• Company surpassed $7.0 billion milestone in
Total Debt Commitments since inception
• Completed a $125.0 million strategic venture
loan portfolio acquisition from Ares Capital
• Hercules to remain an “Internally Managed”
BDC for the foreseeable future
Q3 2017 Financial Achievements and Highlights
- Net Investment Income “NII” of $24.0
million, or $0.29 per share
- Total Investment Income of $45.9
million
- New Debt and Equity Commitments of
$154.4 million
- Total Gross Fundings of $146.7
million
- Unscheduled early principal repayments
“early payoffs” of $114.7 million
- Distributable Net Operating Income
“DNOI,” a non-GAAP measure, of $25.8 million, or $0.31 per
share
- 14.1% GAAP Effective Yields
- $335.6 million of available liquidity
for future portfolio and earnings growth, subject to existing terms
and covenants
- Net regulatory leverage of 49.4%(1) and
regulatory leverage of 66.2%
- Total Shareholder Returns “TSR” of
4.3%, 71.7% and 104.6%, one, five and seven-year, respectively, as
of September 30, 2017
- 12.1% Return on Average Equity “ROAE”
(NII/Average Equity)
- 6.4% Return on Average Assets “ROAA”
(NII/Average Assets)
Year-to-date ending September 30, 2017 Financial Achievements
and Highlights
- NII of $71.9 million for the nine
months ending September 30, 2017, or $0.88 per share, an increase
of 7.0%, compared to $67.2 million for the nine months ending
September 30, 2016
- Total Investment Income of $140.7
million
- New Equity and Debt Commitments of
$551.4 million
- Total Gross Fundings of $487.3
million
- Unscheduled early principal repayments
of $381.4 million
- Sixteen (16) Announced or Completed
Portfolio Company M&A Liquidity Events
- ~$0.19 per share, or ~$16.0 million of
projected 2017 earnings spillover(2)
(1) Net regulatory leverage is defined as regulatory leverage
less cash balance at period end.
(2) Per share calculation based on weighted shares of common
stock outstanding of 82.1 million, and subject to change based on
Q4 2017 financial performance and any tax adjustments at 2017
year-end.
Hercules Capital, Inc. (NYSE: HTGC) (“Hercules” or the
“Company”), the leading specialty financing provider to innovative
venture growth stage companies backed by leading venture capital
firms, today announced its financial results for the third quarter
ended September 30, 2017.
The Company also announced that its Board of Directors has
declared a third quarter cash distribution of $0.31 per share, that
will be payable on November 20, 2017, to shareholders of record as
of November 13, 2017.
Manuel A. Henriquez, founder, chairman and chief executive
officer of Hercules, commented, “Our strong origination momentum
continued in Q3 2017, despite this typically being our slowest
period, with approximately $154 million in new commitments,
bringing us to a total of over half a billion dollars in new
commitments through the end of Q3 2017. In addition to our team’s
strong origination activities, we also had gross fundings of more
than $487 million, through the end of Q3 2017. During the quarter,
we also continued to experience higher-than-expected levels of
unscheduled early payoffs of approximately $115 million, $15
million higher than anticipated. Finally, our ability to identify
and work with some of the most promising and innovative venture
growth stage companies was evidenced by the sixteen (16) portfolio
company M&A liquidity events that were announced or completed
through the end Q3 2017.”
Henriquez continued, “As we turn our attention to Q4 2017, we
remain well positioned to potentially achieve another record year
for new commitment originations. We expect to achieve this
potential new record while also completing several strategic
initiatives that strengthen our competitive leadership position and
enhance our capabilities, as we continue to pursue our ‘slow and
steady’ portfolio growth strategy and increase shareholder value.
First, we successfully closed our inaugural investment grade
institutional bond offering of $150 million of 4.625% Notes, as we
look to retire a portion of our 6.25% Notes, which is expected to
be accretive to shareholder value as well as optimize our balance
sheet and help lower our overall cost of capital. Second, we
recently announced an agreement with Ares Capital to acquire their
venture lending portfolio for approximately $125 million. The
transaction reinforces our position as the leading and largest
venture-focused BDC in the industry. In addition, the newly
acquired assets are expected to be immediately accretive to
Hercules’ Q4 2017 earnings by approximately $0.01 per share.
Together, these events demonstrate our continuous efforts to expand
our growing market leadership presence while enhancing our overall
investment portfolio and strengthening our balance sheet. These
activities, in conjunction with our disciplined investment
approach, should allow the Company to continue to navigate an
increasingly competitive market.”
Q3 2017 Review and Operating Results
Debt Investment Portfolio
Hercules successfully extended new debt and equity commitments
to seven (7) companies, five (5) new and two (2) existing
companies, totaling $154.4 million, and gross fundings of
$146.7 million.
During the quarter, Hercules realized unscheduled early
principal repayments of $114.7 million, nearly $15.0 million higher
than expected, which along with normal scheduled amortization of
$21.0 million, totaling $135.7 million in total debt
repayments.
Net investment loan portfolio decreased by ($9.7) million, which
included origination growth of $9.8 million, despite higher than
anticipated early repayments, offset by ($19.5) million of net
changes attributed to conversions, liquidations and fees.
The Company’s total investment portfolio, (at cost and fair
value) by category, quarter-over-quarter is highlighted
below:
Total Investment Portfolio: Q2
2017 to Q3 2017
(in millions) Debt Equity
Warrants Total Portfolio Balances at Cost
at 6/30/17 $ 1,324.0 $ 135.1
$ 42.0 $ 1,501.1
New fundings(a) 145.5 0.6 0.6 146.7 Warrants not related to Q3 2017
fundings - - 0.1 0.1 Early payoffs(b) (114.7 ) - - (114.7 )
Principal payments received on investments (21.0 ) - - (21.0 ) Net
changes attributed to conversions, liquidations, and fees
(19.5 ) (0.5 ) (3.2 ) (23.2 ) Net activity
during Q3 2017 (9.7 ) 135.2 (2.5 )
(12.1 )
Balances at Cost at 9/30/17 $
1,314.3 $ 135.2 $
39.5 $ 1,489.0
Balances at Value at 6/30/17 $
1,287.6 $ 75.4 $
32.5 $ 1,395.5 Net activity
during Q3 2017 (9.7 ) 0.1 (2.5 ) (12.1 ) Net change in unrealized
appreciation / (depreciation) 22.2 8.8
2.7 33.7 Net activity during Q3 2017
12.5 8.9 0.2 21.6
Balances at Value at 9/30/17 $ 1,300.1
$ 84.3 $ 32.7
$ 1,417.1
(a) New fundings amount includes $10.0
million total new fundings associated with revolver loans during Q3
2017
(b) Unscheduled paydowns include $6.5
million paydown on revolvers during Q3 2017
Debt Investment Portfolio Balance
(in millions)
Q3 2017 Q2
2017 Q1 2017
Q4 2016 Q3 2016 Ending
Balance at Cost $1,314.3 $1,324.0 $1,399.2 $1,384.9 $1,275.9
Weighted Average Balance $1,300.0 $1,298.0 $1,381.0
$1,322.0 $1,236.0
As of September 30, 2017, 85.6% of the Company’s debt
investments were in a “true first-lien” senior secured
position.
Effective Portfolio Yield and Stable Core Portfolio Yield
(“Core Yield”)
Effective Yields on our debt investment portfolio were 14.1%
during Q3 2017, down from the previous quarter of 14.9%, attributed
to a materially lower level of unscheduled early repayments of
$114.7 million compared to $166.4 million in Q2 2017, or 31.1%
lower early repayments. Our effective portfolio yields generally
include the effects of fees and income accelerations attributed to
early payoffs, and other one-time events. Our effective yields are
materially impacted by elevated levels of unscheduled early
principal repayments, and are derived by dividing total investment
income by the weighted average earning investment portfolio assets
outstanding during the quarter, which excludes non-interest earning
assets such as warrants and equity investments.
Core Yields were at 12.6% during Q3 2017, or slightly above our
2017 expected normalized levels of 11.5% to 12.5%, mostly
attributed to older lower yielding debt investments being
refinanced or repaid during the quarter and replaced by above
average yielding debt investments. Hercules defines Core Yield as
yields that generally exclude any benefit from income related to
early debt repayments attributed to the acceleration of unamortized
income and prepayment fees, and includes income from expired
commitments.
Income Statement
Total investment income increased slightly in Q3 2017 to $45.9
million, compared to $45.1 million in Q3 2016. The increase is
primarily attributable to debt investment portfolio growth, a
greater weighted average principal outstanding of the Company’s
debt investment portfolio and a higher level of unscheduled early
repayments.
Non-interest and fees expenses were slightly higher to $11.4
million in Q3 2017, compared to $11.2 million in Q3 2016. The
slight increase was primarily attributed to new hires and variable
compensation related to investment origination activities.
Interest expense and fees were $10.5 million in Q3 2017,
compared to $10.1 million in Q3 2016. The increase was primarily
due to the higher weighted average note balances outstanding on our
6.25% notes due 2024 and our $230.0 million 4.375% convertible
notes due 2022 (“Convertible Notes”), offset by the retirement of
our 7.00% Notes due 2019 (“2019 Notes”).
The Company had a weighted average cost of borrowings comprised
of interest and fees, of 5.6% in Q3 2017 compared to 6.0% in Q3
2016. The decrease was primarily related to the retirement of our
2019 Notes in Q1 2017.
NII – Net Investment Income
NII for Q3 2017 increased modestly to $24.0 million compared to
$23.8 million in Q3 2016; or $0.29 per share, based on higher
shares of 82.5 million basic weighted average shares outstanding in
Q3 2017.
DNOI - Distributable Net Operating Income
DNOI, a non-GAAP measure, for Q3 2017 was $25.8 million or $0.31
per share, compared to $25.2 million, or $0.34 per share, in Q3
2016. The increase in DNOI income is primarily attributable to the
increase in the weighted average loan balance and an increase in
unscheduled early debt repayment fees and accelerations, offset by
a higher amount of stock-based compensation, compared to the prior
year period.
DNOI is a non-GAAP financial measure. The Company believes that
DNOI provides useful information to investors and management
because it measures Hercules’ operating performance, exclusive of
employee stock compensation, which represents expense to the
Company, but does not require settlement in cash. DNOI includes
income from payment-in-kind, or “PIK,” and back-end fees that are
generally not payable in cash on a regular basis, but rather at
investment maturity. Hercules believes disclosing DNOI and the
related per share measures are useful and appropriate supplements
and not alternatives to GAAP measures for net operating income, net
income, earnings per share and cash flows from operating
activities.
Continued Credit Discipline and Strong Credit Performance
Since Inception
Hercules’ net cumulative realized gain/(loss) position, since
its first origination activities in October 2004 through September
30, 2017, (including net loan, warrant and equity activity) on
investments, totaled ($29.3) million, on a GAAP basis, spanning
nearly 13 years of investment activities.
When compared to cumulative total new debt investment
commitments during the same period of over $7.0 billion, the total
cumulative realized gain/(loss) since inception of ($29.3) million
represents approximately 42 basis points “bps” or 0.42% of
cumulative debt commitments, or an effective annualized loss rate
of 3 bps or 0.03%.
Realized Gains/(Losses)
During Q3 2017, Hercules had net realized gain/(loss) of ($24.5)
million, which included gross realized gains of $1.3 million
primarily from the sale or acquisition of existing warrant and
equity positions. These gains were offset by gross realized losses
of ($25.8) million primarily from the liquidation or write off of
various warrant and equity investments in seven (7) portfolio
companies and debt investments in three (3) portfolio
companies.
Unrealized Appreciation/ (Depreciation)
A break-down of the net unrealized appreciation/(depreciation)
in the investment portfolio is highlighted below:
Three Months Ended September 30,
2017 (in millions) Debt Equity
Warrants Total Collateral Based Impairments $ (3.0 )
$ 4.0 $ (0.2 ) $ 0.8 Reversals of Prior Period Collateral Based
Impairments — — — — Reversals due to Debt Payoffs &
Warrant/Equity Sales 25.9 (0.2 ) (2.5 )
23.2
Sub-total Impairments and Reversals 22.9
3.8 (2.7 ) 24.0 Fair Value Market/Yield
Adjustments* Level 1 & 2 Assets — 5.7 0.4 6.1 Level 3 Assets
(0.7 ) (0.7 ) 5.0 3.6
Sub-total Fair Value Market/Yield Adjustments (0.7
) 5.0 5.4 9.7
Net Unrealized Appreciation/(Depreciation)* $
22.2 $ 8.8 $ 2.8
$ 33.7 *Excludes unrealized
depreciation from escrow receivable and taxes payable
During Q3 2017, we recorded $33.7 million of net unrealized
appreciation from our debt, equity, and warrant investments.
Approximately $22.2 million was attributed to net unrealized
appreciation on our debt investments which was primarily related to
the reversal of $25.9 million of unrealized depreciation upon
payoff or liquidation or our debt investments in three portfolio
companies.
Approximately $8.8 million was attributed to net unrealized
appreciation on our equity investments which was primarily related
to $4.0 million reduction in collateral based impairment on one
portfolio company and $5.7 million of unrealized appreciation on
our public equity portfolio related to portfolio company
performance.
Finally, approximately $2.8 million was attributed to net
unrealized appreciation on our warrant investments primarily due to
$5.0 million and $411,000 of unrealized appreciation on our private
and public warrant portfolio, respectively, related to portfolio
company and industry performance. This unrealized appreciation was
partially offset by the reversal of $2.5 million of net unrealized
appreciation upon being realized as a gain or loss due to the
acquisition or liquidation or our warrant investments.
Portfolio Asset Quality
As of September 30, 2017, the weighted average grade of the debt
investment portfolio continued to show signs of improvement, of
2.24, on a cost basis, compared to 2.27 as of June 30, 2017, based
on a scale of 1 to 5, with 1 being the highest quality. Hercules’
policy is to generally adjust the grading down on its portfolio
companies as they approach the need for additional equity capital,
thereby increasing our Grade 3 rated investments.
Additionally, we may downgrade our portfolio companies, from
time to time, if they are not meeting our financing criteria,
underperforming relative to their respective business plans, or
approaching an additional round of new equity capital investment.
It is expected that venture growth stage companies typically
require multiple additional rounds of equity capital, generally
every 9-14 months, since they are not generating positive cash
flows for their operations. Various companies in our portfolio will
require additional rounds of funding from time to time to maintain
their operations.
As of September 30, 2017, grading of the debt investment
portfolio at fair value, excluding warrants and equity investments,
was as follows:
Credit Grading at Fair Value, Q3 2017 - Q3 2016 ($ in
millions) Q3
2017 Q2
2017 Q1
2017 Q4
2016 Q3
2016 Grade 1 - High
$ 190.0 14.6 % $ 267.1
20.7 % $ 260.2 19.8 %
$ 275.8 20.8 %
$ 269.8 22.0 %
Grade 2 $ 696.2 53.6 % $
613.7 47.6 % $ 591.7 45.1 % $ 590.5 44.4 % $ 516.5 42.3 %
Grade
3 $ 370.9 28.5 % $ 315.2 24.5 % $ 356.9 27.2 % $ 329.4 24.8 % $
372.0 30.4 %
Grade 4 $ 43.0 3.3 % $ 87.0 6.8 % $ 78.9 6.0 %
$ 58.9 4.4 % $ 40.8 3.3 %
Grade 5 - Low $ - 0.0 % $ 4.6 0.4
% $ 24.2 1.9 % $ 74.2 5.6 % $ 25.1 2.0 %
Weighted Avg.
2.24
2.27
2.43
2.41
2.32
Non-Accruals
Non-accruals improved during the third quarter. As of September
30, 2017, the Company had five debt investments on non-accrual with
a cumulative investment cost and fair value of approximately $14.0
million and $3.0 million, respectively, or 1.1% and 0.2% as a
percentage of our total investment portfolio at cost and value,
respectively. As of compared to June 30, 2017, the Company had
seven debt investments on non-accrual with cumulative investment
cost and fair value of approximately $43.6 million and $3.6
million, respectively, or 2.9% and 0.3% as a percentage of our
total investment portfolio at cost and value, respectively.
Q3 2017 Q2 2017
Q1 2017 Q4 2016
Q3 2016
Total
Investments at Cost $1,314.3 $1,501.1 $1,525.1 $1,511.5
$1,388.2
Loans on non-accrual as a % of Total
Investments at Value
0.2% 0.3% 1.3% 0.4% 0.7%
Loans on non-accrual as a % of Total
Investments at Cost
1.1% 2.9% 7.0% 2.9% 3.3%
Liquidity and Capital Resources
The Company ended Q3 2017 with $335.6 million in available
liquidity, including $140.6 million in unrestricted cash and cash
equivalents, and $195.0 million in available credit facilities,
subject to existing terms and advance rates and regulatory and
covenant requirements.
During Q3 2017, Hercules sold ~768,000 shares of common stock
under its At-the-Market "ATM" equity distribution agreement with
JMP Securities (the “Equity Distribution Agreement”), for total
accumulated net proceeds of $9.4 million, all accretive to net
asset value. For YTD through Q3 2017, Hercules has sold
approximately 4.1 million shares of common stock for total net
proceeds of approximately $56.3 million, all issuances accretive to
net asset value.
Bank Facilities
As of September 30, 2017, Hercules has two committed credit
facilities with Wells Fargo Capital Finance (“WFCF”), part of
Wells Fargo & Company (NYSE: WFC) (the “Wells Fargo Facility”)
and Union Bank (the “Union Bank Facility”) for $120.0
million and $75.0 million, respectively. The Wells Fargo and
Union Bank Facilities both include an accordion feature that
enables the Company to increase the existing facilities to a
maximum value of $300.0 million and $200.0 million, respectively,
or $500.0 million in aggregate. Pricing at September 30,
2017 under the Wells Fargo Facility and Union Bank
Facility were both LIBOR+3.25% with no LIBOR floor. There were no
outstanding borrowings under either facility at September 30,
2017.
Leverage
Hercules’ regulatory leverage, or debt to equity ratio,
excluding our Small Business Administration “SBA” debentures was
66.2% and net regulatory leverage (excluding cash of approximately
$140.6 million) of 49.4%, as of September 30, 2017. Hercules’ GAAP
leverage ratio, including our SBA debentures, was 89.0%, as of
September 30, 2017.
Hercules has an order from the Securities and Exchange
Commission “SEC” granting it exemptive relief, thereby allowing it
to exclude from its regulatory leverage limitations (1:1) of all
its outstanding SBA debentures of $190.2 million, providing the
Company with the potential capacity to add leverage of $282.3
million to its balance sheet as of September 30, 2017, bringing the
maximum potential leverage to $1.0 billion, or 122.7% (1.23:1), if
it had access to such additional leverage.
Available Unfunded Commitments – Representing only 3.5% of
debt investment balance, at cost
The Company’s unfunded commitments and contingencies consist
primarily of unused commitments to extend credit in the form of
loans to select portfolio companies. A portion of these unfunded
contractual commitments are dependent upon the portfolio company
reaching certain milestones in order to gain access to additional
funding. Furthermore, our credit agreements contain customary
lending provisions that allow us relief from funding obligations
for previously made commitments. In addition, since a portion of
these commitments may also expire without being drawn, unfunded
contractual commitments do not necessarily represent future cash
requirements.
As of September 30, 2017, the Company had $46.3 million of
available unfunded commitments at the request of portfolio
companies and unencumbered by any milestones, including undrawn
revolving facilities, representing 3.5% of Hercules’ debt
investment balance, at cost. This decreased from the previous
quarter of $57.6 million of available unfunded commitments at the
request of portfolio companies or 4.4% of Hercules’ debt investment
balance, at cost, as we funded available commitments.
Existing Pipeline and Signed Term Sheets
After closing $154.4 million in new commitments in Q3 2017,
Hercules finished Q3 2017 with $20.0 million in signed non-binding
term sheets outstanding. Since the close of Q3 2017 and as of
October 30, 2017, Hercules closed debt and equity commitments of
$58.9 million to new and existing portfolio companies, and funded
$52.3 million.
Signed non-binding term sheets are subject to satisfactory
completion of Hercules’ due diligence and final investment
committee approval process as well as negotiations of definitive
documentation with the prospective portfolio companies. These
non-binding term sheets generally convert to contractual
commitments in approximately 90 days from signing. It is important
to note that not all signed non-binding term sheets are expected to
close and do not necessarily represent future cash requirements or
investments.
Net Asset Value
As of September 30, 2017, the Company’s net assets were $836.3
million, compared to $817.5 million at the end of Q2 2017, an
increase of 2.3%. NAV per share increased to $10.00 on 83.6 million
outstanding shares as of June 30, 2017, compared to $9.87 on 82.8
million outstanding shares as of June 30, 2017. The increase in NAV
per share was primarily attributed to the unrealized appreciation
on the debt investment portfolio.
High Asset Sensitivity – Expected Increase in Prime Rate Will
Benefit Hercules Significantly – Will Help Drive Future Earnings
Growth
We have purposely constructed a very asset sensitive debt
investment portfolio and have structured our debt borrowings for
any eventual increases in market rates that may occur in the near
future. With 96.7% of our debt investment portfolio being priced at
floating interest rates as of September 30, 2017, with a Prime or
LIBOR-based interest rate floor, coupled with 100% of our
outstanding debt borrowings bearing fixed interest rates, this
leads to higher net investment income to our shareholders.
Based on our Consolidated Statement of Assets and Liabilities as
of September 30, 2017, the following table shows the approximate
annualized increase in components of net income resulting from
operations of hypothetical base rate changes in interest rates,
such as Prime Rate, assuming no changes in our debt investments and
borrowings. These estimates are subject to change due to the impact
from active participation in the Company’s equity ATM program.
We expect each 25-bps increase in the Prime Rate to contribute
approximately $2.6 million, or $0.03 per share, of net investment
income annually.
(in thousands) Interest Interest
Net EPS(2) Basis Point
Change Income(1) Expense Income
25 $ 2,630 $ - $ 2,630 $ 0.03 50 $ 5,505 $ - $ 5,505 $ 0.07
75 $ 8,380 $ - $ 8,380 $ 0.10 100 $ 11,406 $ - $ 11,406 $ 0.14 200
$ 24,161 $ - $ 24,161 $ 0.29 300 $ 37,169 $ - $ 37,169 $ 0.45
(1) Source: Hercules Capital Form 10-Q for
Q3 2017
(2) EPS calculated on basic weighted
shares outstanding of 82,496. Estimates are subject to change due
to impact from active participation in the Company's equity ATM
program.
Existing Equity and Warrant Portfolio – Potential Future
Additional Returns to Shareholders
Equity Portfolio
Hercules held equity positions in 55 portfolio companies with a
fair value of $84.3 million and a cost basis of $135.2 million as
of September 30, 2017, with one portfolio company (Solar Spectrum)
representing a fair value of $12.8 million and a cost basis of
$61.5 million. On a fair value basis, 19.0% or $16.0 million is
related to existing public equity positions, at September 30,
2017.
Warrant Portfolio
Hercules held warrant positions in 128 portfolio companies with
a fair value of $32.7 million and a cost basis of $39.5 million as
of September 30, 2017.
Portfolio Company IPO, M&A and Other Activity in Q3
2017
IPO Activity
As of October 31, 2017, Hercules held warrant and equity
positions in five (5) portfolio companies that had filed
Registration Statements in contemplation of a potential IPO,
including:
- In October 2017, Hercules portfolio
company, ForeScout Technologies, Inc. (NASDAQ: FSCT),
completed its IPO raising nearly $117 million. Hercules currently
holds 319,099 shares of Preferred Series D stock and 80,587 shares
of Preferred Series E stock as of September 30, 2017.
- In October 2017, Hercules portfolio
company, Aquantia Corporation, which previously filed
confidentially under the JOBS Act, filed a Form S-1 Registration
with the SEC in contemplation of potential public offering.
- Three companies filed confidentially
under the JOBS Act.
There can be no assurances that companies that have yet to
complete their IPOs will do so.
M&A Activity Completed or Announced and Other Pending
Activity
1.
In August 2017, Hercules’ portfolio
companies Cempra, Inc. (NASDAQ: CEMP), a clinical-stage
pharmaceutical company focused on developing differentiated
anti-infectives for acute care and community settings to meet
critical medical needs in the treatment of infectious diseases, and
Melinta Therapeutics, Inc., a privately held company focused
on discovering, developing, and commercializing novel antibiotics
to treat serious bacterial infections, announced that the companies
had entered into a definitive agreement under which Melinta will
merge with a subsidiary of Cempra. The merger is expected to create
a NASDAQ-listed company committed to discovering, developing, and
commercializing important anti-infective therapies for patients and
physicians in areas of significant unmet need. The merger is
expected to close in the fourth quarter of 2017, subject to the
approval of the stockholders of each company as well as other
customary conditions. Hercules committed $40.0 million in venture
debt financing to Cempra from 2011 to 2014. Hercules initially
committed $30.0 million in venture debt financing to Melinta in
December 2014 and currently holds 1,194,448 shares of Preferred
Series 4 stock as of September 30, 2017.
2.
In August 2017, Hercules’ portfolio
company CashStar, Inc., a leading provider of gift card
commerce solutions at the forefront of mobile payments and digital
gifting innovation, was acquired by Blackhawk Network, Inc., a
global financial technology company and a leader in connecting
brands and people through branded value solutions, for $175.0
million in cash. Hercules initially committed $8.0 million in
venture debt financing in June 2013, and held warrants for 727,272
shares of Preferred Series C-2 stock as of June 30, 2017. Upon the
closing of the transaction, the warrants were converted into cash
and received by Hercules.
3.
In September 2017, Hercules’ portfolio
company Cloud Technology Partners, Inc., a born-in-the-cloud
services company with strong enterprise experience, announced that
Hewlett Packard Enterprise intends to acquire the company to
accelerate IT services growth as they transition from a traditional
hardware business to a hybrid IT strategy. Terms of the deal were
not disclosed. Hercules initially committed $14.4 million in
venture debt financing in December 2016, and currently holds
warrants for 113,960 shares of Preferred Series C stock as of June
30, 2017. Upon closing of the transaction, the warrants were
converted into cash and received by Hercules.
4.
In September 2017, Hercules’ portfolio
company Exicure, Inc., the pioneer in developing
three-dimensional Spherical Nucleic Acid constructs as gene
regulatory and immunotherapeutic agents, announced the closing of a
$20 million private placement financing and the completion of a
reverse merger transaction, with Max-1 Acquisition Corporation.
Following the reverse merger transaction, Max-1 changed its name to
Exicure, Inc., and will continue the historical business of
Exicure.
Distributions
The Board of Directors has declared a third quarter cash
distribution of $0.31 per share. This distribution would
represent the Company’s 49th consecutive distribution declaration
since its IPO, bringing the total cumulative distribution declared
to date to $13.71 per share. The following shows the key dates of
our third quarter 2017 distribution payment:
Record Date
November 13, 2017 Payment Date November
20, 2017
Hercules' Board of Directors maintains a variable distribution
policy with the objective of distributing four quarterly
distributions in an amount that approximates 90% to 100% of the
Company’s taxable quarterly income or potential annual income for a
particular year. In addition, at the end of the year, the Company’s
Board of Directors may choose to pay an additional special
distribution, or fifth distribution, so that the Company may
distribute approximately all its annual taxable income in the year
it was earned, or it can elect to maintain the option to spill over
the excess taxable income into the coming year for future
distribution payments.
The determination of the tax attributes of the Company's
distributions is made annually as of the end of the Company's
fiscal year based upon its taxable income for the full year and
distributions paid for the full year. Therefore, a determination
made on a quarterly basis may not be representative of the actual
tax attributes of its distributions for a full year. Of the
distributions declared during the quarter ended September 30, 2017,
100% were distributions derived from the Company’s current and
accumulated earnings and profits. There can be no certainty to
stockholders that this determination is representative of what the
tax attributes of the Company’s 2017 distributions to stockholders
will be.
Subsequent Events
1. As of October 30, 2017, Hercules
has: a. Closed debt and equity commitments of $58.9 million
to new and existing portfolio companies, and funded $52.3 million
since the close of the third quarter. b. Pending commitments
(signed non-binding term sheets) of $71.0 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, 2017 Closed Commitments(a)
$551.4 October 1, 2017 – October 30, 2017 Closed Commitments
(a) $58.9 Closed Commitments (as of October
30, 2017)(a) $610.3 Pending Commitments (as of
October 30, 2017)(b) $71.0
Closed and
Pending Commitments as of October 30, 2017
$681.3
Notes:
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 do not necessarily represent any future cash requirements.
2. The Company has decided to suspend its review of
alternative investment management structures and will remain an
internally managed business development company for the foreseeable
future. 3. On November 1, 2017, Hercules Capital, Inc.
through a wholly owned subsidiary, Bearcub Acquisitions LLC,
entered into, and consummated the transaction contemplated by, a
definitive asset purchase agreement with Ares Capital Corporation
to acquire select venture loan assets for approximately $125.8
million in cash. 4.
In October 2017, Hercules’ portfolio
company Neothetics, Inc. (NASDAQ: NEOT) a clinical-stage
specialty pharmaceutical company that has been focused on
developing therapeutics for the aesthetic market, announced they
have entered into a definitive agreement under which privately-held
Evofem Biosciences will merge with a wholly-owned subsidiary of
Neothetics in an all-stock transaction. Upon closing of the
transaction, Neothetics will be renamed Evofem Biosciences, Inc.
Hercules initially committed $10.0 million in venture debt
financing in June 2014, and currently holds warrants for 46,838
shares of common stock as of September 30, 2017.
5. On October 23, 2017, we issued $150.0 million in
aggregate principal amount of 4.625% Notes due 2022 (the “2022
Notes”). The 2022 Notes were issued pursuant to an Indenture, dated
October 23, 2017, between us and U.S. Bank, National Association,
as trustee. The sale of the 2022 Notes generated net proceeds of
approximately $147.9 million. Aggregate estimated offering expenses
in connection with the transaction, including the underwriter’s
discount of approximately $1.9 million, were approximately $2.1
million. 6. On October 24, 2017, the Company announced a
partial redemption of $75.0 million of outstanding aggregate
principal amount of the 6.25% Notes due 2024 (the “2024 Notes”),
and notice for such redemption has been provided. We have publicly
announced its intention to redeem this portion of the 2024 Notes on
November 23, 2017. 7. Subsequent to September 30, 2017, and
as of October 30, 2017, the Company sold 567,000 shares of common
stock for total accumulated net proceeds of approximately $7.1
million, including $65,000 of offering expenses, under the Equity
Distribution Agreement. As of October 30, 2017, approximately 10.7
million shares remain available for issuance and sale under the
equity ATM program. 8. In October 2017, Hercules announced
the appointments of Brad Koenig, former Head of Global Technology
Investment Banking at Goldman Sachs, and Jorge Titinger, former
President and Chief Executive Officer of Silicon Graphics
International Corp. Mr. Koenig will serve as an independent Class
II director, effective October 25, 2017. Mr. Titinger was elected
by the Company’s board of directors on October 25, 2017, which will
be effective and ratified upon shareholder approval at the
Company’s annual shareholder meeting on December 13, 2017. Upon
shareholder approval, Mr. Titinger will serve as an independent
Class I director. 9.
On October 27, 2017, the Company and Mark
Harris mutually agreed that Mr. Harris would separate from the
Company and end his tenure as Chief Financial Officer and Chief
Accounting Officer effective November 2, 2017. Mr. Harris’
separation did not result from any disagreements with the Company
regarding its operations, policies, practices or any issues
regarding financial disclosures, accounting or legal matters.
Effective October 31, 2017, the Board of Directors appointed David
Lund, the Company’s former Chief Financial Officer, as the
Company’s Interim Chief Financial Officer and Gerard R. Waldt, Jr.,
the Company’s current Controller, as the Company’s Interim Chief
Accounting Officer.
Conference Call
Hercules has scheduled its third quarter 2017 financial results
conference call for November 2, 2017 at 2:00 p.m. PDT (5:00 p.m.
EDT). To listen to the call, please dial (877) 304-8957 (or (408)
427-3709 internationally) and reference Conference ID: 98019960 if
asked, approximately 10 minutes prior to the start of the call. A
taped replay will be made available approximately three hours after
the conclusion of the call and will remain available for seven
days. To access the replay, please dial (855) 859-2056 or (404)
537-3406 and enter the passcode 98019960.
About Hercules Capital, Inc.
Hercules Capital, Inc. (NYSE: HTGC) (“Hercules”) is the leading
and largest specialty finance company focused on providing senior
secured venture growth loans to high-growth, innovative venture
capital-backed companies in a broad variety of technology, life
sciences and sustainable and renewable technology industries. Since
inception (December 2003), Hercules has committed more than $7.0
billion to over 390 companies and is the lender of choice for
entrepreneurs and venture capital firms seeking growth capital
financing. Companies interested in learning more about financing
opportunities should contact info@htgc.com, or call
650.289.3060.
Hercules’ common stock trades on the New York Stock Exchange
(NYSE) under the ticker symbol "HTGC." In addition, Hercules has
three outstanding bond issuances of 6.25% Unsecured Notes due July
2024 (NYSE: HTGX), 4.375% Convertible Senior Notes due February
2022 and 4.625% Unsecured Investment Grade Notes due October
2022.
Forward-Looking Statements
This press release may contain “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act
of 1995. You should understand that under Section 27A(b)(2)(B) of
the Securities Act of 1933, as amended, and Section 21E(b)(2)(B) of
the Securities Exchange Act of 1934, as amended, or the Exchange
Act, the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995 do not apply to forward-looking
statements made in periodic reports we file under the Exchange
Act.
The information disclosed in this press release is made as of
the date hereof and reflects Hercules most current assessment of
its historical financial performance. Actual financial results
filed with the SEC may differ from those contained herein due to
timing delays between the date of this release and confirmation of
final audit results. These forward-looking statements are not
guarantees of future performance and are subject to uncertainties
and other factors that could cause actual results to differ
materially from those expressed in the forward-looking statements
including, without limitation, the risks, uncertainties, including
the uncertainties surrounding the current market volatility, and
other factors the Company identifies from time to time in its
filings with the SEC. Although Hercules believes that the
assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate
and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. You should not place undue
reliance on these forward-looking statements. The forward-looking
statements contained in this release are made as of the date
hereof, and Hercules assumes no obligation to update the
forward-looking statements for subsequent events.
HERCULES CAPITAL, INC. CONSOLIDATED STATEMENT OF ASSETS
AND LIABILITIES (unaudited) (dollars in thousands,
except per share data) September 30, 2017
December 31, 2016 Assets Investments:
Non-control/Non-affiliate investments (cost of $1,374,173 and
$1,475,918, respectively) 1,360,146 1,414,210 Control investments
(cost of $25,788 and $22,598, respectively) 23,382 4,700 Affiliate
investments (cost of $89,050 and $13,010, respectively)
33,586 5,032 Total investments in securities,
at value (cost of $1,489,011 and $1,511,526, respectively)
1,417,114 1,423,942 Cash and cash equivalents 140,568 13,044
Restricted cash 7,813 8,322 Interest receivable 10,507 11,614 Other
assets 6,995 7,282
Total assets
$ 1,582,997 $ 1,464,204
Liabilities
Accounts payable and accrued liabilities $ 19,057 $ 21,463 Credit
Facilities — 5,016 2021 Asset-Backed Notes, net (principal of
$65,476 and $109,205, respectively) (1) 64,860 107,972 Convertible
Notes, net (principal of $230,000 and $0, respectively)(1) 223,097
— 2019 Notes, net (principal of $0 and $110,364, respectively) (1)
— 108,818 2024 Notes, net (principal of $258,510 and $252,873,
respectively) (1) 251,716 245,490 Long-Term SBA Debentures, net
(principal of $190,200 and $190,200, respectively) (1)
187,983 187,501
Total liabilities $
746,713 $ 676,260
Net assets consist of: Common
stock, par value 84 80 Capital in excess of par value 904,357
839,657 Unrealized depreciation on investments(2) (73,388 ) (89,025
) Accumulated undistributed realized gains on investments 10,674
37,603 Distributions in excess of net investment income
(5,443 ) (371 )
Total net assets $ 836,284 $
787,944
Total liabilities and net assets $ 1,582,997
$ 1,464,204
Shares of common stock
outstanding ($0.001 par value, 200,000,000 authorized) 83,615
79,555
Net asset value per share $ 10.00 $ 9.90
(1) The Company’s SBA Debentures, 2019
Notes, 2024 Notes, 2021 Asset-Backed Notes, and Convertible Notes,
as each term is defined herein, are presented net of the associated
debt issuance costs for each instrument.
(2) Amounts include $1.5 million and $1.4
million, respectively, in net unrealized depreciation on other
assets and accrued liabilities, including escrow receivables,
estimated taxes payable and Citigroup warrant participation
agreement liabilities.
HERCULES CAPITAL, INC. CONSOLIDATED STATEMENT OF
OPERATIONS (unaudited) (in thousands, except per
share data) Three Months
Ended September 30, Nine Months Ended September 30,
2017 2016
2017 2016 Investment
income: Interest and PIK interest income Interest income:
Non-control/Non-affiliate investments $ 39,361 $ 37,783 $ 117,388 $
110,219 Control investments 321 7 994 7 Affiliate investments
246 30 248 145
Total interest income 39,928 37,820 118,630 110,371 PIK
interest income: Non-control/Non-affiliate investments 2,364 2,124
6,661 5,668 Control investments 143 8
511 8 Total PIK interest income
2,507 2,132 7,172 5,676
Total interest and PIK interest income 42,435
39,952 125,802 116,047
Fee Income: Commitment, facility, and loan fee income
Non-control/Non-affiliate investments 2,239 3,274 7,613 8,700
Control investments 1 1 11 1 Affiliate investments 2
— 2 — Total commitment,
facility, and loan fee income 2,242 3,275
7,626 8,701 One-time fee income:
Non-control/Non-affiliate investments 1,188
1,875 7,254 2,831 Total one-time
fee income 1,188 1,875 7,254
2,831 Total fee income 3,430
5,150 14,880 11,532
Total investment income 45,865 45,102 140,682 127,579
Operating expenses: Interest 9,185 8,717 28,046 23,306 Loan
fees 1,314 1,432 5,500 3,698 General and administrative 3,548 4,114
12,362 12,095 Employee compensation: Compensation and benefits
6,014 5,621 17,276 15,637 Stock-based compensation 1,831
1,442 5,573 5,616
Total employee compensation 7,845 7,063
22,849 21,253
Total operating
expenses 21,892 21,326
68,757 60,352
Net investment income
23,973 23,776 71,925 67,227
Net realized gain (loss) on
investments Non-control/Non-affiliate investments (8,911 )
7,870 (10,940 ) 3,427 Control investments (15,543 ) —
(15,989 ) — Total net realized gain
(loss) on investments (24,454 ) 7,870
(26,929 ) 3,427
Net change in unrealized
appreciation (depreciation) on investments
Non-control/Non-affiliate investments 11,320 (1,387 ) 45,420
(11,005 ) Control investments 17,624 — 17,703 (3,421 ) Affiliate
investments 4,609 553 (47,486 )
(1,646 ) Total net unrealized depreciation on investments
33,553 (834 ) 15,637
(16,072 )
Total net realized and unrealized loss
9,099 7,036 (11,292 ) (12,645 )
Net increase in net assets resulting from operations $
33,072 $ 30,812 $ 60,633 $ 54,582
Net investment income before investment gains and losses per
common share: Basic $ 0.29 $ 0.32 $ 0.87 $
0.91 Change in net assets resulting from operations per
common share: Basic $ 0.40 $ 0.41 $ 0.73 $
0.74 Diluted $ 0.40 $ 0.41 $ 0.73 $
0.74 Weighted average shares outstanding Basic 82,496
74,122 82,073 72,685
Diluted 82,607 74,157
82,173 72,702 Distributions declared per
common share: Basic $ 0.31 $ 0.31 $ 0.93 $ 0.93
HERCULES
CAPITAL, INC.
NON GAAP FINANCIAL MEASURES
(in thousands, except per share
data)
Three Months Ended September 30, Reconciliation of
Net Investment Income to DNOI 2017 2016
Net investment income $ 23,973 $ 23,776 Stock-based compensation
1,831 1,442 DNOI $ 25,804 $ 25,218 DNOI per
share-weighted average common shares Basic $ 0.31 $ 0.34
Weighted average shares outstanding Basic 82,496
74,122
Distributable Net Operating Income, “DNOI” represents net
investment income as determined in accordance with GAAP, adjusted
for amortization of employee restricted stock awards and stock
options. Hercules views DNOI and the related per share measures as
useful and appropriate supplements to net operating income, net
income, earnings per share and cash flows from operating
activities. DNOI is a non-GAAP financial measure. The Company
believes that DNOI provides useful information to investors and
management because it serves as an additional measure of Hercules’
operating performance exclusive of employee restricted stock
amortization, which represents expenses of the Company but does not
require settlement in cash. DNOI does include PIK interest and back
end fee income which are generally not payable in cash on a regular
basis, but rather at investment maturity or when declared. DNOI
should not be considered as an alternative to net operating income,
net income, earnings per share and cash flows from operating
activities (each computed in accordance with GAAP). Instead, DNOI
should be reviewed in connection with net operating income, net
income (loss), earnings (loss) per share and cash flows from
operating activities in Hercules’ consolidated financial
statements, to help analyze how Hercules’ business is
performing.
HERCULES CAPITAL, INC.
NON GAAP FINANCIAL MEASURES
(in thousands, except per share
data)
September 30, 2017 Total Debt (Principal Outstanding)
$ 744,186 Long-term SBA Debentures $ (190,200 ) Cash and cash
equivalents (140,568 )
Numerator: net debt (total debt less cash
and cash equivalents and SBA Debentures)
$ 413,418 Denominator: Total net assets $ 836,284 Net Leverage
Ratio 49.4 %
Net leverage ratio is calculated by deducting the outstanding
cash of $140.6 million and long-term SBA debentures of $190.2
million, at September 30, 2017 from total principal outstanding of
$744.2 million divided by our total equity of $836.3 million,
resulting in a net leverage ratio of 49.4%. Net leverage ratio is a
non-GAAP measure and is not intended to replace financial
performance measures determined in accordance with GAAP. Rather,
they are presented as additional information because management
believes they are useful indicators of the current financial
performance of the Company’s core businesses.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171102006582/en/
Hercules Capital, Inc.Michael Hara, 650-433-5578 HT-HNInvestor
Relations and Corporate Communicationsmhara@htgc.com
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