Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

htgc-10q_20200630.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 June 30, 2020

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 July 27, 2020, there were 114,229,759 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 Statements of Assets and Liabilities as of June 30, 2020 and December 31, 2019 (unaudited)

  

3

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)

  

5

 

 

 

Consolidated Statements of Changes in Net Assets for the three and six months ended June 30, 2020 and 2019 (unaudited)

  

6

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

  

8

 

 

 

Consolidated Schedule of Investments as of June 30, 2020 (unaudited)

  

10

 

 

 

Consolidated Schedule of Investments as of December 31, 2019 (unaudited)

  

21

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

31

Item 2.

 

 

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

  

65

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

83

Item 4.

 

 

Controls and Procedures

  

84

 

PART II. OTHER INFORMATION

  

85

 

Item 1.

 

Legal Proceedings

  

85

Item 1A.

 

 

Risk Factors

 

85

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

87

Item 3.

 

Defaults Upon Senior Securities

  

87

Item 4.

 

 

Mine Safety Disclosures

  

87

Item 5.

 

 

Other Information

  

87

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

88

 

SIGNATURES

  

91

 

 

 

 

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, unless the context otherwise requires.

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(unaudited)

(in thousands, except per share data)

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $2,347,547 and $2,248,524, respectively)

 

$

2,297,180

 

 

$

2,232,972

 

Control investments (cost of $65,227 and $65,333, respectively)

 

 

54,431

 

 

 

59,746

 

Affiliate investments (cost of $88,584 and $88,175, respectively)

 

 

11,910

 

 

 

21,808

 

Total investments in securities, at value (cost of $2,501,357 and $2,402,032, respectively)

 

 

2,363,521

 

 

 

2,314,526

 

Cash and cash equivalents

 

 

35,884

 

 

 

64,393

 

Restricted cash

 

 

33,599

 

 

 

50,603

 

Interest receivable

 

 

19,458

 

 

 

20,207

 

Right of use asset

 

 

10,492

 

 

 

11,659

 

Other assets

 

 

5,547

 

 

 

580

 

Total assets

 

$

2,468,501

 

 

$

2,461,968

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

29,162

 

 

$

30,306

 

Operating lease liability

 

 

10,178

 

 

 

11,538

 

SBA Debentures, net (principal of $110,250 and $149,000, respectively) (1)

 

 

109,808

 

 

 

148,165

 

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

 

 

148,776

 

 

 

148,514

 

July 2024 Notes, net (principal of $105,000 and $105,000, respectively) (1)

 

 

103,795

 

 

 

103,685

 

February 2025 Notes, net (principal of $50,000 and $0, respectively) (1)

 

 

49,465

 

 

 

 

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

 

 

73,161

 

 

 

72,970

 

June 2025 Notes, net (principal of $70,000 and $0, respectively) (1)

 

 

69,217

 

 

 

 

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

 

 

38,555

 

 

 

38,501

 

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

 

 

197,448

 

 

 

197,312

 

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

 

 

247,511

 

 

 

247,395

 

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

 

 

227,395

 

 

 

226,614

 

Credit Facilities

 

 

 

 

 

103,919

 

Total liabilities

 

$

1,304,471

 

 

$

1,328,919

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

115

 

 

 

108

 

Capital in excess of par value

 

 

1,223,263

 

 

 

1,145,106

 

Total distributable earnings (loss)

 

 

(59,348

)

 

 

(12,165

)

Total net assets

 

$

1,164,030

 

 

$

1,133,049

 

Total liabilities and net assets

 

$

2,468,501

 

 

$

2,461,968

 

 

 

 

 

 

 

 

 

 

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

 

 

114,230

 

 

 

107,364

 

Net asset value per share

 

$

10.19

 

 

$

10.55

 

 

(1)

The Company’s SBA debentures, 2022 Notes, July 2024 Notes, February 2025 Notes, June 2025 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”.

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 Statements of Assets and Liabilities above.

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

 

33,599

 

 

$

50,603

 

2027 Asset-Backed Notes, investments in securities, at value (cost of $297,358 and $283,891, respectively)

 

 

296,249

 

 

 

283,658

 

2028 Asset-Backed Notes, investments in securities, at value (cost of $352,401 and $347,295, respectively)

 

 

351,871

 

 

 

347,929

 

Total assets

 

$

681,719

 

 

$

682,190

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

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

 

$

197,448

 

 

$

197,312

 

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

 

 

247,511

 

 

 

247,395

 

Total liabilities

 

$

444,959

 

 

$

444,707

 

 

(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 STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

62,667

 

 

$

59,932

 

 

$

128,005

 

 

$

113,872

 

Control investments

 

 

731

 

 

 

1,040

 

 

 

1,377

 

 

 

2,064

 

Affiliate investments

 

 

157

 

 

 

738

 

 

 

377

 

 

 

1,247

 

Total interest income

 

 

63,555

 

 

 

61,710

 

 

 

129,759

 

 

 

117,183

 

Fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment, facility and loan fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

3,511

 

 

 

5,028

 

 

 

7,707

 

 

 

7,478

 

Control investments

 

 

5

 

 

 

4

 

 

 

10

 

 

 

8

 

Affiliate investments

 

 

 

 

 

72

 

 

 

 

 

 

160

 

Total commitment, facility and loan fee income

 

 

3,516

 

 

 

5,104

 

 

 

7,717

 

 

 

7,646

 

One-time fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

897

 

 

 

2,450

 

 

 

4,111

 

 

 

3,230

 

Total one-time fee income

 

 

897

 

 

 

2,450

 

 

 

4,111

 

 

 

3,230

 

Total fee income

 

 

4,413

 

 

 

7,554

 

 

 

11,828

 

 

 

10,876

 

Total investment income

 

 

67,968

 

 

 

69,264

 

 

 

141,587

 

 

 

128,059

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

15,076

 

 

 

13,515

 

 

 

29,608

 

 

 

26,070

 

Loan fees

 

 

1,650

 

 

 

1,646

 

 

 

3,444

 

 

 

4,655

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal expenses

 

 

991

 

 

 

1,963

 

 

 

1,890

 

 

 

2,626

 

Tax expenses

 

 

899

 

 

 

593

 

 

 

2,034

 

 

 

891

 

Other expenses

 

 

3,973

 

 

 

3,239

 

 

 

7,998

 

 

 

6,431

 

Total general and administrative

 

 

5,863

 

 

 

5,795

 

 

 

11,922

 

 

 

9,948

 

Employee compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

7,180

 

 

 

9,190

 

 

 

15,394

 

 

 

15,813

 

Stock-based compensation

 

 

2,515

 

 

 

3,851

 

 

 

4,955

 

 

 

7,273

 

Total employee compensation

 

 

9,695

 

 

 

13,041

 

 

 

20,349

 

 

 

23,086

 

Total operating expenses

 

 

32,284

 

 

 

33,997

 

 

 

65,323

 

 

 

63,759

 

Net investment income

 

 

35,684

 

 

 

35,267

 

 

 

76,264

 

 

 

64,300

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

141

 

 

 

4,271

 

 

 

7,108

 

 

 

8,826

 

Total net realized gain (loss) on investments

 

 

141

 

 

 

4,271

 

 

 

7,108

 

 

 

8,826

 

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

23,613

 

 

 

9,794

 

 

 

(34,816

)

 

 

41,884

 

Control investments

 

 

2,642

 

 

 

808

 

 

 

(5,209

)

 

 

(2,068

)

Affiliate investments

 

 

(315

)

 

 

(2,009

)

 

 

(10,305

)

 

 

(3,226

)

Total net unrealized appreciation (depreciation) on investments

 

 

25,940

 

 

 

8,593

 

 

 

(50,330

)

 

 

36,590

 

Total net realized and unrealized gain (loss)

 

 

26,081

 

 

 

12,864

 

 

 

(43,222

)

 

 

45,416

 

Net increase (decrease) in net assets resulting from operations

 

$

61,765

 

 

$

48,131

 

 

$

33,042

 

 

$

109,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Basic

 

$

0.32

 

 

$

0.36

 

 

$

0.69

 

 

$

0.66

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

 

$

0.49

 

 

$

0.29

 

 

$

1.13

 

Diluted

 

$

0.55

 

 

$

0.49

 

 

$

0.29

 

 

$

1.12

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

111,558

 

 

 

98,223

 

 

 

110,256

 

 

 

97,226

 

Diluted

 

 

111,729

 

 

 

98,737

 

 

 

110,504

 

 

 

97,630

 

Distributions paid per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

0.33

 

 

$

0.72

 

 

$

0.64

 

See notes to consolidated financial statements

5


 

 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Net

 

For the Three Months Ended June 30, 2020

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)

 

 

Assets

 

Balance at March 31, 2020

 

110,601

 

 

$

111

 

 

$

1,182,080

 

 

$

(85,111

)

 

$

1,097,080

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

61,765

 

 

 

61,765

 

Public offering, net of offering expenses

 

3,525

 

 

 

4

 

 

 

38,696

 

 

 

 

 

 

38,700

 

Issuance of common stock under restricted stock plan

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(10

)

 

 

 

 

 

(282

)

 

 

 

 

 

(282

)

Distributions reinvested in common stock

 

62

 

 

 

 

 

 

643

 

 

 

 

 

 

643

 

Distributions

 

 

 

 

 

 

 

 

 

 

(36,002

)

 

 

(36,002

)

Stock-based compensation (1)

 

 

 

 

 

 

 

2,126

 

 

 

 

 

 

2,126

 

Balance at June 30, 2020

 

114,230

 

 

$

115

 

 

$

1,223,263

 

 

$

(59,348

)

 

$

1,164,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

107,364

 

 

$

108

 

 

$

1,145,106

 

 

$

(12,165

)

 

$

1,133,049

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

33,042

 

 

 

33,042

 

Public offering, net of offering expenses

 

5,966

 

 

 

6

 

 

 

73,656

 

 

 

 

 

 

73,662

 

Issuance of common stock due to stock option exercises

 

29

 

 

 

 

 

 

362

 

 

 

 

 

 

362

 

Retired shares from net issuance

 

(24

)

 

 

 

 

 

(376

)

 

 

 

 

 

(376

)

Issuance of common stock under restricted stock plan

 

801

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(27

)

 

 

 

 

 

(1,162

)

 

 

 

 

 

(1,162

)

Distributions reinvested in common stock

 

121

 

 

 

 

 

 

1,470

 

 

 

 

 

 

1,470

 

Distributions

 

 

 

 

 

 

 

 

 

 

(80,225

)

 

 

(80,225

)

Stock-based compensation (1)

 

 

 

 

 

 

 

4,208

 

 

 

 

 

 

4,208

 

Balance at June 30, 2020

 

114,230

 

 

$

115

 

 

$

1,223,263

 

 

$

(59,348

)

 

$

1,164,030

 

 

(1)

Stock-based compensation includes $23 and $44 of restricted stock and option expense related to director compensation for the three and six months ended June 30, 2020.

 

See notes to consolidated financial statements

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Treasury

 

 

Net

 

For the Three Months Ended June 30, 2019

 

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)(2)

 

 

Stock

 

 

Assets

 

Balance at March 31, 2019

 

 

96,543

 

 

$

96

 

 

$

1,051,427

 

 

$

(61,174

)

 

$

 

 

$

990,349

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

48,131

 

 

 

 

 

 

48,131

 

Public offering, net of offering expenses

 

 

7,700

 

 

 

8

 

 

 

95,436

 

 

 

 

 

 

 

 

 

95,444

 

Issuance of common stock due to stock option exercises

 

 

1

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Retired shares from net issuance

 

 

(1

)

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

(7

)

Issuance of common stock under restricted stock plan

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock under repurchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(13

)

 

 

 

 

 

(196

)

 

 

 

 

 

 

 

 

(196

)

Distributions reinvested in common stock

 

 

42

 

 

 

 

 

 

557

 

 

 

 

 

 

 

 

 

557

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(32,151

)

 

 

 

 

 

(32,151

)

Stock-based compensation (1)

 

 

 

 

 

 

 

 

2,550

 

 

 

 

 

 

 

 

 

2,550

 

Balance at June 30, 2019

 

 

104,282

 

 

$

104

 

 

$

1,149,774

 

 

$

(45,194

)

 

$

 

 

$

1,104,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 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

 

 

 

 

 

 

 

 

 

 

 

109,716

 

 

 

 

 

 

109,716

 

Public offering, net of offering expenses

 

 

7,700

 

 

 

8

 

 

 

95,415

 

 

 

 

 

 

 

 

 

95,423

 

Issuance of common stock due to stock option exercises

 

 

14

 

 

 

 

 

 

161

 

 

 

 

 

 

 

 

 

161

 

Retired shares from net issuance

 

 

(12

)

 

 

 

 

 

(166

)