10-Q 1 htgc-10q_20190630.htm 10-Q htgc-10q_20190630.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, 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 July 29, 2019, there were 104,570,273 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 June 30, 2019 and December 31, 2018 (unaudited)

  

3

 

 

 

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

  

5

 

 

 

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

  

6

 

 

 

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

  

8

 

 

 

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

  

10

 

 

 

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

  

21

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

37

Item 2.

 

 

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

  

74

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

94

Item 4.

 

 

Controls and Procedures

  

95

 

PART II. OTHER INFORMATION

  

96

 

Item 1.

 

Legal Proceedings

  

96

Item 1A.

 

 

Risk Factors

 

96

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

98

Item 3.

 

 Defaults Upon Senior Securities

  

98

Item 4.

 

 

Mine Safety Disclosures

  

98

Item 5.

 

 

Other Information

  

98

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

99

 

SIGNATURES

  

102

 

 

 

 

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)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $2,162,377 and $1,830,725, respectively)

 

$

2,174,691

 

 

$

1,801,258

 

Control investments (cost of $65,143 and $64,799, respectively)

 

 

55,894

 

 

 

57,619

 

Affiliate investments (cost of $88,142 and $85,000, respectively)

 

 

21,414

 

 

 

21,496

 

Total investments in securities, at value (cost of $2,315,662 and $1,980,524, respectively)

 

 

2,251,999

 

 

 

1,880,373

 

Cash and cash equivalents

 

 

13,261

 

 

 

34,212

 

Restricted cash

 

 

15,339

 

 

 

11,645

 

Interest receivable

 

 

18,206

 

 

 

16,959

 

Right of use asset (1)

 

 

8,493

 

 

 

 

Other assets

 

 

4,269

 

 

 

2,002

 

Total assets

 

$

2,311,567

 

 

$

1,945,191

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

27,274

 

 

$

25,961

 

Operating lease liability (1)

 

 

8,530

 

 

 

 

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

 

 

147,910

 

 

 

147,655

 

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

 

 

148,252

 

 

 

147,990

 

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

 

 

 

 

 

81,852

 

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

 

 

72,780

 

 

 

72,590

 

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

 

 

38,447

 

 

 

38,427

 

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

 

 

197,171

 

 

 

197,265

 

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

 

 

247,266

 

 

 

 

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

 

 

225,832

 

 

 

225,051

 

Credit Facilities

 

 

93,421

 

 

 

52,956

 

Total liabilities

 

$

1,206,883

 

 

$

989,747

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

104

 

 

 

96

 

Capital in excess of par value

 

 

1,149,774

 

 

 

1,052,269

 

Total distributable earnings (loss) (3)

 

 

(45,194

)

 

 

(92,859

)

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

 

 

 

 

 

(4,062

)

Total net assets

 

$

1,104,684

 

 

$

955,444

 

Total liabilities and net assets

 

$

2,311,567

 

 

$

1,945,191

 

 

 

 

 

 

 

 

 

 

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

 

 

104,282

 

 

 

96,501

 

Net asset value per share

 

$

10.59

 

 

$

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, 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 2.

 

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)

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

$

15,339

 

 

$

11,645

 

2027 Asset-Backed Notes, investments in securities, at value (cost of $298,584 and $279,373, respectively)

 

 

293,149

 

 

 

277,781

 

2028 Asset-Backed Notes, investments in securities, at value (cost of $363,734 and $0, respectively)

 

 

365,745

 

 

 

 

Total assets

 

$

674,233

 

 

$

289,426

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

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

 

$

197,171

 

 

$

197,265

 

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

 

 

247,266

 

 

 

 

Total liabilities

 

$

444,437

 

 

$

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

59,932

 

 

$

44,535

 

 

$

113,872

 

 

$

86,369

 

Control investments

 

 

1,040

 

 

 

841

 

 

 

2,064

 

 

 

1,427

 

Affiliate investments

 

 

738

 

 

 

500

 

 

 

1,247

 

 

 

1,061

 

Total interest income

 

 

61,710

 

 

 

45,876

 

 

 

117,183

 

 

 

88,857

 

Fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment, facility and loan fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

5,028

 

 

 

1,930

 

 

 

7,478

 

 

 

4,370

 

Control investments

 

 

4

 

 

 

 

 

 

8

 

 

 

 

Affiliate investments

 

 

72

 

 

 

84

 

 

 

160

 

 

 

192

 

Total commitment, facility and loan fee income

 

 

5,104

 

 

 

2,014

 

 

 

7,646

 

 

 

4,562

 

One-time fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

2,450

 

 

 

1,672

 

 

 

3,230

 

 

 

4,843

 

Total one-time fee income

 

 

2,450

 

 

 

1,672

 

 

 

3,230

 

 

 

4,843

 

Total fee income

 

 

7,554

 

 

 

3,686

 

 

 

10,876

 

 

 

9,405

 

Total investment income

 

 

69,264

 

 

 

49,562

 

 

 

128,059

 

 

 

98,262

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

13,515

 

 

 

9,878

 

 

 

26,070

 

 

 

19,264

 

Loan fees

 

 

1,646

 

 

 

3,362

 

 

 

4,655

 

 

 

4,537

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal expenses

 

 

1,963

 

 

 

637

 

 

 

2,626

 

 

 

1,212

 

Other expenses

 

 

3,832

 

 

 

3,037

 

 

 

7,322

 

 

 

6,471

 

Total general and administrative

 

 

5,795

 

 

 

3,674

 

 

 

9,948

 

 

 

7,683

 

Employee compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

9,190

 

 

 

7,017

 

 

 

15,813

 

 

 

12,775

 

Stock-based compensation

 

 

3,851

 

 

 

2,857

 

 

 

7,273

 

 

 

5,166

 

Total employee compensation

 

 

13,041

 

 

 

9,874

 

 

 

23,086

 

 

 

17,941

 

Total operating expenses

 

 

33,997

 

 

 

26,788

 

 

 

63,759

 

 

 

49,425

 

Net investment income

 

 

35,267

 

 

 

22,774

 

 

 

64,300

 

 

 

48,837

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

4,271

 

 

 

(3,953

)

 

 

8,826

 

 

 

(7,465

)

Control investments

 

 

 

 

 

(2,900

)

 

 

 

 

 

(4,308

)

Affiliate investments

 

 

 

 

 

(2,058

)

 

 

 

 

 

(2,058

)

Total net realized gain (loss) on investments

 

 

4,271

 

 

 

(8,911

)

 

 

8,826

 

 

 

(13,831

)

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

9,794

 

 

 

32,700

 

 

 

41,884

 

 

 

18,360

 

Control investments

 

 

808

 

 

 

3,957

 

 

 

(2,068

)

 

 

3,337

 

Affiliate investments

 

 

(2,009

)

 

 

1,540

 

 

 

(3,226

)

 

 

1,303

 

Total net unrealized appreciation (depreciation) on investments

 

 

8,593

 

 

 

38,197

 

 

 

36,590

 

 

 

23,000

 

Total net realized and unrealized gain (loss)

 

 

12,864

 

 

 

29,286

 

 

 

45,416

 

 

 

9,169

 

Net increase (decrease) in net assets resulting from operations

 

$

48,131

 

 

$

52,060

 

 

$

109,716

 

 

$

58,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Basic

 

$

0.36

 

 

$

0.26

 

 

$

0.66

 

 

$

0.57

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

 

$

0.59

 

 

$

1.13

 

 

$

0.67

 

Diluted

 

$

0.49

 

 

$

0.59

 

 

$

1.12

 

 

$

0.67

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

98,223

 

 

 

87,125

 

 

 

97,226

 

 

 

85,868

 

Diluted

 

 

98,737

 

 

 

87,199

 

 

 

97,630

 

 

 

85,939

 

Distributions paid per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

 

$

0.31

 

 

$

0.64

 

 

$

0.62

 

 

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 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

)

 

 

 

 

 

 

 

 

(166

)

Issuance of common stock under restricted stock plan

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock under repurchase plan

 

 

 

 

 

 

 

(4,062

)

 

 

 

 

 

4,062

 

 

 

 

Retired shares for restricted stock vesting

 

(68

)

 

 

 

 

 

(887

)

 

 

 

 

 

 

 

 

(887

)

Distributions reinvested in common stock

 

89

 

 

 

 

 

 

1,189

 

 

 

 

 

 

 

 

 

1,189

 

Distributions

 

 

 

 

 

 

 

 

 

 

(62,051

)

 

 

 

 

 

(62,051

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,855

 

 

 

 

 

 

 

 

 

5,855

 

Balance at June 30, 2019

 

104,282

 

 

$

104

 

 

$

1,149,774

 

 

$

(45,194

)

 

$

 

 

$

1,104,684

 

 

(1)

Stock-based compensation includes $24 and $31 of restricted stock and option expense related to director compensation for the three and six months ended June 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 2.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2018

 

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)(2)

 

 

Assets

 

Balance at March 31, 2018

 

 

85,239

 

 

$

85

 

 

$

916,738

 

 

$

(88,092

)

 

$

828,731

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

52,060

 

 

 

52,060

 

Public offering, net of offering expenses

 

 

9,008

 

 

 

9

 

 

 

106,665

 

 

 

 

 

 

106,674

 

Issuance of common stock due to stock option exercises

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Retired shares from net issuance

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Issuance of common stock under restricted stock plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(21

)

 

 

 

 

 

(242

)

 

 

 

 

 

(242

)

Distributions reinvested in common stock

 

 

34

 

 

 

 

 

 

428

 

 

 

 

 

 

428

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(26,678

)

 

 

(26,678

)

Stock-based compensation (1)

 

 

 

 

 

 

 

 

2,724

 

 

 

 

 

 

2,724

 

Balance at June 30, 2018

 

 

94,260

 

 

$

94

 

 

$

1,026,313

 

 

$

(62,710

)

 

$

963,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2018