33.3 million of unamortized fees, of which approximately $29.3 million was included as an offset to the cost basis of our current debt investments and approximately $4.0 million was deferred contingent upon the occurrence of a funding or milestone.

Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. At September 30, 2018, we had approximately $23.3 million in exit fees receivable, of which approximately $21.6 million was included as a component of the cost basis of our current debt investments and approximately $1.7 million was a deferred receivable related to expired commitments. At December 31, 2017, we had approximately $27.5 million in exit fees receivable, of which approximately $23.9 million was included as a component of the cost basis of our current debt investments and approximately $3.6 million was a deferred receivable related to expired commitments.

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 recorded as interest income and added to the principal balance of the loan on specified capitalization dates. To maintain our ability to be subject to tax as a RIC, this non-cash source of income must be distributed to stockholders with other sources of income in the form of dividend distributions even though we have not yet collected the cash. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments. We recorded approximately $2.4 million and $2.5 million in PIK income during the three months ended September 30, 2018 and 2017, respectively. We recorded approximately $7.0 million and $7.2 million in PIK income during the nine months ended September 30, 2018 and 2017, respectively.

The core yield on our debt investments, which excludes the effects of fee and income accelerations attributed to early payoffs, restructuring, loan modifications and other one-time events and includes income from expired commitments, was 12.7% and 12.6% during the three months ended September 30, 2018 and 2017, 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 events, was 13.5% and 14.1% for the three months ended September 30, 2018 and 2017, respectively. The effective yield is derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the quarter, excluding non-interest earning assets such as warrants and equity investments. Both the core yield and effective yield may be higher than what our common stockholders may realize as the core yield and effective yield do not reflect our expenses and any sales load paid by our common stockholders. The total yield on our investment portfolio was 12.3% and 13.0% during the three months ended September 30, 2018 and 2017, respectively. The total yield is derived by dividing total investment income by the weighted average investment portfolio assets outstanding during the quarter, including non-interest earning assets such as warrants and equity investments at amortized cost.

The total return for our investors was approximately 7.6% and -2.3% during the nine months ended September 30, 2018 and 2017, respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus dividend distributions paid per share during the period, divided

 

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by the beginning price assuming the distribution is reinvested on the date of the distribution. The total return does not reflect any sales load that must be paid by investors. See “Note 9—Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement.

Portfolio Composition

Our portfolio companies are primarily privately held companies and public companies which are active in the software, drug discovery & development, internet consumer & business services, sustainable and renewable technology, drug delivery, healthcare services, medical devices & equipment, media/content/info, diversified financial services, information services, electronics & computer hardware, consumer & business products, surgical devices, communications & networking, biotechnology tools, semiconductors, diagnostic and specialty pharmaceuticals 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.

As of September 30, 2018, approximately 83.9% of the fair value of our portfolio was composed of investments in five industries: 28.0% investments in the software industry, 26.4% investments in the drug discovery & development industry, 16.1% investments in the internet consumer & business services industry, 6.7% investments in the sustainable and renewable technology industry, and 6.7% investments in the Medical Devices & Equipment industry.

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 warrants or other equity-related interests, can fluctuate materially when a loan is paid off or a warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated in several portfolio companies.

For the nine months ended September 30, 2018 and the year ended December 31, 2017, our ten largest portfolio companies represented approximately 27.9% and 34.6% of the total fair value of our investments in portfolio companies, respectively. At September 30, 2018 and December 31, 2017, we had five and seven investments, respectively, that represented 5% or more of our net assets. At September 30, 2018, we had seven equity investments representing approximately 66.5% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. At December 31, 2017, we had nine equity investments which represented approximately 67.1% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments.

As of September 30, 2018, approximately 97.0% 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 continue to rise.

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 may obtain a negative pledge covering a company’s intellectual property. As of September 30, 2018, approximately 84.4% of our debt investments were in a senior secured first lien position, with 46.6% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 30.0% secured by a first priority security in all of the assets of the portfolio company and the portfolio company was prohibited from pledging or encumbering its intellectual property, 1.3% of our debt investments were senior secured by the equipment of the portfolio company, and 6.5% were in a first lien “last-out” senior secured position with security interest in all of the assets of the portfolio company, whereby the “last-out” loans will be subordinated to the “first-out” portion of the unitranche loan in a liquidation, sale or other disposition. Another 14.7% of our debt investments were secured by a second priority security interest in all of the portfolio company’s assets, and 0.9% were unsecured.

Our investments in senior secured debt with warrants have detachable equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for

 

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capital appreciation. These features are treated as original issue discount and are accreted into interest income over the term of the loan as a yield enhancement. 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 September 30, 2018, we held warrants in 130 portfolio companies, with a fair value of approximately $29.8 million. The fair value of our warrant portfolio decreased by approximately $7.0 million, as compared to a fair value of $36.8 million at December 31, 2017 primarily related to the slight decrease in portfolio companies and valuation of the portfolio.

Our existing warrant holdings would require us to invest approximately $79.2 million to exercise such warrants as of September 30, 2018. 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 multiples in the range of approximately 1.02x to 29.06x 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 experience losses from our warrant portfolio.

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. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of September 30, 2018 and December 31, 2017, respectively:

 

(in thousands)    September 30, 2018     December 31, 2017  

Investment Grading

   Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
    Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
 

1

     7      $ 150,185        9.4     12      $ 345,191        24.4

2

     51        987,494        61.6     32        583,017        41.2

3

     24        420,240        26.2     32        443,775        31.3

4

     5        44,483        2.7     4        41,744        2.9

5

     2        873        0.1     5        2,257        0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     89      $ 1,603,275        100.0     85      $ 1,415,984        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of September 30, 2018, our debt investments had a weighted average investment grading of 2.23 on a cost basis, as compared to 2.17 at December 31, 2017. 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 have been downgraded until their funding is complete or their operations improve. The decline in weighted average investment grading at September 30, 2018 from December 31, 2017 is primarily due to the payoff of five positions with a credit rating 1.

At September 30, 2018, we had two debt investments on non-accrual with a cumulative investment cost and fair value of approximately $2.8 million and $65,000, respectively. At December 31, 2017, we had five debt investments on non-accrual with cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cumulative cost of debt investments on non-accrual between September 30, 2018 and December 31, 2017 is the result of the liquidation of three debt investments that were on non-accrual at December 31, 2017, which resulted in a realized loss of approximately $10.3 million, slightly offset by a loan repayment in full from one debt investment.

 

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Results of Operations

Comparison of the three and nine months ended September 30, 2018 and 2017

Investment Income

Interest Income

Total investment income for the three months ended September 30, 2018 was approximately $52.6 million as compared to approximately $45.9 million for the three months ended September 30, 2017. Total investment income for the nine months ended September 30, 2018 was approximately $150.9 million as compared to approximately $140.7 million for the nine months ended September 30, 2017.

Interest income for the three months ended September 30, 2018 totaled approximately $49.1 million as compared to approximately $42.4 million for the three months ended September 30, 2017. Interest income for the nine months ended September 30, 2018 totaled approximately $137.9 million as compared to approximately $125.8 million for the nine months ended September 30, 2017. The increase in interest income for the three and nine months ended September 30, 2018 as compared to the same periods ended September 30, 2017, is primarily attributable to an increase in recurring interest income and an increase in the weighted average principal outstanding of loans.

Of the $49.1 million in interest income for the three months ended September 30, 2018, approximately $47.7 million represents recurring income from the contractual servicing of our loan portfolio and approximately $1.4 million represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $39.7 million and $2.7 million, respectively, of the $42.4 million interest income for the three months ended September 30, 2017.

Of the $137.9 million in interest income for the nine months ended September 30, 2018, approximately $131.9 million represents recurring income from the contractual servicing of our loan portfolio and approximately $6.0 million represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $117.6 million and $8.2 million, respectively, of the $125.8 million interest income for the nine months ended September 30, 2017.

The following table shows the PIK-related activity for the nine months ended September 30, 2018 and 2017, at cost:

 

     Nine Months Ended
September 30,
 
(in thousands)    2018      2017  

Beginning PIK interest receivable balance

   $ 15,487      $ 9,930  

PIK interest income during the period

     6,992        7,172  

PIK accrued (capitalized) to principal

     (1,472      —    

Payments received from PIK loans

     (9,473      (2,349

Realized gain (loss)

     —          (2,183
  

 

 

    

 

 

 

Ending PIK interest receivable balance

   $ 11,534      $ 12,570  
  

 

 

    

 

 

 

The slight decrease in PIK interest income during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 is due to a decrease in the weighted average principal outstanding of loans which bear PIK interest.

Fee Income

Fee income from commitment, facility and loan related fees for the three months ended September 30, 2018 totaled approximately $3.5 million as compared to approximately $3.4 million for the three months ended

 

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September 30, 2017. Fee income from commitment, facility and loan related fees for the nine months ended September 30, 2018 totaled approximately $12.9 million as compared to approximately $14.9 million for the nine months ended September 30, 2017. The increase in fee income for three months ended September 30, 2018 is primarily due to an increase in one-time fees due to early repayments. The decrease in fee income for nine months ended September 30, 2018 is primarily due to a decrease in the acceleration of unamortized fees and one-time fees due to early repayments.

Of the $3.5 million in fee income for the three months ended September 30, 2018, approximately $1.6 million represents income from recurring fee amortization and approximately $1.9 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $1.6 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $1.3 million and $2.1 million, respectively, of the $3.4 million in income for the three months ended September 30, 2017.

Of the $12.9 million in fee income for the nine months ended September 30, 2018, approximately $4.7 million represents income from recurring fee amortization and approximately $8.2 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $6.4 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $4.9 million and $10.0 million, respectively, of the $14.9 million in income for the nine months ended September 30, 2017.

In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and nine months ended September 30, 2018 or 2017.

Operating Expenses

Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Our operating expenses totaled approximately $23.3 million and $21.9 million during the three months ended September 30, 2018 and 2017, respectively. Our operating expenses totaled approximately $72.7 million and $68.8 million during the nine months ended September 30, 2018 and 2017, respectively.

Interest and Fees on our Borrowings

Interest and fees on our borrowings totaled approximately $11.0 million and $10.5 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $34.8 million and $33.5 million during the nine months ended September 30, 2018 and 2017, respectively. Interest and fee expense during the three and nine months ended September 30, 2018, as compared to the same periods ended September 30, 2017, increased due to the issuance of our 2033 Notes in September 2018, 2025 Notes in April 2018 and 2022 Notes issued in October 2017 as well as interest related to our credit facilities, offset by the partial redemptions of our 2024 Notes and amortization of our 2021 Asset-Backed Notes.

We had a weighted average cost of debt, comprised of interest and fees, of approximately 5.6% for the three months ended September 30, 2018 and 2017, respectively, and a weighted average cost of debt of approximately 5.8% for the nine months ended September 30, 2018 and 2017, respectively.

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 $3.7 million from $3.5 million for the three months ended September 30, 2018 and 2017, respectively. Our general and administrative expenses decreased to

 

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$11.4 million from $12.4 million for the nine months ended September 30, 2018 and 2017. The increase in general and administrative expenses for three months ended September 30, 2018 is primarily due to an increase in workout related costs and outside services for contract labor. The decrease in general and administrative expenses for nine months ended September 30, 2018 is primarily due to a decrease in corporate legal and other expenses.

Employee Compensation

Employee compensation and benefits totaled $5.3 million for the three months ended September 30, 2018 as compared to $6.0 million for the three months ended September 30, 2017, and $18.1 million for the nine months ended September 30, 2018 as compared to $17.3 million for the nine months ended September 30, 2017. The decrease between the three months ended September 30, 2018 and 2017 was primarily due to reduced payroll related expenses and the increase between the nine months ended September 30, 2018 and 2017 was primarily due to changes in variable compensation expenses due to company performance objectives.

Employee stock-based compensation totaled $3.3 million for the three months ended September 30, 2018 as compared to $1.8 million for the three months ended September 30, 2017, and $8.5 million for the nine months ended September 30, 2018 as compared to $5.6 million for the nine months ended September 30, 2017. The increase for the comparative periods was primarily related to restricted stock award vesting and retention rewards.

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 three and nine months ended September 30, 2018 and 2017 is as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
(in thousands)          2018                  2017                  2018                  2017        

Realized gains

   $ 4,618      $ 1,345      $ 12,607      $ 12,898  

Realized losses

     (1,268      (25,799      (23,088      (39,827
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ 3,350      $ (24,454    $ (10,481    $ (26,929
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2018, we recognized net realized gains of $3.3 million and net realized losses of $10.5 million, respectively. During the three months ended September 30, 2018, we recorded gross realized gains of $4.6 million primarily from the sale or acquisition of our holdings. These gains were partially offset by gross realized losses of $1.3 million primarily from the liquidation or write-off of our warrant and equity investments in seven portfolio companies.

During the nine months ended September 30, 2018, we recorded gross realized gains of $12.6 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $23.1 million primarily from the liquidation or write-off of our warrant and equity investments in twenty portfolio companies and our debt investments in three portfolio companies.

During the three and nine months ended September 30, 2017, we recognized net realized losses of $24.5 million and $26.9 million respectively. During the three months ended September 30, 2017, we recorded

 

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gross realized gains of $1.3 million primarily from the sale of our holdings in three portfolio companies. These gains were offset by gross realized losses of $25.8 million primarily from the liquidation or write-off of our warrant and equity investments in seven portfolio companies and our debt investment in three portfolio companies.

During the nine months ended September 30, 2017, we recorded gross realized gains of $12.9 million primarily from the sale of our holdings in four portfolio companies. These gains were offset by gross realized losses of $39.8 million primarily from the liquidation or write-off of our warrant and equity investments in nineteen portfolio companies and our debt investment in four portfolio companies.

The following table summarizes the change in net unrealized appreciation or depreciation of investments for the three and nine months ended September 30, 2018 and 2017:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in thousands)    2018     2017     2018     2017  

Gross unrealized appreciation on portfolio investments

   $ 14,366     $ 26,421     $ 53,133     $ 114,287  

Gross unrealized depreciation on portfolio investments

     (9,317     (15,764     (53,684     (125,327

Reversal of prior period net unrealized appreciation (depreciation) upon a realization event

     (2,018     23,116       25,573       26,727  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on debt, equity, and warrant investments

     3,031       33,773       25,022       15,687  

Other net unrealized appreciation (depreciation)

     (54     (220     954       (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

   $ 2,977     $ 33,553     $ 25,976     $ 15,637  
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended September 30, 2018, we recorded $3.0 million of net unrealized appreciation which was mainly from our debt, equity and warrant investments. We recorded $3.5 million of net unrealized appreciation on our debt investments which was attributable to $4.2 million of unrealized appreciation on the debt portfolio, including $0.3 million of unrealized appreciation on collateral-based impairments on four portfolio companies, along with $0.7 million of unrealized depreciation primarily due to the reversal of unrealized appreciation upon pay-off of three portfolio companies.

We recorded $1.5 million of net unrealized appreciation on our equity investments and $1.9 million of net unrealized depreciation on our warrant investments during the three months ended September 30, 2018. This net unrealized depreciation of $0.4 million was primarily attributable to $1.3 million of unrealized depreciation due to the reversal of unrealized appreciation upon acquisition or liquidation of our equity and warrant investments. This is partially offset by $0.9 million of unrealized appreciation on the equity and warrant portfolio investments.

During the nine months ended September 30, 2018, we recorded $26.0 million of net unrealized appreciation, of which $25.0 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $19.3 million of net unrealized appreciation on our debt investments which was primarily related to $24.7 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon write-off of three portfolio companies and loan repayments from six portfolio companies. This unrealized appreciation was partially offset by $5.3 million of unrealized depreciation on the debt portfolio, including $8.0 million of unrealized depreciation on collateral-based impairments on eight portfolio companies.

We recorded $5.6 million of net unrealized appreciation on our equity investments and $0.1 million of net unrealized appreciation on our warrant investments during the nine months ended September 30, 2018. This net unrealized appreciation of $5.7 million was due to $4.8 million of unrealized appreciation on the equity and warrant portfolio and $0.9 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon being realized as a gain or loss due to the acquisition or liquidation of our equity and warrant investments.

 

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During the three months ended September 30, 2017, we recorded $33.6 million of net unrealized appreciation, of which $33.7 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $22.2 million of net unrealized appreciation on our debt investments, which was primarily was attributed to the reversal of $25.9 million unrealized depreciation upon payoff or liquidation of our debt investments in three portfolio companies.

We recorded $8.8 million of net unrealized appreciation on our equity investments primarily due to the collateral-based impairment on one portfolio company, and $5.7 million of unrealized appreciation on our public equity portfolio related to portfolio company performance. We also recorded $2.7 million of net unrealized appreciation on our warrant investments during the three months ended September 30, 2017.

During the nine months ended September 30, 2017, we recorded $15.6 million of net unrealized appreciation, of which $15.7 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $41.9 million of net unrealized appreciation on our debt investments, which was primarily related to $41.6 million of unrealized depreciation for collateral-based impairments on eight portfolio companies offset by the reversal of $52.0 million unrealized depreciation for the prior period collateral-based impairments on eight portfolio companies.

We recorded $36.9 million of net unrealized depreciation on our equity investments primarily due to $50.4 million of collateral based impairment on three portfolio companies, and partially offset by $11.6 million of unrealized appreciation on our equity portfolio. We also recorded $10.7 million of net unrealized appreciation on our warrant investments during nine months ended September 30, 2017.

Income and Excise Taxes

We account for income taxes in accordance with the provisions of Topic 740 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”), “Income Taxes”, under which income taxes are provided for amounts currently payable and for amounts deferred based upon the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances may be used to reduce deferred tax assets to the amount likely to be realized. Based upon our previous election and anticipated continued qualification to be subject to taxation as a RIC, we are typically not subject to a material level of federal income taxes. We distributed 100% of our spillover earnings from ordinary income for our taxable year ended December 31, 2017 to our stockholders during the three months ended September 30, 2018.

Net Change in Net Assets Resulting from Operations and Earnings Per Share

For the three months ended September 30, 2018, we had a net increase in net assets resulting from operations of approximately $35.6 million and for the three months ended September 30, 2017, we had a net increase in net assets resulting from operations of approximately $33.1 million. For the nine months ended September 30, 2018, we had a net increase in net assets resulting from operations of approximately $93.6 million and for the nine months ended September 30, 2017, we had a net increase in net assets resulting from operations of approximately $60.6 million.

Both the basic and fully diluted net change in net assets per common share were $0.37 per share for the three months ended September 30, 2018 and $1.04 per share for the nine months ended September 30, 2018. Both the basic and fully diluted net change in net assets per common share were $0.40 per share and $0.73 per share for the three and nine months ended September 30, 2017, respectively.

For the purpose of calculating diluted earnings per share for three and nine months ended September 30, 2018 and 2017, the effect of the 2022 Convertible Notes, outstanding options, and restricted stock units under the treasury stock method was considered. The effect of the 2022 Convertible Notes was excluded from these calculations for the three and nine months ended September 30, 2018 and 2017 as our share price was less than the conversion price in effect which results in anti-dilution.

 

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Financial Condition, Liquidity, and Capital Resources

Our liquidity and capital resources are derived from our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, Credit Facilities 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 also raise additional equity or debt capital through registered offerings off a shelf registration, ATM and private offerings of securities, by securitizing a portion of our investments, or by borrowing from the SBA through our SBIC subsidiary.

On August 16, 2013, we entered into an ATM equity distribution agreement with JMP Securities (the “Prior Equity Distribution Agreement”). On March 7, 2016, we renewed the Prior Equity Distribution Agreement and on December 21, 2016, we further amended the agreement to increase the total shares available under the program. The Prior Equity Distribution Agreement, as amended, provided that we may offer and sell up to 12.0 million shares of our common stock from time to time through JMP Securities, as our sales agent.

On September 7, 2017, we terminated the Prior Equity Distribution Agreement and entered into the Equity Distribution Agreement. As a result, the remaining shares that were available under the Prior Equity Distribution agreement are no longer available for issuance. The Equity Distribution Agreement provides that the Company may offer and sell up to 12.0 million shares of its common stock from time to time through JMP Securities, 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 nine months ended September 30, 2018, we sold 5.0 million shares of common stock, which were issued under the Equity Distribution Agreement, for a total accumulated net proceeds of approximately $62.3 million, including $1.4 million of offering expenses. As of September 30, 2018, approximately 5.4 million shares remain available for issuance and sale under the Equity Distribution Agreement. See “—Subsequent Events”.

Our 6.00% convertible notes due 2016 (the “2016 Convertible Notes”) were fully settled on or before their contractual maturity date of April 15, 2016. Throughout the life of the 2016 Convertible Notes, holders of approximately $74.8 million of our 2016 Convertible Notes exercised their conversion rights. These 2016 Convertible Notes were settled with a combination of cash equal to the outstanding principal amount of the converted notes and approximately 1.6 million shares of our common stock, or $24.3 million.

On May 2, 2016, we closed an underwritten public offering of an additional $72.9 million in aggregate principal amount of our 2024 Notes. The $72.9 million in aggregate principal amount includes $65.4 million from the initial offering on April 21, 2016 and $7.5 million as a result of underwriters exercising a portion of their option to purchase up to an additional $9.8 million in aggregate principal to cover overallotments on April 29, 2016. On June 27, 2016, we closed an underwritten public offering of an additional $60.0 million in aggregate principal amount of the 2024 Notes. On June 30, 2016, the underwriters exercised their option to purchase up to an additional $9.0 million in aggregate principal to cover overallotments, resulting in total aggregate principal of $69.0 million from the offering. The 2024 Notes rank equally in right of payment and form a single series of notes.

On May 5, 2016, we, through a special purpose wholly-owned subsidiary, Hercules Funding III, LLC, as borrower, entered the Union Bank Facility. The Union Bank Facility replaced our credit facility (the “Prior Union Bank Facility”) entered into on August 14, 2014 (as amended and restated from time to time) with MUFG

 

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Union Bank, N.A., as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility from time to time. Any references to amounts related to the Union Bank Facility prior to May 5, 2016 were incurred and relate to the Prior Union Bank Facility.

On October 11, 2016, we entered into a debt distribution agreement, pursuant to which we may offer for sale, from time to time, up to $150.0 million in aggregate principal amount of 2024 Notes through FBR Capital Markets & Co. acting as our sales agent. Sales of the 2024 Notes, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE, or similar securities exchange or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.

We did not sell any notes under the program during the nine months ended September 30, 2018. During the year ended December 31, 2017, we sold 225,457 notes for approximately $5.6 million in aggregate principal amount. As of September 30, 2018, approximately $136.4 million in aggregate principal amount remains available for issuance and sale under the debt distribution agreement.

On January 25, 2017, we issued $230.0 million in aggregate principal amount of 2022 Convertible Notes, which amount includes the additional $30.0 million aggregate principal amount issued pursuant to the initial purchaser’s exercise in full of its overallotment option. The sale generated net proceeds of approximately $225.5 million, including $4.5 million of debt issuance costs. Aggregate issuances costs include the initial purchaser’s discount of approximately $5.2 million, offset by the reimbursement of $1.2 million by the initial purchaser.

On February 24, 2017, we redeemed the $110.4 million remaining outstanding balance of our 2019 Notes in full.

On October 23, 2017, we issued $150.0 million in aggregate principal amount of the 2022 Notes pursuant to the Fourth Supplemental Indenture to the Base Indenture, dated October 23, 2017, between the Company and U.S. Bank, National Association, as trustee. The sale of the 2022 Notes generated net proceeds of approximately $147.4 million, including a public offering discount of $826,500. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions of approximately $975,000, were approximately $1.8 million.

On November 23, 2017, we redeemed $75.0 million of the $258.5 million issued and outstanding aggregate principal amount of our 2024 Notes. On April 2, 2018, we redeemed an additional $100.0 million of the remaining outstanding aggregate principal amount of the 2024 Notes.

On April 26, 2018, we issued $75.0 million in aggregate principal amount of the 2025 Notes pursuant to the Fifth Supplemental Indenture to the Base Indenture, dated April 26, 2018, between the Company and U.S. Bank, National Association, as trustee. The sale of the 2025 Notes generated net proceeds of approximately $72.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $2.6 million.

On May 25, 2018, we entered into the Second Amendment to the Union Bank Facility. The Second Amendment amends certain provisions of the Union Bank Facility to increase the commitments thereunder from $75.0 million to $100.0 million.

On June 14, 2018, we closed an underwritten public offering of 6.9 million shares of common stock, including an over-allotment option to purchase an additional 900,000 shares of common stock. The offering generated net proceeds, before expenses, of $81.3 million, including the underwriting discount and commissions of $2.6 million.

 

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On July 31, 2018, we entered into a further amendment to the Wells Facility to extend the maturity date and fully repay the pro-rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc., thereby resigning both as lenders and terminating their commitments thereunder.

On September 20, 2018, we issued $40.0 million in aggregate principal amount of the 2033 Notes pursuant to the Sixth Supplemental Indenture to the Base Indenture, dated September 24, 2018, between the Company and U.S. Bank, National Association, as trustee. The sale of the 2033 Notes generated net proceeds of approximately $38.8 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $1.2 million.

At September 30, 2018, we had $149.0 million of SBA debentures, $150.0 million of 2022 Notes, $83.5 million of 2024 Notes, $75.0 million of 2025 Notes, $40.0 million of 2033 Notes, $3.5 million of 2021 Asset-Backed Notes, and $230.0 million of 2022 Convertible Notes payable along with $38.5 million of borrowings outstanding on the Wells Facility and $42.4 million of borrowings outstanding on the Union Bank Facility.

At September 30, 2018, we had $137.3 million in available liquidity, including $43.2 million in cash and cash equivalents. We had available borrowing capacity of $36.5 million under the Wells Facility and $57.6 million under the Union Bank Facility, both subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts.

At September 30, 2018, we had $74.5 million of capital outstanding in restricted accounts related to our SBIC that we may use to fund new investments in the SBIC. With our net investment of $74.5 million in HT III, we have the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval. At September 30, 2018, we have issued $149.0 million in SBA guaranteed debentures in our SBIC subsidiary. On July 13, 2018, we completed repayment of the remaining outstanding Hercules Technology II, L.P., or HT II, debentures and subsequently surrendered the SBA license with respect to HT II.

At September 30, 2018, we had approximately $2.4 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 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 nine months ended September 30, 2018, 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, 2018, our operating activities used $115.4 million of cash and cash equivalents, compared to $76.6 million provided during the nine months ended September 30, 2017. This $192.0 million increase in cash used in operating activities is primarily related to an increase in investment purchases of $218.8 million, partially offset by an increase in investment repayments of $17.0 million.

During the nine months ended September 30, 2018, our investing activities used approximately $325,000 of cash, compared to $127,000 used during the nine months ended September 30, 2017. The $198,000 increase in cash used in investing activities was due to an increase in purchase of capital equipment.

During the nine months ended September 30, 2018, our financing activities provided $66.3 million of cash, compared to $50.5 million provided during the nine months ended September 30, 2017. $15.8 million increase in cash provided by financing activities was primarily due to the issuance of $75.0 million of our 2025 Notes in April 2018, issuance of $40.0 million of our 2033 Notes in September 2018, increase in credit facilities

 

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borrowings of $208.0 million, and issuance of our common stock of $87.2 million, partially offset by the repayment of $100.0 million of our 2024 Notes in April 2018, increase in repayment of our credit facility borrowings of $121.7 million, and amortization of our 2021 Asset-Backed Notes.

As of September 30, 2018, net assets totaled $1.0 billion, with a NAV per share of $10.38. 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.

As required by the 1940 Act, our asset coverage must be at least 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) after each issuance of senior securities. As of September 30, 2018 our asset coverage ratio under our regulatory requirements as a business development company was 251.0% 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% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage ratio when including our SBA debentures was 223.3% at September 30, 2018.

Outstanding Borrowings

At September 30, 2018 and December 31, 2017, we had the following available borrowings and outstanding amounts:

 

     September 30, 2018      December 31, 2017  
(in thousands)    Total
Available
     Principal      Carrying
Value(1)
     Total
Available
     Principal      Carrying
Value(1)
 

SBA Debentures(2)

   $ 149,000      $ 149,000      $ 147,527      $ 190,200      $ 190,200      $ 188,141  

2022 Notes

     150,000        150,000        147,859        150,000        150,000        147,572  

2024 Notes

     83,510        83,510        81,791        183,510        183,510        179,001  

2025 Notes

     75,000        75,000        72,495        —          —          —    

2033 Notes

     40,000        40,000        38,752        —          —          —    

2021 Asset-Backed Notes

     3,515        3,515        3,423        49,153        49,153        48,650  

2022 Convertible Notes

     230,000        230,000        224,660        230,000        230,000        223,488  

Wells Facility(3)

     75,000        38,512        38,512        120,000        —          —    

Union Bank Facility(3)

     100,000        42,382        42,382        75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 906,025      $ 811,919      $ 797,401      $ 997,863      $ 802,863      $ 786,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Except for the Wells Facility and Union Bank Facility, all carrying values represent the principal amount outstanding less the remaining unamortized debt issuance costs and unaccreted discount, if any, associated with the loan as of the balance sheet date. See below for the amount of debt issuance cost associated with each borrowing.

(2)

At September 30, 2018, the total available borrowings under the SBA debentures were $149.0 million which were available in HT III. On July 13, 2018, we completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II. At December 31, 2017, 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.

(3)

Availability subject to us meeting the borrowing base requirements. On July 31, 2018, the Wells Facility was reduced to $75.0 million as we fully repaid the pro-rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc. See “Note 4—Borrowings”.

Debt issuance costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective

 

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yield method or the straight line method, which closely approximates the effective yield method. In accordance with ASC Subtopic 835-30 (“Interest—Imputation of Interest”), debt issuance costs are presented as a reduction to the associated liability balance on the Consolidated Statement of Assets and Liabilities, except for debt issuance costs associated with line-of-credit arrangements. Debt issuance costs, net of accumulated amortization, as of September 30, 2018 and December 31, 2017 were as follows:

 

(in thousands)    September 30, 2018      December 31, 2017  

SBA Debentures

   $ 1,473      $ 2,059  

2022 Notes

     1,469        1,633  

2024 Notes

     1,761        4,591  

2025 Notes

     2,505        —    

2033 Notes

     1,248        —    

2021 Asset-Backed Notes

     93        503  

2022 Convertible Notes

     3,046        3,715  

Wells Facility(1)

     144        227  

Union Bank Facility(1)

     235        379  
  

 

 

    

 

 

 

Total

   $ 11,974      $ 13,107  
  

 

 

    

 

 

 

 

(1)

As the Wells Facility and Union Bank Facility are line-of-credit arrangements, the debt issuance costs associated with these instruments are presented separately as an asset on the Consolidated Statement of Assets and Liabilities in accordance with ASC Subtopic 835-30.

Refer to “Note 4—Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement for a discussion of the contract terms, interest expense, and fees associated with each outstanding borrowing as of and for the three and nine months ended September 30, 2018.

Commitments

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded contractual 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. A portion of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Furthermore, our credit agreements contain customary lending provisions which allow us relief from funding obligations for previously made 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. As such, our disclosure of unfunded contractual commitments includes only those which are available at the request of the portfolio company and unencumbered by milestones.

At September 30, 2018, we had approximately $172.0 million of unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments.

We also had approximately $42.0 million of non-binding term sheets outstanding to three new and no 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.

 

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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 imbedded in the borrowing agreements.

As of September 30, 2018, our unfunded contractual commitments available at the request of the portfolio company, including undrawn revolving facilities, and unencumbered by milestones are as follows:

 

(in thousands)

Portfolio Company

   Unfunded
Commitments(1)
 

ThumbTack, Inc.

   $ 25,000  

Tricida, Inc.

     25,000  

Couchbase, Inc.

     20,000  

Impossible Foods, Inc.

     20,000  

Contentful, Inc.

     15,000  

Postmates Inc.

     15,000  

Chemocentryx, Inc.

     10,000  

Xometry, Inc.

     8,000  

Evernote Corporation

     7,500  

Businessolver.com, Inc.

     6,375  

Achronix Semiconductor Corporation

     5,000  

Lithium Technologies, Inc.

     3,623  

Intent Media, Inc.

     3,000  

Emma, Inc.

     2,963  

Credible Behavioral Health, Inc.

     2,500  

First Insight, Inc.

     1,500  

Greenphire, Inc.

     500  

Insurance Technologies Corporation

     500  

Salsa Labs, Inc.

     500  
  

 

 

 

Total

   $ 171,961  
  

 

 

 

 

(1)

Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.

Contractual Obligations

The following table shows our contractual obligations as of September 30, 2018:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less than
1 year
     1 - 3 years      3 - 5 years      After 5
years
 

Borrowings(2)(3)

   $ 811,919      $ 42,027      $ 106,132      $ 465,250      $ 198,510  

Operating Lease Obligations(4)

     16,008        2,766        5,723        5,853        1,666  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 827,927      $ 44,793      $ 111,855      $ 471,103      $ 200,176  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to our portfolio companies.

(2)

Includes $149.0 million in principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $83.5 million of the 2024 Notes, $75.0 million of the 2025 Notes, $40.0 million of the 2033 Notes, $3.5 million of the 2021 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes, $38.5 million under the Wells Facility, and $42.4 million under the Union Bank Facility as of September 30, 2018.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to our consolidated financial statements appearing elsewhere in this prospectus supplement.

(4)

Facility leases and licenses.

 

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Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense amounted to approximately $522,000 and $1.5 million during the three and nine months ended September 30, 2018. Total rent expense amounted to approximately $443,000 and $1.3 million during the three and nine months ended September 30, 2017.

Indemnification Agreements

We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements are intended to provide our directors and executive officers the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that we shall indemnify the director or executive officer who is a party to the agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Maryland law and the 1940 Act.

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.

Distributions

The following table summarizes our distributions declared and paid, to be paid, or reinvested on all shares, including restricted stock, to date:

 

Date Declared

   Record Date      Payment Date      Amount Per Share  

Cumulative distributions declared and paid prior to January 1, 2016

         $ 11.23  

February 17, 2016

     March 7, 2016        March 14, 2016        0.31  

April 27, 2016

     May 16, 2016        May 23, 2016        0.31  

July 27, 2016

     August 15, 2016        August 22, 2016        0.31  

October 26, 2016

     November 14, 2016        November 21, 2016        0.31  

February 16, 2017

     March 6, 2017        March 13, 2017        0.31  

April 26, 2017

     May 15, 2017        May 22, 2017        0.31  

July 26, 2017

     August 14, 2017        August 21, 2017        0.31  

October 25, 2017

     November 13, 2017        November 20, 2017        0.31  

February 14, 2018

     March 5, 2018        March 12, 2018        0.31  

April 25, 2018

     May 14, 2018        May 21, 2018        0.31  

July 25, 2018

     August 13, 2018        August 20, 2018        0.31  

October 24, 2018

     November 12, 2018        November 19, 2018        0.31  

October 24, 2018

     November 12, 2018        November 19, 2018        0.02
        

 

 

 
         $ 14.97  
        

 

 

 

 

*

Supplemental Distribution

 

 

On October 24, 2018, the Board of Directors declared a cash distribution of $0.31 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. This distribution represents our fifty-third consecutive distribution since our initial public offering. In addition to the cash distribution, on October 24, 2018, the Board of Directors declared a supplemental distribution of $0.02 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. The total cumulative distribution to date, including the supplemental distribution, is $14.97 per share.

Our Board of Directors maintains a variable distribution policy with the objective of distributing four quarterly distributions in an amount that approximates 90—100% of our taxable quarterly income or potential

 

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annual income for a particular taxable year. In addition, at the end of our taxable year, our Board of Directors may choose to pay an additional special distribution, or fifth distribution, so that we may distribute approximately all of our annual taxable income in the taxable year in which it was earned, or may elect to maintain the option to spill over our excess taxable income into the following taxable year as part of any future distribution payments.

Distributions from our taxable income (including gains) to a stockholder generally will be treated as a dividend for U.S. federal income tax purposes to the extent of such stockholder’s allocable share of our current or accumulated earnings and profits. 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 a stockholder’s tax basis in our shares, 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 taxable year based upon our taxable income for the full taxable year and distributions paid for the full taxable year. As a result, any determination of the tax attributes of our distributions made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. Of the distributions declared during the year ended December 31, 2017, 100% were distributions derived from our current and accumulated earnings and profits.

During the three months ended September 30, 2018, we declared a distribution of $0.31 per share. If we had determined the tax attributes of our distributions year-to-date as of September 30, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2018 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 distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.

Shortly after the close of each calendar year information 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, if any) will be provided to our stockholders subject to information reporting. To the extent our taxable earnings fall below the total amount of our distributions for any taxable year, a portion of those distributions may be deemed a tax return of capital to our stockholders.

We expect to qualify to be subject to tax as a RIC under Subchapter M of the Code. In order to be subject to tax as a RIC, we are required to satisfy certain annual gross income and quarterly asset composition tests, as well as make distributions to our stockholders each taxable year treated as dividends for federal income tax purposes of an amount at least equal to 90% of the sum of our investment company taxable income, determined without regard to any deduction for dividends paid, plus our net tax-exempt income, if any. Upon being eligible to be subject to tax as a RIC, we would be entitled to deduct such distributions we pay to our stockholders in determining the overall components of our “taxable income.” Components of our taxable income include our taxable interest, dividend and fee income, reduced by certain deductions, as well as taxable net realized securities 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 such gains or losses are not included in taxable income until they are realized. In connection with maintaining our ability to be subject to tax as a RIC, among other things, we have made and intend to continue to make the requisite distributions to our stockholders each taxable year, which generally should relieve us from corporate-level U.S. federal income taxes.

As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income and gains unless we make distributions treated as dividends for U.S. federal income tax purposes in a timely

 

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manner to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the 1-year period ending October 31 of each such calendar year and (3) any ordinary income and capital gain net income realized, but not distributed, in preceding calendar years. We will not be subject to this excise tax on any amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).

Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S. federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into and distributed in the current taxable 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 distributed 100% of our spillover earnings, which consists of ordinary income, from the year ended December 31, 2017 to our stockholders during the three months ended September 30, 2018.

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.

Revision of Previously Issued Financial Statements

It was determined that there was a misclassification in the previously issued quarterly consolidated financial statements of $14.9 million in the distributions for the nine months ended September 30, 2017. The amount had been categorized as distributions of net investment income rather than distributions of realized gains and the components of net assets have been revised in the period to reflect the correct classification. In addition, the financial highlights in Note 9 have been updated to reclassify $0.18 per share from distributions of net investment income to distributions of realized gains for the nine months ended September 30, 2017. The amounts reclassified are not material individually, or in the aggregate, and there no impact on previously reported net assets, total distributions, and earnings per share for the nine months ended September 30, 2017.

Valuation of Investments

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.

 

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At September 30, 2018, approximately 96.6% of our total assets represented investments in portfolio companies whose fair value is determined in good faith 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 ASC Topic 946 and measured in accordance with ASC Topic 820. Our debt securities are primarily invested in venture capital-backed companies in technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare and sustainable and renewable technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of our investments in these portfolio companies are considered Level 3 assets under ASC Topic 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 by our Board of Directors in accordance with the provisions of ASC Topic 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. We engage independent valuation firms on a discretionary basis. Specifically, on a quarterly basis, we will identify portfolio investments with respect to which an independent valuation firm will assist in valuing. We select these portfolio investments based on a number of factors, including, but not limited to, the potential for material fluctuations in valuation results, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.

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.

Refer to “Note 2 – Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement for a discussion of our valuation policies for the three and nine months ended September 30, 2018.

Income Recognition

See “—Changes in Portfolio” for a discussion of our income recognition policies and results during the three and nine months ended September 30, 2018. See “—Results of Operations” for a comparison of investment income for the three and nine months ended September 30, 2018 and 2017.

Stock Based Compensation

We have issued and may, from time to time, issue stock options and restricted stock to employees under the Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan and the Hercules Capital, Inc. 2018 Non-employee Director Plan. We follow the guidelines set forth under ASC Topic 718, (“Compensation – Stock Compensation”) to account for stock options granted. Under ASC Topic 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 requires judgment, including estimating stock price volatility, forfeiture rate and expected option life.

 

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Recent Accounting Pronouncements

In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things, requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the ASU changes the disclosure requirements for financial instruments. ASU 2016-01 is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2017. We have adopted this standard, which did not have a material impact, on our consolidated financial statements and related disclosures for the periods presented.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which, among other things, requires recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Additionally, the ASU requires the classification of all cash payments on leases within operating activities in the Consolidated Statement of Cash Flows. ASU 2016-02 is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2018. Early adoption is permitted. We anticipate an increase in the recognition of right-of-use assets and lease liabilities, however, we do not believe that ASU 2016-02 will have a material impact on our consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues including, among other things, the classification of debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2017. We have adopted this standard, which did not have a material impact, on our consolidated financial statements and related disclosures for the periods presented.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230),” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017. We have adopted this standard, which did not have a material impact, on our consolidated financial statements and related disclosures for the periods presented.

In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. This amendment expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees and is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2018. We do not believe that ASU 2018-07 will have a material impact on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to Disclosure Requirements for Fair Value Measurement”, which is intended to improve the effectiveness of fair value measurement disclosures. The amendment, among other things, affects certain disclosure requirements related to transfers between level 1 and level 2 of the fair value hierarchy, and level 3

 

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fair value measurements as they relate to valuation process, unrealized gains and losses, measurement uncertainty, and significant unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any interim or annual period. We do not believe that ASU 2018-13 will have a material impact on our consolidated financial statements and disclosures.

In August 2018, the SEC issued Final Rule Release No. 33-10532—“Disclosure Update and Simplification.” This rule amends various SEC disclosure requirements that have been determined to be redundant, duplicative, overlapping, outdated, or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in stockholders’ equity. This final rule is effective on November 5, 2018. We do not believe that the adoption of this standard will have a material impact on our consolidated financial statements and disclosures.

Subsequent Events

Distribution Declaration

On October 24, 2018, our Board of Directors declared a cash distribution of $0.31 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. This distribution represents our fifty-third consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.95 per share.

In addition to the cash distribution, on October 24, 2018, our Board of Directors declared a supplemental distribution of $0.02 per share to be paid on November 19, 2018 to stockholders of record as of November 12, 2018. The total cumulative distribution to date, including the supplemental distribution, is $14.97 per share.

ATM Equity Program Issuances

We did not sell any shares subsequent to September 30, 2018 and as of November 6, 2018, under the Equity Distribution Agreement. As of November 6, 2018, approximately 5.4 million shares remain available for issuance and sale under the Equity Distribution Agreement.

2021 Asset-Backed Notes Repayment

In July 2018, changes in the payment schedule of obligors in the 2021 Asset-Backed Notes collateral pool triggered a rapid amortization event in accordance with the sale and servicing agreement for the 2021 Asset-Backed Notes. Due to this event, the 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.

2027 Asset-Backed Notes

On November 1, 2018, we completed a term debt securitization in connection with which an affiliate of ours made an offering of $200,000,000 in aggregate principal amount of 2027 Asset-Backed Notes. The 2027 Asset-Backed Notes were rated A(sf) by KBRA.

The 2027 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2018-1 pursuant to a note purchase agreement, dated as of October 25, 2018, by and among us, the 2018 Trust Depositor, the 2018 Securitization Issuer, and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and are to be serviced by us. The outstanding principal balance of the pool of loans as of September 30, 2018 was approximately $284,761,977. Interest on the 2027 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.605% per annum. The 2027 Asset-Backed Notes have a stated maturity of November 22, 2027.

 

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Portfolio Company Developments

As of November 6, 2018, we held warrants or equity positions in two companies that have filed registration statements in contemplation of potential initial public offerings, including:

 

   

Stealth Bio Therapeutics filed a public registration with the Hong Kong Exchange (HKEX) in contemplation of a potential public offering.

 

   

One portfolio company filed confidentially under the JOBS Act.

There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all. Subsequent to September 30, 2018 and as of November 6, 2018, there were no companies that announced or completed liquidity events.

Quantitative and Qualitative Disclosures about Market 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, cash and cash equivalents and idle fund 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 September 30, 2018, approximately 97.0% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. Our borrowings under the Credit Facilities bear interest at a floating rate and the borrowings under our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, and 2022 Convertible Notes bear interest at a fixed rate. 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 September 30, 2018, 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
     EPS(1)  

25

   $ 4,303      $ 46      $ 4,257      $ 0.04  

50

   $ 7,921      $ 93      $ 7,828      $ 0.08  

75

   $ 11,720      $ 139      $ 11,581      $ 0.12  

100

   $ 15,518      $ 186      $ 15,332      $ 0.16  

200

   $ 31,188      $ 372      $ 30,816      $ 0.32  

300

   $ 45,681      $ 558      $ 45,123      $ 0.47  

 

(1)

Earnings per share impact calculated based on basic weighted average shares outstanding of 95,460.

We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations (and foreign currency) by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates (and foreign currency), 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 nine months ended September 30, 2018, we did not engage in interest rate (or foreign currency) 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 SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes and Credit Facilities that could affect the net increase in net assets resulting from operations, or net

 

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income. It also does not assume any repayments from borrowers. 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 SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” and “Note 4—Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement.

 

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SENIOR SECURITIES

Information about our senior securities is shown in the following table for the periods as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, and 2008. The information as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011 and 2010 has been derived from our audited financial statements for these periods, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The report of PricewaterhouseCoopers LLP on the senior securities table as of December 31, 2017 is attached as an exhibit to the registration statement of which this prospectus is a part. The “N/A” indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

Securitized Credit Facility with Wells Fargo Capital Finance

        

December 31, 2008

   $ 89,582,000      $ 6,689        N/A  

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011

   $ 10,186,830      $ 73,369        N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015

   $ 50,000,000      $ 26,352        N/A  

December 31, 2016

   $ 5,015,620      $ 290,234        N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 38,511,640      $ 47,081        N/A  

Securitized Credit Facility with Union Bank, NA

        

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011(6)

     —          —          N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015(6)

     —          —          N/A  

December 31, 2016(6)

     —          —          N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 42,381,906      $ 42,782        N/A  

Small Business Administration Debentures (HT II)(4)

        

December 31, 2008

   $ 127,200,000      $ 4,711        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 150,000,000      $ 3,942        N/A  

December 31, 2011

   $ 125,000,000      $ 5,979        N/A  

December 31, 2012

   $ 76,000,000      $ 14,786        N/A  

December 31, 2013

   $ 76,000,000      $ 16,075        N/A  

December 31, 2014

   $ 41,200,000      $ 31,535        N/A  

December 31, 2015

   $ 41,200,000      $ 31,981        N/A  

December 31, 2016

   $ 41,200,000      $ 35,333        N/A  

December 31, 2017

   $ 41,200,000      $ 39,814        N/A  

December 31, 2018 (as of September 30, 2018, unaudited)

     —          —          N/A  

Small Business Administration Debentures (HT III)(5)

        

December 31, 2010

   $ 20,000,000      $ 29,564        N/A  

December 31, 2011

   $ 100,000,000      $ 7,474        N/A  

December 31, 2012

   $ 149,000,000      $ 7,542        N/A  

December 31, 2013

   $ 149,000,000      $ 8,199        N/A  

December 31, 2014

   $ 149,000,000      $ 8,720        N/A  

December 31, 2015

   $ 149,000,000      $ 8,843        N/A  

December 31, 2016

   $ 149,000,000      $ 9,770        N/A  

December 31, 2017

   $ 149,000,000      $ 11,009        N/A  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 149,000,000      $ 12,169        N/A  

 

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Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

2016 Convertible Notes

        

December 31, 2011

   $ 75,000,000      $ 10,623      $ 885  

December 31, 2012

   $ 75,000,000      $ 15,731      $ 1,038  

December 31, 2013

   $ 75,000,000      $ 16,847      $ 1,403  

December 31, 2014

   $ 17,674,000      $ 74,905      $ 1,290  

December 31, 2015

   $ 17,604,000      $ 74,847      $ 1,110  

December 31, 2016

     —          —          —    

April 2019 Notes

        

December 31, 2012

   $ 84,489,500      $ 13,300      $ 986  

December 31, 2013

   $ 84,489,500      $ 14,460      $ 1,021  

December 31, 2014

   $ 84,489,500      $ 15,377      $ 1,023  

December 31, 2015

   $ 64,489,500      $ 20,431      $ 1,017  

December 31, 2016

   $ 64,489,500      $ 22,573      $ 1,022  

December 31, 2017

     —          —          —    

September 2019 Notes

        

December 31, 2012

   $ 85,875,000      $ 13,086      $ 1,003  

December 31, 2013

   $ 85,875,000      $ 14,227      $ 1,016  

December 31, 2014

   $ 85,875,000      $ 15,129      $ 1,026  

December 31, 2015

   $ 45,875,000      $ 28,722      $ 1,009  

December 31, 2016

   $ 45,875,000      $ 31,732      $ 1,023  

December 31, 2017

     —          —          —    

2024 Notes

        

December 31, 2014

   $ 103,000,000      $ 12,614      $ 1,010  

December 31, 2015

   $ 103,000,000      $ 12,792      $ 1,014  

December 31, 2016

   $ 252,873,175      $ 5,757      $ 1,016  

December 31, 2017

   $ 183,509,600      $ 8,939      $ 1,025  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 83,509,600      $ 21,712      $ 1,011  

2025 Notes

        

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 75,000,000      $ 24,176      $ 968  

2033 Notes

        

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 40,000,000      $ 45,329      $ 964  

2017 Asset-Backed Notes

        

December 31, 2012

   $ 129,300,000      $ 8,691      $ 1,000  

December 31, 2013

   $ 89,556,972      $ 13,642      $ 1,004  

December 31, 2014

   $ 16,049,144      $ 80,953      $ 1,375  

December 31, 2015

     —          —          —    

2021 Asset-Backed Notes

        

December 31, 2014

   $ 129,300,000      $ 10,048      $ 1,000  

December 31, 2015

   $ 129,300,000      $ 10,190      $ 996  

December 31, 2016

   $ 109,205,263      $ 13,330      $ 1,002  

December 31, 2017

   $ 49,152,504      $ 33,372      $ 1,001  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 3,515,411      $ 515,779      $ 1,000  

2022 Convertible Notes

        

December 31, 2017

   $ 230,000,000      $ 7,132      $ 1,028  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 230,000,000      $ 7,883      $ 969  

2022 Notes

        

December 31, 2017

   $ 150,000,000      $ 10,935      $ 1,014  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 150,000,000      $ 12,088      $ 962  

Total Senior Securities(7)

        

December 31, 2008

   $ 216,782,000      $ 2,764        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 170,000,000      $ 3,478        N/A  

December 31, 2011

   $ 310,186,830      $ 2,409        N/A  

December 31, 2012

   $ 599,664,500      $ 1,874        N/A  

December 31, 2013

   $ 559,921,472      $ 2,182        N/A  

December 31, 2014

   $ 626,587,644      $ 2,073        N/A  

December 31, 2015

   $ 600,468,500      $ 2,194        N/A  

December 31, 2016

   $ 667,658,558      $ 2,180        N/A  

December 31, 2017

   $ 802,862,104      $ 2,043        N/A  

December 31, 2018 (as of September 30, 2018, unaudited)

   $ 811,918,557      $ 2,233        N/A  

 

(1)

Total amount of each class of senior securities outstanding at the end of the period presented.

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, including senior securities not subject to asset coverage requirements

 

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  under the 1940 Act due to exemptive relief from the SEC, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage per Unit.
(3)

Not applicable because senior securities are not registered for public trading.

(4)

Issued by HT II, one of our prior SBIC subsidiaries, to the SBA. On July 13, 2018, we completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(5)

Issued by HT III, our SBIC subsidiary, to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(6)

The Company’s Wells Facility and Union Bank Facility had no borrowings outstanding during the periods noted above.

(7)

The total senior securities and Asset Coverage per Unit shown for those securities do not represent the asset coverage ratio requirement under the 1940 Act because the presentation includes senior securities not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC. As of September 30, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 251.0% excluding our SBA debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio.

 

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MANAGEMENT

On August 16, 2018, Gerard R. Waldt, Jr., Controller and Interim Chief Accounting Officer, tendered his resignation from the Company. Mr. Waldt’s resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. David Lund, the Company’s current Interim Chief Financial Officer, assumed the duties of Interim Chief Accounting Officer effective as of August 23, 2018. The resignation of Mr. Waldt was effective on September 7, 2018.

LEGAL MATTERS

Certain legal matters in connection with the securities offered hereby will be passed upon for us by Dechert LLP, New York, NY. Certain legal matters in connection with the securities offered hereby will be passed upon for JMP Securities by Skadden, Arps, Slate, Meagher & Flom LLP.

EXPERTS

The consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Annual Report on Internal Control over Financial Reporting) as of December 31, 2017 included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our securities offered by this prospectus supplement and the accompanying prospectus. The registration statement contains additional information about us and our securities being offered by this prospectus supplement and the accompanying prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus supplement and accompanying prospectus form a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at 202-551-8090. The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s Internet website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, 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, Washington, D.C. 20549-0102.

 

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INDEX TO FINANCIAL STATEMENTS

 

UNAUDITED FINANCIAL STATEMENTS

  

Consolidated Statements of Assets and Liabilities as of September  30, 2018 and December 31, 2017 (unaudited)

     S-58  

Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)

     S-60  

Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2018 and 2017 (unaudited)

     S-61  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

     S-62  

Consolidated Schedule of Investments as of September  30, 2018 (unaudited)

     S-64  

Consolidated Schedule of Investments as of December  31, 2017 (unaudited)

     S-81  

Notes to Consolidated Financial Statements (unaudited)

     S-98  

Consolidated Schedule of Investments In and Advances to Affiliates as of September 30, 2018

     S-142  

 

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HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

    September 30, 2018     December 31, 2017  

Assets

   

Investments:

   

Non-control/Non-affiliate investments (cost of $1,663,658 and $1,506,454, respectively)

  $ 1,670,034     $ 1,491,458  

Control investments (cost of $64,630 and $25,419, respectively)

    62,387       19,461  

Affiliate investments (cost of $84,821 and $87,956, respectively)

    28,095       31,295  
 

 

 

   

 

 

 

Total investments in securities, at value (cost of $1,813,109 and $1,619,829, respectively)

    1,760,516       1,542,214  

Cash and cash equivalents

    43,212       91,309  

Restricted cash

    2,429       3,686  

Interest receivable

    15,722       12,262  

Other assets

    1,175       5,244  
 

 

 

   

 

 

 

Total assets

  $ 1,823,054     $ 1,654,715  
 

 

 

   

 

 

 

Liabilities

   

Accounts payable and accrued liabilities

  $ 21,473     $ 26,896  

SBA Debentures, net (principal of $149,000 and $190,200, respectively)(1)

    147,527       188,141  

2022 Notes, net (principal of $150,000 and $150,000, respectively)(1)

    147,859       147,572  

2024 Notes, net (principal of $83,510 and $183,510, respectively)(1)

    81,791       179,001  

2025 Notes, net (principal of $75,000 and $0, respectively)(1)

    72,495       —    

2033 Notes, net (principal of $40,000 and $0, respectively)(1)

    38,752       —    

2021 Asset-Backed Notes, net (principal of $3,515 and $49,153, respectively)(1)

    3,423       48,650  

2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively)(1)

    224,660       223,488  

Credit Facilities

    80,894       —    
 

 

 

   

 

 

 

Total liabilities

  $ 818,874     $ 813,748  

Net assets consist of:

   

Common stock, par value

    96       85  

Capital in excess of par value

    1,060,875       908,501  

Unrealized appreciation (depreciation) on investments(2)

    (53,784     (79,760

Accumulated undistributed realized gains (losses) on investments

    (30,855     (20,374

Undistributed net investment income

    27,848       32,515  
 

 

 

   

 

 

 

Total net assets

  $ 1,004,180     $ 840,967  
 

 

 

   

 

 

 

Total liabilities and net assets

  $ 1,823,054     $ 1,654,715  
 

 

 

   

 

 

 

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

    96,751       84,424  

Net asset value per share

  $ 10.38     $ 9.96  

 

(1)

The Company’s SBA Debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes and 2022 Convertible Notes, 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 $1.2 million and $2.1 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, and estimated taxes payable as of September 30, 2018 and December 31, 2017, respectively.

 

See notes to consolidated financial statements.

 

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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, 2018      December 31, 2017  

Assets

     

Restricted Cash

   $ 2,429      $ 3,686  

Total investments in securities, at value (cost of $86,070 and $146,208, respectively)

     85,965        144,513  
  

 

 

    

 

 

 

Total assets

   $ 88,394      $ 148,199  
  

 

 

    

 

 

 

Liabilities

     

2021 Asset-Backed Notes, net (principal of $3,515 and $49,153, respectively)(1)

   $ 3,423      $ 48,650  
  

 

 

    

 

 

 

Total liabilities

   $ 3,423      $ 48,650  
  

 

 

    

 

 

 

 

(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.

 

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HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2018             2017             2018             2017      

Investment income:

        

Interest income

        

Non-control/Non-affiliate investments

   $ 47,662     $ 41,725     $ 134,031     $ 124,049  

Control investments

     921       464       2,348       1,505  

Affiliate investments

     509       246       1,570       248  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     49,092       42,435       137,949       125,802  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee income

        

Commitment, facility and loan fee income:

        

Non-control/Non-affiliate investments

     1,858       2,239       6,228       7,613  

Control investments

     1       1       1       11  

Affiliate investments

     71       2       263       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commitment, facility and loan fee income

     1,930       2,242       6,492       7,626  
  

 

 

   

 

 

   

 

 

   

 

 

 

One-time fee income:

        

Non-control/Non-affiliate investments

     1,580       1,188       6,423       7,254  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total one-time fee income

     1,580       1,188       6,423       7,254  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     3,510       3,430       12,915       14,880  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     52,602       45,865       150,864       140,682  

Operating expenses:

        

Interest

     9,451       9,185       28,715       28,046  

Loan fees

     1,502       1,314       6,039       5,500  

General and administrative

        

Legal Expenses

     677       925       1,889       3,792  

Other Expenses

     3,044       2,623       9,515       8,570  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

     3,721       3,548       11,404       12,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee compensation:

        

Compensation and benefits

     5,294       6,014       18,069       17,276  

Stock-based compensation

     3,332       1,831       8,498       5,573  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     8,626       7,845       26,567       22,849  

Total operating expenses

     23,300       21,892       72,725       68,757  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     29,302       23,973       78,139       71,925  

Net realized gain (loss) on investments

        

Non-control/Non-affiliate investments

     3,350       (8,911     (4,115     (10,940

Control investments

     —         (15,543     (4,308     (15,989

Affiliate investments

     —         —         (2,058     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss) on investments

     3,350       (24,454     (10,481     (26,929
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

        

Non-control/Non-affiliate investments

     3,967       11,320       22,327       45,420  

Control investments

     378       17,624       3,715       17,703  

Affiliate investments

     (1,368     4,609       (66     (47,486
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     2,977       33,553       25,976       15,637  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     6,327       9,099       15,495       (11,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 35,629     $ 33,072     $ 93,634     $ 60,633  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.31     $ 0.29     $ 0.87     $ 0.87  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets resulting from operations per common share:

        

Basic

   $ 0.37     $ 0.40     $ 1.04     $ 0.73  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.37     $ 0.40     $ 1.04     $ 0.73  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     95,460       82,496       89,100       82,073  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     95,671       82,607       89,212       82,173  
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

        

Basic

   $ 0.31     $ 0.31     $ 0.93     $ 0.93  

See notes to consolidated financial statements.

 

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HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

   

 

Common Stock

    Capital in
excess
of par value
    Unrealized
Appreciation
(Depreciation)
on Investments
    Accumulated
Undistributed
Realized
Gains (Losses)
on Investments
    Undistributed
Net Investment
Income
    Net
Assets
 
    Shares     Par Value  

Balance at December 31, 2016

    79,555     $ 80     $ 839,657     $ (89,025   $ 14,314     $ 22,918     $ 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

    —         —         —         —         (14,893     (62,104     (76,997

Stock-based compensation(1)

    —         —         5,619       —         —         —         5,619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

    83,615     $ 84     $ 904,357     $ (73,388   $ (27,508   $ 32,739     $ 836,284  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    84,424     $ 85     $ 908,501     $ (79,760   $ (20,374   $ 32,515     $ 840,967  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

    —         —         —         25,976       (10,481     78,139       93,634  

Public offering, net of offering expenses

    11,953       11       143,787       —         —         —         143,798  

Issuance of common stock due to stock option exercises

    63       —         704       —         —         —         704  

Retired shares from net issuance

    (57     —         (718     —         —         —         (718

Issuance of common stock under restricted stock plan

    336       —         —         —         —         —         —    

Retired shares for restricted stock vesting

    (76     —         (937     —         —         —         (937

Distributions reinvested in common stock

    108       —         1,372       —         —         —         1,372  

Distributions

    —         —         —         —         —         (82,806     (82,806

Stock-based compensation(1)

    —         —         8,166       —         —         —         8,166  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

    96,751     $ 96     $ 1,060,875     $ (53,784   $ (30,855   $ 27,848     $ 1,004,180  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Stock-based compensation includes $33 and $46 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2018 and 2017, respectively.

See notes to consolidated financial statements.

 

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HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     For the Nine Months
Ended September 30,
 
     2018     2017  

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 93,634     $ 60,633  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchase of investments

     (706,113     (487,321

Principal and fee payments received on investments

     503,971       486,985  

Proceeds from the sale of investments

     17,521       21,945  

Net unrealized depreciation (appreciation) on investments

     (25,976     (15,637

Net realized loss (gain) on investments

     10,481       26,929  

Accretion of paid-in-kind principal

     (7,040     (7,078

Accretion of loan discounts

     (2,961     (5,242

Accretion of loan discount on Convertible Notes

     504       448  

Accretion of loan exit fees

     (12,482     (14,413

Change in deferred loan origination revenue

     3,472       1,083  

Unearned fees related to unfunded commitments

     1,908       441  

Amortization of debt fees and issuance costs

     5,197       4,534  

Depreciation

     147       153  

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

     8,166       5,619  

Change in operating assets and liabilities:

    

Interest and fees receivable

     (3,460     1,107  

Prepaid expenses and other assets

     2,141       (1,100

Accounts payable

     (187     —    

Accrued liabilities

     (4,282     (2,457
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (115,359     76,629  

Cash flows from investing activities:

    

Purchases of capital equipment

     (325     (127
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (325     (127

Cash flows from financing activities:

    

Issuance of common stock, net

     143,498       56,334  

Retirement of employee shares

     (651     (2,442

Distributions paid

     (81,434     (75,217

Issuance of 2022 Convertible Notes

     —         230,000  

Issuance of 2024 Notes

     —         5,637  

Issuance of 2025 Notes

     75,000       —    

Issuance of 2033 Notes

     40,000       —    

Repayments of 2019 Notes

     —         (110,364

Repayments of 2024 Notes

     (100,000     —    

Repayments of 2021 Asset-Backed Notes

     (45,637     (43,729

Repayments of Long-Term SBA Debentures

     (41,200     —    

Borrowings of credit facilities

     216,109       8,497  

Repayments of credit facilities

     (135,216     (13,513

Cash paid for debt issuance costs

     (3,978     (4,662

Fees paid for credit facilities and debentures

     (161     (28
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     66,330       50,513  

Net increase (decrease) in cash, cash equivalents and restricted cash

     (49,354     127,015  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

     94,995       21,366  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 45,641     $ 148,381  
  

 

 

   

 

 

 

Supplemental non-cash investing and financing activities:

    

Distributions reinvested

     1,372       1,780  

 

(1)

Stock-based compensation includes $33 and $46 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2018 and 2017, respectively.

See notes to consolidated financial statements.

 

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The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Statement of Assets and Liabilities that sum to the total of the same such amounts in the Consolidated Statement of Cash Flows:

 

     For the Nine Months
Ended September 30,
 

(Dollars in thousands)

       2018              2017      

Cash and cash equivalents

   $ 43,212      $ 140,568  

Restricted cash

     2,429        7,813  
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash presented in the Consolidated Statements of Cash Flows

   $ 45,641      $ 148,381  
  

 

 

    

 

 

 

See “Note 2 – Summary of Significant Accounting Policies” and “Note 11- Recent Accounting Pronouncements” for a description of restricted cash and cash equivalents.

 

 

See notes to consolidated financial statements.

 

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HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Debt Investments

 

 

Biotechnology Tools

 

 

Under 1 Year Maturity

 

 

Exicure, Inc.(12)

  Biotechnology Tools     Senior Secured     September 2019  

Interest rate PRIME + 6.45%

or Floor rate of 9.95%, 3.85% Exit Fee

  $ 4,999     $ 5,171     $       5,171  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    5,171       5,171  
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.51%)*

 

    5,171       5,171  
           

 

 

   

 

 

 

Consumer & Business Products

             

1-5 Years Maturity

             

WHOOP, INC.(12)

  Consumer & Business Products     Senior Secured     July 2021  

Interest rate PRIME + 3.75%

or Floor rate of 8.50%, 6.95% Exit Fee

  $ 6,000       5,970       5,970  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,970       5,970  
           

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.59%)*

 

    5,970       5,970  
           

 

 

   

 

 

 

Diversified Financial Services

             

1-5 Years Maturity

 

   

Gibraltar Business Capital, LLC(7)

  Diversified Financial Services     Unsecured     March 2023   Interest rate FIXED 14.50%   $ 15,000       14,718       14,865  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    14,718       14,865  
           

 

 

   

 

 

 

Subtotal: Diversified Financial Services (1.48%)*

 

    14,718       14,865  
           

 

 

   

 

 

 

Drug Delivery

             

Under 1 Year Maturity

 

   

Agile Therapeutics, Inc.(11)

  Drug Delivery     Senior Secured     December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 5,939       6,523       6,523  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    6,523       6,523  
           

 

 

   

 

 

 

1-5 Years Maturity

             

AcelRx Pharmaceuticals, Inc.(11)

  Drug Delivery     Senior Secured     March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 12,943       13,786       13,733  

Antares Pharma Inc.(10)(15)

  Drug Delivery     Senior Secured     July 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.25%, 4.25% Exit Fee

  $ 25,000       25,233       25,304  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    39,019       39,037  
           

 

 

   

 

 

 

Subtotal: Drug Delivery (4.54%)*

 

    45,542       45,560  
           

 

 

   

 

 

 

Drug Discovery & Development

           

Under 1 Year Maturity

           

Auris Medical Holding, AG(5)(10)

  Drug Discovery & Development     Senior Secured     February 2019  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 1,527       2,209       2,209  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development     Senior Secured     September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 7.82% Exit Fee

  $ 5,581       5,996       5,996  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development     Senior Secured     December 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 2,277       2,561       65  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    10,766       8,270  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

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Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

1-5 Years Maturity

           

Acacia Pharma Inc.(10)

  Drug Discovery & Development     Senior Secured     January 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.25%, 3.95% Exit Fee

  $ 10,000     $   9,815     $ 9,815  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development     Senior Secured     July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       10,053       9,954  
  Drug Discovery & Development     Senior Secured     July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       10,144       10,123  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       20,197       20,077  

Axovant Sciences Ltd.(5)(10)(16)

  Drug Discovery & Development     Senior Secured     March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       54,107       54,262  

BridgeBio Pharma LLC(13)

  Drug Discovery & Development     Senior Secured     January 2022  

Interest rate PRIME + 4.35%

or Floor rate of 9.35%, 6.35% Exit Fee

  $ 35,000       34,850       34,850  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development     Senior Secured     December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 15,000       14,976       14,990  

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development     Senior Secured     May 2021  

Interest rate PRIME + 2.75%

or Floor rate of 7.75%, 10.12% Exit Fee

  $ 14,000       14,762       14,767  

Merrimack Pharmaceuticals, Inc.(12)

  Drug Discovery & Development     Senior Secured     August 2021  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 5.55% Exit Fee

  $ 15,000       14,928       14,928  

Mesoblast(5)(10)

  Drug Discovery & Development     Senior Secured     March 2022  

Interest rate PRIME + 4.95%

or Floor rate of 9.45%, 6.95% Exit Fee

  $ 35,000       35,116       35,519  

Metuchen Pharmaceuticals LLC(14)

  Drug Discovery & Development     Senior Secured     October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 19,902       20,508       20,480  

Motif BioSciences Inc.(5)(10)(15)

  Drug Discovery & Development     Senior Secured     September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,839       14,787  

Myovant Sciences, Ltd.(5)(10)(13)

  Drug Discovery & Development     Senior Secured     November 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 40,000       40,050       39,638  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(10)(15)(16)

  Drug Discovery & Development     Senior Secured     September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,776       40,383  
  Drug Discovery & Development     Senior Secured     September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,210       10,096  
  Drug Discovery & Development     Senior Secured     September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000       10,064       9,980  
  Drug Discovery & Development     Senior Secured     August 2022  

Interest rate PRIME + 2.10%

or Floor rate of 7.85%, 6.95% Exit Fee

  $ 10,000       9,959       9,959  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 70,000       71,009       70,418  

Stealth Bio Therapeutics Corp.(5)(10)(12)

  Drug Discovery & Development     Senior Secured     January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 6.00% Exit Fee

  $ 20,000       20,253       20,059  

Tricida, Inc.(15)(17)

  Drug Discovery & Development     Senior Secured     March 2022  

Interest rate PRIME + 3.35%

or Floor rate of 8.35%, 11.14% Exit Fee

  $ 25,000       25,132       25,096  

 

See notes to consolidated financial statements.

 

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HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development     Senior Secured     May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000     $ 20,608     $ 20,551  

Verastem, Inc.(12)

  Drug Discovery & Development     Senior Secured     December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000           5,031       5,026  
  Drug Discovery & Development     Senior Secured     December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,059       5,054  
  Drug Discovery & Development     Senior Secured     December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,030       5,023  
  Drug Discovery & Development     Senior Secured     December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 10,000       9,967       9,888  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 25,000       25,087       24,991  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    436,237       435,228  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (44.17%)*

 

    447,003       443,498  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

1-5 Years Maturity

           

908 DEVICES INC.(15)

  Electronics & Computer Hardware     Senior Secured     September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,080       10,099  

Glo AB(5)(10)(13)(14)

  Electronics & Computer Hardware     Senior Secured     February 2021  

Interest rate PRIME + 6.20%

or Floor rate of 10.45%,

PIK Interest 1.75%, 2.95% Exit Fee

  $ 12,138       12,153       12,214  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    22,233       22,313  
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (2.22%)*

 

    22,233       22,313  
         

 

 

   

 

 

 

Healthcare Services, Other

           

1-5 Years Maturity

           

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other     Senior Secured     February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 20,346       20,211       20,116  
  Healthcare Services, Other     Senior Secured     February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,076       5,047       5,020  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 25,422       25,258       25,136  

Oak Street Health(12)

  Healthcare Services, Other     Senior Secured     September 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.75%, 5.95% Exit Fee

  $ 30,000       30,320       30,127  

PH Group Holdings(13)

  Healthcare Services, Other     Senior Secured     September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,929       19,946  
  Healthcare Services, Other     Senior Secured     September 2020