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Section 1: 10-Q (10-Q)

htgc-10q_20190930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For The Quarterly Period Ended September 30, 2019

OR

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

Commission File Number: 814-00702

 

HERCULES CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

 

74-3113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

 

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

 

94301

(Zip Code)

 

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $0.001 per share

HTGC

New York Stock Exchange

5.25% Notes due 2025

HCXZ

New York Stock Exchange

6.25% Notes due 2033

HCXY

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

 

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

 

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

On October 25, 2019, there were 104,633,262 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 


 

HERCULES CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

3

 

Item 1.

 

 

Consolidated Financial Statements

  

3

 

 

 

Consolidated Statement of Assets and Liabilities as of September 30, 2019 and December 31, 2018 (unaudited)

  

3

 

 

 

Consolidated Statement of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)

  

5

 

 

 

Consolidated Statement of Changes in Net Assets for the three and nine months ended September 30, 2019 and 2018 (unaudited)

  

6

 

 

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)

  

8

 

 

 

Consolidated Schedule of Investments as of September 30, 2019 (unaudited)

  

10

 

 

 

Consolidated Schedule of Investments as of December 31, 2018 (unaudited)

  

20

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

36

Item 2.

 

 

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

  

68

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

84

Item 4.

 

 

Controls and Procedures

  

85

 

PART II. OTHER INFORMATION

  

86

 

Item 1.

 

Legal Proceedings

  

86

Item 1A.

 

 

Risk Factors

 

86

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

89

Item 3.

 

Defaults Upon Senior Securities

  

89

Item 4.

 

 

Mine Safety Disclosures

  

89

Item 5.

 

 

Other Information

  

89

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

90

 

SIGNATURES

  

93

 

 

 

 

2


 

PART I: FINANCIAL INFORMATION

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

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(in thousands, except per share data)

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $2,182,777 and $1,830,725, respectively)

 

$

2,167,682

 

 

$

1,801,258

 

Control investments (cost of $65,319 and $64,799, respectively)

 

 

58,560

 

 

 

57,619

 

Affiliate investments (cost of $88,238 and $85,000, respectively)

 

 

20,964

 

 

 

21,496

 

Total investments in securities, at value (cost of $2,336,334 and $1,980,524, respectively)

 

 

2,247,206

 

 

 

1,880,373

 

Cash and cash equivalents

 

 

21,045

 

 

 

34,212

 

Restricted cash

 

 

14,886

 

 

 

11,645

 

Interest receivable

 

 

19,847

 

 

 

16,959

 

Right of use asset (1)

 

 

12,218

 

 

 

 

Other assets

 

 

1,727

 

 

 

2,002

 

Total assets

 

$

2,316,929

 

 

$

1,945,191

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

25,451

 

 

$

25,961

 

Operating lease liability (1)

 

 

11,922

 

 

 

 

SBA Debentures, net (principal of $149,000 and $149,000, respectively) (2)

 

 

148,038

 

 

 

147,655

 

2022 Notes, net (principal of $150,000 and $150,000, respectively) (2)

 

 

148,383

 

 

 

147,990

 

2024 Notes, net (principal of $0 and $83,510, respectively) (2)

 

 

 

 

 

81,852

 

July 2024 Notes, net (principal of $105,000 and $0, respectively) (2)

 

 

103,723

 

 

 

 

2025 Notes, net (principal of $75,000 and $75,000, respectively) (2)

 

 

72,875

 

 

 

72,590

 

2033 Notes, net (principal of $40,000 and $40,000, respectively) (2)

 

 

38,474

 

 

 

38,427

 

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (2)

 

 

197,241

 

 

 

197,265

 

2028 Asset-Backed Notes, net (principal of $250,000 and $0, respectively) (2)

 

 

247,333

 

 

 

 

2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively) (2)

 

 

226,223

 

 

 

225,051

 

Credit Facilities

 

 

11,585

 

 

 

52,956

 

Total liabilities

 

$

1,231,248

 

 

$

989,747

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

105

 

 

 

96

 

Capital in excess of par value

 

 

1,147,054

 

 

 

1,052,269

 

Total distributable earnings (loss) (3)

 

 

(61,478

)

 

 

(92,859

)

Treasury Stock, at cost, no shares as of September 30, 2019 and 376,466 shares as of December 31, 2018

 

 

 

 

 

(4,062

)

Total net assets

 

$

1,085,681

 

 

$

955,444

 

Total liabilities and net assets

 

$

2,316,929

 

 

$

1,945,191

 

 

 

 

 

 

 

 

 

 

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

 

 

104,636

 

 

 

96,501

 

Net asset value per share

 

$

10.38

 

 

$

9.90

 

 

(1)

See “Note 2 – Summary of Significant Accounting Policies” for a description of Right of use asset and Operating lease liability.

(2)

The Company’s SBA debentures, 2022 Notes, 2024 Notes, July 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 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”.

(3)

Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See Note 11.

 

See notes to consolidated financial statements

3


 

The following table presents the assets and liabilities of our consolidated securitization trusts for the 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes (see Note 4), which are variable interest entities, or VIEs. The assets of our securitization VIEs can only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statement of Assets and Liabilities above.

 

(Dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

$

14,886

 

 

$

11,645

 

2027 Asset-Backed Notes, investments in securities, at value (cost of $296,240 and $279,373, respectively)

 

 

288,524

 

 

 

277,781

 

2028 Asset-Backed Notes, investments in securities, at value (cost of $365,607 and $0, respectively)

 

 

366,033

 

 

 

 

Total assets

 

$

669,443

 

 

$

289,426

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (1)

 

$

197,241

 

 

$

197,265

 

2028 Asset-Backed Notes, net (principal of $250,000 and $0, respectively) (1)

 

 

247,333

 

 

 

 

Total liabilities

 

$

444,574

 

 

$

197,265

 

 

(1)

The Company’s 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4 – Borrowings”.

See notes to consolidated financial statements

4


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

62,696

 

 

$

47,662

 

 

$

176,568

 

 

$

134,031

 

Control investments

 

 

1,055

 

 

 

921

 

 

 

3,119

 

 

 

2,348

 

Affiliate investments

 

 

493

 

 

 

509

 

 

 

1,740

 

 

 

1,570

 

Total interest income

 

 

64,244

 

 

 

49,092

 

 

 

181,427

 

 

 

137,949

 

Fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment, facility and loan fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

3,591

 

 

 

1,858

 

 

 

11,069

 

 

 

6,228

 

Control investments

 

 

5

 

 

 

1

 

 

 

13

 

 

 

1

 

Affiliate investments

 

 

26

 

 

 

71

 

 

 

186

 

 

 

263

 

Total commitment, facility and loan fee income

 

 

3,622

 

 

 

1,930

 

 

 

11,268

 

 

 

6,492

 

One-time fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

1,372

 

 

 

1,580

 

 

 

4,602

 

 

 

6,423

 

Total one-time fee income

 

 

1,372

 

 

 

1,580

 

 

 

4,602

 

 

 

6,423

 

Total fee income

 

 

4,994

 

 

 

3,510

 

 

 

15,870

 

 

 

12,915

 

Total investment income

 

 

69,238

 

 

 

52,602

 

 

 

197,297

 

 

 

150,864

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

13,857

 

 

 

9,451

 

 

 

39,927

 

 

 

28,715

 

Loan fees

 

 

1,138

 

 

 

1,502

 

 

 

5,793

 

 

 

6,039

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal expenses

 

 

1,586

 

 

 

677

 

 

 

4,212

 

 

 

1,889

 

Tax expenses

 

 

815

 

 

 

117

 

 

 

1,706

 

 

 

689

 

Other expenses

 

 

3,967

 

 

 

2,927

 

 

 

10,398

 

 

 

8,826

 

Total general and administrative

 

 

6,368

 

 

 

3,721

 

 

 

16,316

 

 

 

11,404

 

Employee compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

7,559

 

 

 

5,294

 

 

 

23,372

 

 

 

18,069

 

Stock-based compensation

 

 

1,443

 

 

 

3,332

 

 

 

8,716

 

 

 

8,498

 

Total employee compensation

 

 

9,002

 

 

 

8,626

 

 

 

32,088

 

 

 

26,567

 

Total operating expenses

 

 

30,365

 

 

 

23,300

 

 

 

94,124

 

 

 

72,725

 

Net investment income

 

 

38,873

 

 

 

29,302

 

 

 

103,173

 

 

 

78,139

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

4,807

 

 

 

3,350

 

 

 

13,633

 

 

 

(4,115

)

Control investments

 

 

 

 

 

 

 

 

 

 

 

(4,308

)

Affiliate investments

 

 

 

 

 

 

 

 

 

 

 

(2,058

)

Total net realized gain (loss) on investments

 

 

4,807

 

 

 

3,350

 

 

 

13,633

 

 

 

(10,481

)

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

(26,351

)

 

 

3,967

 

 

 

15,533

 

 

 

22,327

 

Control investments

 

 

2,489

 

 

 

378

 

 

 

421

 

 

 

3,715

 

Affiliate investments

 

 

(547

)

 

 

(1,368

)

 

 

(3,773

)

 

 

(66

)

Total net unrealized appreciation (depreciation) on investments

 

 

(24,409

)

 

 

2,977

 

 

 

12,181

 

 

 

25,976

 

Total net realized and unrealized gain (loss)

 

 

(19,602

)

 

 

6,327

 

 

 

25,814

 

 

 

15,495

 

Net increase (decrease) in net assets resulting from operations

 

$

19,271

 

 

$

35,629

 

 

$

128,987

 

 

$

93,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Basic

 

$

0.37

 

 

$

0.31

 

 

$

1.03

 

 

$

0.87

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.37

 

 

$

1.29

 

 

$

1.04

 

Diluted

 

$

0.18

 

 

$

0.37

 

 

$

1.29

 

 

$

1.04

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

104,314

 

 

 

95,460

 

 

 

99,615

 

 

 

89,100

 

Diluted

 

 

104,655

 

 

 

95,671

 

 

 

100,043

 

 

 

89,212

 

Distributions paid per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.31

 

 

$

0.98

 

 

$

0.93

 

 

See notes to consolidated financial statements

5


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Treasury

 

 

Net

 

For the Three Months Ended September 30, 2019

Shares

 

 

Par Value

 

 

of par value

 

 

(loss) (2)

 

 

Stock

 

 

Assets

 

Balance at June 30, 2019

 

104,282

 

 

$

104

 

 

$

1,149,774

 

 

$

(45,194

)

 

$

 

 

$

1,104,684

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

19,271

 

 

 

 

 

 

19,271

 

Public offering, net of offering expenses

 

 

 

 

 

 

 

(331

)

 

 

 

 

 

 

 

 

(331

)

Issuance of common stock due to stock option exercises

 

23

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

300

 

Retired shares from net issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under restricted stock plan

 

770

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(482

)

 

 

 

 

 

(4,471

)

 

 

 

 

 

 

 

 

(4,471

)

Distributions reinvested in common stock

 

43

 

 

 

 

 

 

544

 

 

 

 

 

 

 

 

 

544

 

Distributions

 

 

 

 

 

 

 

 

 

 

(35,555

)

 

 

 

 

 

(35,555

)

Stock-based compensation (1)

 

 

 

 

 

 

 

1,239

 

 

 

 

 

 

 

 

 

1,239

 

Balance at September 30, 2019

 

104,636

 

 

$

105

 

 

$

1,147,054

 

 

$

(61,478

)

 

$

 

 

$

1,085,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

96,501

 

 

$

96

 

 

$

1,052,269

 

 

$

(92,859

)

 

$

(4,062

)

 

$

955,444

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

128,987

 

 

 

 

 

 

128,987

 

Public offering, net of offering expenses

 

7,700

 

 

 

8

 

 

 

95,084

 

 

 

 

 

 

 

 

 

95,092

 

Issuance of common stock due to stock option exercises

 

37

 

 

 

 

 

 

461

 

 

 

 

 

 

 

 

 

461

 

Retired shares from net issuance

 

(12

)

 

 

 

 

 

(166

)

 

 

 

 

 

 

 

 

(166

)

Issuance of common stock under restricted stock plan

 

828

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Retirement of common stock under repurchase plan

 

 

 

 

 

 

 

(4,062

)

 

 

 

 

 

4,062

 

 

 

 

Retired shares for restricted stock vesting

 

(550

)

 

 

 

 

 

(5,358

)

 

 

 

 

 

 

 

 

(5,358

)

Distributions reinvested in common stock

 

132

 

 

 

 

 

 

1,733

 

 

 

 

 

 

 

 

 

1,733

 

Distributions

 

 

 

 

 

 

 

 

 

 

(97,606

)

 

 

 

 

 

(97,606

)

Stock-based compensation (1)

 

 

 

 

 

 

 

7,094

 

 

 

 

 

 

 

 

 

7,094

 

Balance at September 30, 2019

 

104,636

 

 

$

105

 

 

$

1,147,054

 

 

$

(61,478

)

 

$

 

 

$

1,085,681

 

 

(1)

Stock-based compensation includes $25 and $56 of restricted stock and option expense related to director compensation for the three and nine months ended September 30, 2019, respectively.

(2)

Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See Note 11.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

6


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Net

 

For the Three Months Ended September 30, 2018

 

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)(2)

 

 

Assets

 

Balance at June 30, 2018

 

 

94,260

 

 

$

94

 

 

$

1,026,313

 

 

$

(62,710

)

 

$

963,697

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

35,629

 

 

 

35,629

 

Public offering, net of offering expenses

 

 

2,467

 

 

 

2

 

 

 

31,170

 

 

 

 

 

 

31,172

 

Issuance of common stock due to stock option exercises

 

 

25

 

 

 

 

 

 

271

 

 

 

 

 

 

271

 

Retired shares from net issuance

 

 

(21

)

 

 

 

 

 

(271

)

 

 

 

 

 

(271

)

Issuance of common stock under restricted stock plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(19

)

 

 

 

 

 

(249

)

 

 

 

 

 

(249

)

Distributions reinvested in common stock

 

 

39

 

 

 

 

 

 

518

 

 

 

 

 

 

518

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(29,710

)

 

 

(29,710

)

Stock-based compensation (1)

 

 

 

 

 

 

 

 

3,123

 

 

 

 

 

 

3,123

 

Balance at September 30, 2018

 

 

96,751

 

 

$

96

 

 

$

1,060,875

 

 

$

(56,791

)

 

$

1,004,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2018