Company Achieves Multiple Records for Total New
Debt and Equity Commitments, Total Gross Fundings, Total Investment
Income, Net Investment Income, Total Investment Assets and Total
Debt Investments
Record FY2018 New Debt and Equity Commitments
of $1.21 Billion, up 37.6% Year-over-Year
Record Net Portfolio Growth of $312.9 Million,
leading to Record Total Debt Investments of $1.75 billion, at cost,
an increase of 21.7% year-over-year
Received Stockholder Approval to Reduce Its
Asset Coverage Requirement from 200% to 150%
Net Investment Income of $0.32 per Share
provides 103% Coverage of Regular Dividend Distribution Payout
Record Undistributed Earnings Spillover of
~$30.7 million, or $0.32 Earnings per Share(1)
Q4 2018 Financial Achievements and Highlights
- Net Investment Income “NII” of $30.6
million, or $0.32 per share, an increase of 24.8% year-over-year
- Total Investment Income of $56.9
million, an increase of 13.3% year-over-year
- Distributable Net Operating Income(2)
“DNOI,” a non-GAAP measure, of $33.9 million, or $0.35 per
share
- New debt and equity commitments of
$249.4 million
- Total gross fundings of $254.7
million
- Unscheduled early principal repayments
or “early loan repayments” of $63.9 million
- 13.6% Return on Average Equity “ROAE”
(NII/Average Equity)
- 6.8% Return on Average Assets “ROAA”
(NII/Average Assets)
- Regulatory leverage of 87.0% and net
regulatory leverage, a non-GAAP measure, of 83.4%(3)
- 13.5% GAAP Effective Yields and 12.9%
Core Yields(4), a non-GAAP measure
Full-year ending December 31, 2018 Financial
Highlights
- Record Total Assets of $1.94 billion,
an increase of 17.6%, as compared to $1.65 billion for the 12
months ending December 31, 2017
- Record Total Debt Investments of $1.73
billion, at fair value, an increase of 22.4%, as compared to $1.42
billion for the 12 months ended December 31, 2017
- Record total new debt and equity
commitments of $1.21 billion, an increase of 37.6%, as compared to
$881.9 million for the 12 months ending December 31, 2017
- Record Total Gross Fundings of $960.8
million, an increase of 25.6%, as compared to $764.8 million for
the 12 months ending December 31, 2017
- Record NII of $108.7 million, or $1.19
per share, an increase of 12.7%, as compared to $96.4 million for
the 12 months ending December 31, 2017
- Record Total Investment Income of
$207.8 million, an increase of 8.8%, as compared to $190.9 million
for the 12 months ending December 31, 2017
- Unscheduled early principal repayments
of $486.6 million
Footnotes:
(1) Per Share calculation based on weighted shares of common
stock outstanding of 96.4 million, subject to final tax filings in
2018
(2) Distributable Net Operating Income, “DNOI” represents net
investment income as determined in accordance with U.S. generally
accepted accounting principles, or GAAP, adjusted for amortization
of employee restricted stock awards and stock options.
(3) Net regulatory leverage is defined as regulatory leverage
less cash balance at period end
(4) Core Yield excludes Early Loan Repayments and One-Time Fees,
and includes income and fees from expired commitments
Hercules Capital, Inc. (NYSE: HTGC) (“Hercules” or the
“Company”), the largest and leading specialty financing provider to
innovative venture growth stage companies backed by leading venture
capital and select private equity firms, today announced its
financial results for the fourth quarter and full-year ended
December 31, 2018.
The Company announced that its Board of Directors has declared a
fourth quarter cash distribution of $0.31 per share, respectively,
that will be payable on March 11, 2019, to shareholders of record
as of March 4, 2019.
“We capped off a record year with a strong finish in Q4 2018,
setting multiple records for Total New Debt and Equity Commitments,
Total Investment Income, Net Investment Income, Total Investment
Assets and Total Debt Investments for the year, delivering record
portfolio growth, and generating NII in excess of our dividend
distribution payout while increasing our earnings spill-over for
future potential dividend increases or supplemental dividend
distributions,” stated Manuel A. Henriquez, chairman and chief
executive officer of Hercules. “2018 truly showed the benefits of
our scale and platform capabilities as we continue to leverage our
industry-leading venture debt platform and market leadership
position, which resulted in total debt and equity commitments of
$249.4 million and total gross fundings $254.7 million in Q4, and
ending the year with a record debt investment portfolio balance of
$1.75 billion. Our healthy ecosystem continues to fuel our
investment pipeline as venture capital fundraising and investment
remained at record levels, while the IPO market exhibits
ever-increasing signs of renewed optimism with many notable
companies preparing for their IPO debuts in 1H2019. This includes
two of our own portfolio companies that completed IPOs in February
2019, and five more that have filed for their respective IPO
debuts. We remain very optimistic as we head into 2019, subject to
existing market conditions remaining favorable.”
Henriquez continued, “Our balance sheet remains highly liquid
and asset sensitive which positions Hercules to benefit from the
recent increases in PRIME. Our debt investment portfolio continues
to deliver strong core and effective yields while also benefiting
from reduced early loan repayments in the quarter, allowing our
debt investment portfolio to grow. We finished Q4 2018 with a
strong liquidity position of $156.2 million, and our access to the
capital markets keeps us well positioned to fund our expected loan
portfolio growth throughout the year in 2019. We remain very active
in the capital markets, having recently completed our fourth
securitization raising an additional $250.0 million of capital to
continue to fund our investment portfolio growth. This transaction
caps off a remarkable year for Hercules in which we raised
approximately $708.0 million of new debt and equity capital,
expanding and diversifying our sources of capital and providing
long-dated maturities to help support our growth and deliver
increased earnings in 2019 and beyond.”
Henriquez concluded, “Finally, I am very pleased to welcome Seth
Meyer, who will join our executive team as the new Chief Financial
Officer on March 4, 2019. As we continue to set a path for organic
growth and potential future expansion of our product offerings to
our innovative companies, Seth will be in integral part of our
senior management team, as we focus on the growth opportunities
before us and look to achieve our long-term growth objectives.”
Q4 2018 Review and Operating Results
Debt Investment Portfolio
Hercules achieved another strong quarter of new commitments,
totaling $249.4 million, and gross fundings of $254.7 million.
During the quarter, Hercules realized early loan repayments of
$63.9 million, which along with normal scheduled amortization of
$23.2 million, resulted in total debt repayments of $87.1
million.
The strong new debt investment origination and funding
activities lead to net debt investment portfolio growth of $144.9
million during the fourth quarter, on a cost basis.
The Company’s total investment portfolio, (at cost and fair
value) by category, quarter-over-quarter and year-over-year are
highlighted below:
Total Investment Portfolio: Q3
2018 to Q4 2018
(in millions) Debt Equity Warrants
Total Portfolio Balances at Cost at 9/30/18 $
1,608.0 $ 168.6 $
36.5 $ 1,813.1 New fundings(a)
230.1 23.4 1.1 254.6 Warrants not related to Q4 2018 fundings — — —
— Early payoffs(b) (63.9 ) — — (63.9 ) Principal payments received
on investments (23.2 ) — — (23.2 ) Net changes attributed to
conversions, liquidations, and fees 1.9 (0.1 )
(1.9 ) (0.1 ) Net activity during Q4 2018
144.9 23.3 (0.8 ) 167.4
Balances at Cost at 12/31/18 $ 1,752.9
$ 191.9 $ 35.7 $
1,980.5
Balances at Value at 9/30/18 $ 1,603.3
$ 127.4 $ 29.8 $
1,760.5 Net activity during Q4 2018 144.9 23.3 (0.8 )
167.4 Net change in unrealized appreciation (depreciation)
(14.7 ) (30.5 ) (2.3 ) (47.5 ) Total net
activity during Q4 2018 130.2 (7.2 )
(3.1 ) 119.9
Balances at Value at 12/31/18
$ 1,733.5 $ 120.2
$ 26.7 $ 1,880.4
(a)New fundings amount does not include revolver loans during Q4
2018. (b)Unscheduled paydowns include $1M paydown on revolvers
during Q4 2018.
Debt Investment Portfolio Balances by Quarter
(in millions) Q4 2018
Q3 2018 Q2 2018
Q1 2018 Q4 2017
Ending Balance at
Cost $ 1,752.9 $ 1,608.0 $ 1,554.2 $ 1,368.6 $ 1,440.0
Weighted Average Balance $ 1,685.0 $ 1,555.0 $ 1,470.0 $
1,364.0 $ 1,413.0
As of December 31, 2018, 85.3% of the Company’s debt investments
were in a senior secured first lien position.
Effective Portfolio Yield and Growing Core Portfolio Yield
(“Core Yield”)
Effective yields on Hercules’ debt investment portfolio were
13.5% during Q4 2018, the same level as Q3 2018. The Company
realized $63.9 million of early loan repayments in Q4 2018 compared
to $64.9 million in Q3 2018, or a decrease of 1.5%. Effective
portfolio yields generally include the effects of fees and income
accelerations attributed to early loan repayments, and other
one-time events. Effective yields are materially impacted by
elevated levels of early loan repayments and 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, a non-GAAP measure, were 12.9% during Q4 2018,
exceeding the upper end of the Company’s 2018 expected range of
11.5% to 12.5%, and above the 12.7% level achieved in Q3 2018.
Hercules defines core yield as yields that generally exclude any
benefit from income related to early repayments attributed to the
acceleration of unamortized income and prepayment fees and includes
income from expired commitments.
Income Statement
Total investment income increased to $56.9 million for Q4 2018,
compared to $50.2 million in Q4 2017, an increase of 13.3%
year-over-year. The increase is primarily attributable to a higher
average debt investment balance between periods along with an
increase in the core yield from 12.5% in Q4 2017 to 12.9% in Q4
2018.
Non-interest and fee expenses increased to $14.4 million in Q4
2018 versus $12.6 million for Q4 2017. The increase was primarily
due to an increase in G&A and stock-based compensation
expenses, offset by lower variable compensation expenses.
Interest expense and fees were $11.9 million in Q4 2018,
compared to $13.0 million in Q4 2017. The decrease was due to a
lower weighted average cost of borrowings comprised of interest and
fees, of 5.3% in Q4 2018, a decrease from 6.4% in Q4 2017. The
lower weighted average cost of borrowings resulted from the
issuance of the 5.25% Notes due 2025 in April 2018, 6.25% Notes due
2033 in October 2018, and 4.605% fixed rate asset-backed notes due
2027 (the “2027 Asset-Backed Notes”) in November 2018, as well as
increased average borrowing under our credit facilities.
NII – Net Investment Income
NII for Q4 2018 was $30.6 million, or $0.32 per share, based on
96.4 million basic weighted average shares outstanding, compared to
$24.5 million, or $0.29 per share, based on 83.8 million basic
weighted average shares outstanding in Q4 2017, an increase of
24.9% year-over-year. The increase is primarily attributable to a
higher average debt investment balance between periods along with
an increase in the core yield from 12.5% in Q4 2017 to 12.9% in Q4
2018.
DNOI - Distributable Net Operating Income
DNOI, a non-GAAP measure, for Q4 2018 was $33.9 million, or
$0.35 per share, compared to $26.1 million, or $0.31 per share, in
Q4 2017.
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
Hercules’ net cumulative realized gain/(loss) position, since
its first origination activities in October 2004 through December
31, 2018, (including net loan, warrant and equity activity) on
investments, totaled ($40.1) million, on a GAAP basis, spanning 15
years of investment activities.
When compared to total new debt investment commitments during
the same period of over $8.5 billion, the total realized
gain/(loss) since inception of ($40.1) million represents
approximately 47 basis points “bps,” or 0.47%, of cumulative debt
commitments, or an effective annualized loss rate of 3 bps, or
0.03%.
Realized Gains/(Losses)
During Q4 2018, Hercules had gross realized gains/(losses) of
$(0.6) million primarily from gross realized gains of $1.4 million,
offset by the liquidation, write-off or expiration of warrant and
equity investments in seven (7) portfolio companies and a debt
investment in one (1) portfolio company, of ($2.0) million.
Unrealized Appreciation/(Depreciation)
During Q4 2018, Hercules recorded $47.1 million of net
unrealized depreciation primarily related to mark-to-market changes
which were mainly driven by the volatility in the public markets in
Q4 2018 which adversely impacted our public equity and warrant
investments, as well as our private investments. The allocation
was:
- ($33.9) million of unrealized
depreciation which was attributable to our mark-to-market
adjustments based on comparable public peer group performance
- ($17.7) million of unrealized
depreciation which was attributable to our private securities
mark-to-market adjustments based on comparable public peer group
performance; and
- ($16.2) million of unrealized
depreciation was directly attributed to our public securities
mark-to-market performance adjustments;
- ($9.1) million of unrealized
depreciation due to collateral-based impairments;
- ($6.6) million was related to
mark-to-market yields adjustments; and
- $2.5 million was related to the
reversal of unrealized depreciation from actual realizations
Portfolio Asset Quality
As of December 31, 2018, the weighted average grade of the debt
investment portfolio remained level at 2.18, on a cost basis,
compared to 2.23 as of September 30, 2018, based on a scale of 1 to
5, with 1 being the highest quality. Hercules’ policy is to
generally adjust the credit grading down on its portfolio companies
as they approach their expected need for additional growth equity
capital to fund their respective operations for the next 9-14
months.
Additionally, Hercules may selectively downgrade portfolio
companies, from time to time, if they are not meeting the Company’s
financing criteria, underperforming relative to their respective
business plans, or approaching an additional round of new equity
capital investment. It is expected that venture growth stage
companies typically require multiple additional rounds of equity
capital, generally every 9-14 months, since they are not generating
positive cash flows for their operations. Various companies in the
Company’s portfolio will require additional rounds of funding from
time to time to maintain their operations.
As of December 31, 2018, grading of the debt investment
portfolio at fair value, excluding warrants and equity investments,
was as follows:
Credit Grading at Fair Value, Q4 2018 - Q4 2017 ($ in
millions)
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Grade 1 - High $ 311.6
18.0 % $ 150.2 9.4 %
$ 247.5 16.0 %
$ 141.8 10.6 %
$ 345.2 24.4 %
Grade 2 $ 885.1
51.1 % $ 987.5 61.6 % $ 791.9 51.2 % $ 599.8 44.9 % $ 583.0 41.2 %
Grade 3 $ 474.9 27.3 % $ 420.2 26.2 % $ 463.7 30.0 % $ 548.0
41.0 % $ 443.8 31.3 %
Grade 4 $ 60.3 3.5 % $ 44.5 2.7 % $
42.0 2.7 % $ 33.6 2.5 % $ 41.7 2.9 %
Grade 5 - Low $ 1.6 0.1
% $ 0.9 0.1 % $ 0.9 0.1 % $ 13.2 1.0 % $ 2.3 0.2 %
Weighted Avg.
2.18
2.23
2.21
2.43
2.17
Non-Accruals
Non-accruals declined as a percentage of the overall investment
portfolio in the fourth quarter of 2018. As of December 31, 2018,
the Company had two (2) debt investments on non-accrual with a
cumulative investment cost and fair value of approximately $2.7
million and $0.0 million, respectively, or 0.1% and 0.0% as a
percentage of the Company’s total investment portfolio at cost and
value, respectively.
Compared to September 30, 2018, the Company had two (2) debt
investments on non-accrual with cumulative investment cost and fair
value of approximately $2.8 million and $0.0 million, respectively,
or 0.2% and 0.0% as a percentage of the total investment portfolio
at cost and value, respectively.
Q4 2018 Q3 2018
Q2 2018 Q1 2018
Q4 2018
Total Investments at Cost $ 1,980.5 $ 1,813.1
$ 1,757.6 $ 1,576.3 $ 1,619.8
Loans on non-accrual as a %
of Total Investments at Value 0.0% 0.0% 0.0% 0.0% 0.0%
Loans on non-accrual as a % of Total 0.1% 0.2% 0.2%
0.8% 0.9%
Investments at Cost
Liquidity and Capital Resources
The Company ended Q4 2018 with $156.2 million in available
liquidity, including $34.2 million in unrestricted cash and cash
equivalents, and $122.0 million in available credit facilities,
subject to existing terms and advance rates and regulatory and
covenant requirements.
On November 1, 2018, the Company completed a term debt
securitization in connection with which an affiliate of the Company
made an offering of $200 million in aggregate principal amount of
the 2027 Asset-Backed Notes. The 2027 Asset-Backed Notes were rated
A(sf) by Kroll Bond Rating Agency, Inc. (“KBRA”). Interest on the
2027 Asset-Backed Notes will be paid, to the extent of funds
available, at a fixed rate of 4.605% per annum. The 2027
Asset-Backed Notes have a stated maturity of November 22, 2027.
On January 22, 2019, the Company completed a term debt
securitization in connection with which an affiliate of the Company
made an offering of $250 million in aggregate principal amount of
fixed-rate asset-backed notes due 2028 (the “2028 Asset-Backed
Notes”). The 2028 Asset-Backed Notes were rated A(sf) KBRA.
Interest on the 2028 Asset-Backed Notes will be paid, to the extent
of funds available, at a fixed rate of 4.703% per annum. The 2028
Asset-Backed Notes have a stated maturity of February 22, 2028.
On December 7, 2018, the Board of Directors approved a full
redemption, in two equal transactions, of $83.5 million of the
outstanding aggregate principal amount of the 2024 Notes. The 2024
Notes were fully redeemed on January 14, 2019 and February 4,
2019.
During Q4 2018, the Company sold 94,000 shares of common stock,
which were issued under the equity ATM program, for total
accumulated net proceeds of approximately $957,000, including
$150,000 of offering expenses.
For the twelve months ended December 31, 2018, the Company sold
5.1 million shares of common stock under the equity ATM program for
total accumulated net proceeds of approximately $63.3 million,
including $1.5 million of offering expenses.
Bank Facilities
As of December 31, 2018, Hercules has two committed accordion
credit facilities, one with Wells Fargo Capital Finance, part
of Wells Fargo & Company (NYSE: WFC) (the “Wells Fargo
Facility”), and another with Union Bank (the “Union Bank
Facility”) for $75.0 million and $100.0 million,
respectively. The Wells Fargo and Union Bank Facilities both
include an uncommitted 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 December 31, 2018 under the Wells
Fargo Facility and Union Bank Facility were both LIBOR+3.25%, and
no floor, respectively. There were $39.8 million in outstanding
borrowings under the Union Bank Facility and $13.1 million in
outstanding borrowings under the Wells Fargo Facility, for a total
of $52.9 million at December 31, 2018.
On January 11, 2019, the Company entered into the Seventh
Amendment to the Wells Facility. Among others, the amendment amends
certain key provisions of the Wells Facility to increase Wells
Fargo Capital Finance’s commitments thereunder from $75.0 million
to $125.0 million, reduces the current interest rate to LIBOR plus
3.00% with a natural floor of 3.00%, and extends the maturity date
to January 2023. The advance rate was increased to 55% against
eligible loans.
On February 20, 2019, the Company replaced its existing $100.0
million credit facility with MUFG Union Bank with a new credit
facility under which City National, Umpqua Bank, Hitachi Capital
America Corporation and Mutual of Omaha Bank, together with MUFG
Union Bank, have committed a total of $200.0 million in credit
capacity subject to borrowing base, leverage and other
restrictions. The new credit facility also includes an uncommitted
accordion feature of $100.0 million. The interest rate applicable
to borrowings under the new credit facility has been reduced to
LIBOR plus 2.70%. The new credit facility matures in February 2022,
plus a 12-month amortization period. The advance rate under the new
credit facility has been increased to 55% against eligible
loans.
Leverage
On December 6, 2018, the Company announced that its stockholders
approved the proposal to reduce its asset coverage requirement from
200% to 150% at the Company's special stockholders meeting
(“Special Meeting”) held on December 6, 2018. This reduction
applies the modified asset coverage requirements as amended by the
Small Business Credit Availability Act, which was passed into law
on March 23, 2018. At the Special Meeting, a quorum was reached
with stockholder’s voting 91.5% in favor of the proposal.
Hercules’ GAAP leverage ratio, including its SBA debentures, was
102.6%, as of December 31, 2018. Hercules’ regulatory leverage, or
debt to equity ratio, excluding our Small Business Administration
“SBA” debentures, was 87.0% and net regulatory leverage, a non-GAAP
measure (excluding cash of approximately $34.2 million), was 83.4%,
as of December 31, 2018. Hercules’ net leverage ratio, including
its SBA debentures, was 99.0%, as of December 31, 2018.
Available Unfunded Commitments – Representing 7.1% of total
assets
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 December 31, 2018, the Company had $139.0 million of
available unfunded commitments at the request of the portfolio
company and unencumbered by any milestones, including undrawn
revolving facilities, representing 7.1% of Hercules’ total assets.
This decreased from the previous quarter of $171.9 million of
available unfunded commitments at the request of the portfolio
company or 9.4% of Hercules’ total assets.
Existing Pipeline and Signed Term Sheets
After closing $249.4 million in new debt and equity commitments
in Q4 2018, Hercules has pending commitments of $290.6 million in
signed non-binding term sheets outstanding as of February 18, 2019.
Since the close of Q4 2018 and as of February 18, 2019, Hercules
closed new debt and equity commitments of $55.0 million to new and
existing portfolio companies and funded $67.8 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 December 31, 2018, the Company’s net assets were $955.4
million, compared to $1.0 billion at the end of Q3 2018. NAV per
share decreased 4.6% to $9.90 on 96.5 million outstanding shares of
common stock as of December 31, 2018, compared to $10.38 on 96.8
million outstanding shares of common stock as of September 30,
2018. The decrease in NAV per share was primarily attributed to a
change in unrealized depreciation during the quarter.
On December 17, 2018, the Board of Directors authorized a stock
repurchase plan to acquire up to $25.0 million in the aggregate of
Hercules’ common stock at prices that may be above or below net
asset value, in accordance with the guidelines specified in Rule
10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. The
Company may repurchase shares of its common stock in the open
market, including block purchases, at prices that may be above or
below NAV as reported in the most recently published financial
statements. Unless extended or terminated by its Board of
Directors, Hercules expects the share repurchase program to be in
effect until June 18, 2019, or until the approved dollar amount has
been used to repurchase shares.
During the three months ended December 31, 2018, the Company
repurchased 376,466 shares of common stock at an average price of
$10.77 per share.
High Asset Sensitivity – Expected Increase in Prime Rate Will
Benefit Hercules and Help Drive Future Earnings Growth
Hercules has purposely constructed an asset sensitive debt
investment portfolio and has structured its debt borrowings for any
eventual increases in market rates that may occur in the near
future. With 97.3% of our debt investment portfolio being priced at
floating interest rates as of December 31, 2018, with a Prime or
LIBOR-based interest rate floor, coupled with 94.5% of our
outstanding debt borrowings bearing fixed interest rates, this
leads to higher net investment income to our shareholders.
Based on Hercules’ Consolidated Statement of Assets and
Liabilities as of December 31, 2018, 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
Hercules’ 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 $3.9 million, or $0.04 per share, of net investment
income annually.
(in thousands) Interest Interest
Net EPS(2) Basis Point
Change Income(1) Expense Income
25 $ 3,911 $ 40 $ 3,871 $ 0.04 50 $ 8,048 $ 80 $ 7,968 $
0.08 75 $ 12,203 $ 119 $ 12,084 $ 0.13 100 $ 16,372 $ 159 $ 16,213
$ 0.17 200 $ 33,052 $ 318 $ 32,734 $ 0.34 300 $ 49,403 $ 477 $
48,926 $ 0.51 (1) Source: Hercules Capital Form 10-K for
2018 (2) EPS calculated on basic weighted shares outstanding of
96,357. Estimates are subject to change due to impact from active
participation in the Company's equity ATM program and any future
equity offerings.
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 $120.2 million and a cost basis of $191.9 million as
of December 31, 2018. On a fair value basis, 22.7% or $27.3 million
is related to existing public equity positions, at December 31,
2018.
Warrant Portfolio
Hercules held warrant positions in 129 portfolio companies with
a fair value of $26.7 million and a cost basis of $35.7 million as
of December 31, 2018. On a fair value basis, 15.0% or 4.0 million
is related to existing public warrant positions, at December 31,
2018.
Portfolio Company IPO and M&A Activity in Q4 2018
IPO Activity
As of February 18, 2019, Hercules held warrant and equity
positions in seven (7) portfolio companies that had either
completed their IPOs or filed Registration Statements in
contemplation of a potential IPO, including:
- In February 2019, Hercules’ portfolio
company Stealth Bio Therapeutics Corp., (NASDAQ: MITO), a
clinical-stage biopharmaceutical company developing therapeutics to
treat mitochondrial dysfunction, completed its IPO offering 6.5
million American Depositary Shares (“ADS”) at an initial public
offering price of $12.00 per ADS. Hercules currently holds warrants
for 216,666 shares of Preferred Series A stock as of December 31,
2018.
- In February 2019, Hercules portfolio
company Avedro, Inc. (NASDAQ: AVDR), a leading
commercial-stage ophthalmic medical technology company focused on
treating corneal ectatic disorders and improving vision to reduce
dependency on eyeglasses or contact lenses, completed its IPO
offering 5.0 million shares of common stock at an initial public
offering price of $14.00 per share. Hercules currently holds
warrants for 300,000 shares of Preferred Series AA stock as of
December 31, 2018.
- Hercules portfolio company
Lightspeed POS, Inc. (aka Lightspeed Retail), a cloud-based
point-of-sale (POS) software solution used by more than 50,000
retailers and restaurants, has filed a preliminary prospectus with
Canadian regulators and plans to list its shares of common stock on
the Toronto Stock Exchange under the ticker symbol “LSPD.” Hercules
currently holds 230,030 shares of Preferred Series C and 198,677
shares of Preferred Series D stock, and warrants for 245,610 shares
of Preferred Series C stock as of December 31, 2018.
- Four (4) portfolio company 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
1. In November 2018, Hercules’ portfolio
company Edge Therapeutics, Inc. (NASDAQ: EDGE), a
clinical-stage biotechnology company that seeks to discover,
develop and commercialize novel, hospital-based therapies capable
of transforming treatment paradigms for the management of acute,
life-threatening conditions, announced that they have entered into
a definitive merger agreement with PDS Biotechnology Corporation, a
privately-held, clinical-stage cancer immunotherapy company. The
merger is a stock-for-stock transaction, and the merged company
will operate under the PDS Biotechnology Corporation name, and the
combined company’s common stock is expected to continue to trade on
NASDAQ under a new ticker symbol to be announced at a later date.
The merger is expected to close in the first quarter of 2019,
subject to the approval of the stockholders of each company as well
as other customary closing conditions. Terms of the acquisition
were not disclosed. Hercules committed $20.0 million in venture
debt financing beginning in August 2014, and currently holds 49,965
shares of common stock and warrants for 78,595 shares of common
stock as of December 31, 2018.
2. In January 2019, Hercules’ portfolio
company Labcyte Inc., a global biotechnology tools company
developing acoustic liquid handling, was acquired by Beckman
Coulter Life Sciences, a developer and manufacturer of products
that simplify, automate and innovate complex biomedical testing.
Labcyte will transition into Beckman Coulter Life Sciences under
the larger Danaher Life Sciences platform of companies. Terms of
the acquisition were not disclosed. Hercules committed $12.5
million in venture debt financing beginning in October 2009, and
currently holds warrants for 1,127,624 shares of Preferred Series C
stock as of December 31, 2018.
3. In February 2019, Hercules’ portfolio
company Art.com Inc., one of the largest online sellers of
art and wall décor globally, was acquired by Walmart (NYSE: WMT), a
multinational retail corporation that operates a chain of
hypermarket, discount department stores and grocery stores. Terms
of the acquisition were not disclosed. Hercules initially committed
$12.0 million in venture debt financing beginning in March 2018,
and currently holds warrants for 311,005 shares of Preferred Series
B stock as of December 31, 2018.
Distributions
The Board of Directors declared a fourth quarter cash
distribution of $0.31 per share. This distribution would
represent the Company’s 54th consecutive distribution declaration
since its IPO, bringing the total cumulative distribution declared
to date to $15.28 per share. The following shows the key dates of
our fourth quarter 2018 distribution payments:
Record Date
March 4, 2019 Payment Date March 11, 2019
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, during the year, the Company’s Board
of Directors may choose to pay additional supplemental
distributions, 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 December 31, 2018,
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 2019 distributions to stockholders
will be.
Subsequent Events
1. As of February 18, 2018, Hercules has:
a. Closed new debt and equity commitments of
$55.0 million to new and existing portfolio companies and funded
$67.8 million since the close of the fourth quarter.
b. Pending commitments (signed non-binding
term sheets) of $290.6 million.
The table below summarizes our year-to-date closed and pending
commitments as follows:
Closed Commitments and Pending Commitments (in millions) Q1
2019 Closed Commitments (as of February 18, 2019)(a)
$55.0
Q1 2019 Pending Commitments (as of February 18, 2019)(a)
$290.6
Year-to-Date 2019 Closed and Pending Commitments
$345.6
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. On December 7, 2018, the Board of
Directors approved a full redemption, in two equal transactions, of
$83.5 million of the outstanding aggregate principal amount of the
2024 Notes. The 2024 Notes were fully redeemed on January 14, 2019
and February 4, 2019.
3. On January 11, 2019, the Company entered
into the Seventh Amendment to the Wells Facility. Among others, the
amendment amends certain key provisions of the Wells Facility to
increase Wells Fargo Capital Finance’s commitments thereunder from
$75.0 million to $125.0 million, reduces the current interest rate
to LIBOR plus 3.00% with a natural floor of 3.00%, and extends the
maturity date to January 2023. The advance rate was increased to
55% against eligible loans.
4. On January 22, 2019, the Company completed
a term debt securitization in connection with which an affiliate of
the Company made an offering of $250 million in aggregate principal
amount of the 2028 Asset-Backed Notes. The 2028 Asset-Backed Notes
were rated A(sf) by KBRA. Interest on the 2028 Asset-Backed Notes
will be paid, to the extent of funds available, at a fixed rate of
4.703% per annum. The 2028 Asset-Backed Notes have a stated
maturity of February 22, 2028.
5. In February 2019, Hercules’ portfolio
company Stealth Bio Therapeutics Corp., (NASDAQ: MITO), a
clinical-stage biopharmaceutical company developing therapeutics to
treat mitochondrial dysfunction, completed its IPO offering 6.5
million ADSs at an initial public offering price of $12.00 per ADS.
Hercules currently holds warrants for 216,666 shares of Preferred
Series A stock as of December 31, 2018.
6. In February 2019, Hercules portfolio
company Avedro, Inc. (NASDAQ: AVDR), a leading
commercial-stage ophthalmic medical technology company focused on
treating corneal ectatic disorders and improving vision to reduce
dependency on eyeglasses or contact lenses, completed its IPO
offering 5.0 million shares of common stock at an initial public
offering price of $14.00 per share. Hercules currently holds
warrants for 300,000 shares of Preferred Series AA stock as of
December 31, 2018.
7. On February 20, 2019, the Company replaced
its existing $100.0 million credit facility with MUFG Union Bank
with a new credit facility under which City National, Umpqua Bank,
Hitachi Capital America Corporation and Mutual of Omaha Bank,
together with MUFG Union Bank, have committed a total of $200.0
million in credit capacity subject to borrowing base, leverage and
other restrictions. The new credit facility also includes an
uncommitted accordion feature of $100.0 million. The interest rate
applicable to borrowings under the new credit facility has been
reduced to LIBOR plus 2.70%. The new credit facility matures in
February 2022, plus a 12-month amortization period. The advance
rate under the new credit facility has been increased to 55%
against eligible loans.
8. In February 2019, Hercules’ portfolio
company Motif BioSciences Inc. (AIM/NASDAQ: MTFB) entered
into an amendment agreement with the Company under which Motif made
an immediate early repayment of $7.0 million and will make a
further repayment of $0.5 million on the earlier of 90 days, being
May 18, 2019, or receipt of funds from an equity raise of $2.0
million or greater.
Conference Call
Hercules has scheduled its fourth quarter and full-year 2018
financial results conference call for February 21, 2019 at 2:00
p.m. PT (5:00 p.m. ET). To listen to the call, please dial (877)
304-8957 (or (408) 427-3709 internationally) and reference
Conference ID: 3787301 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
3787301.
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 $8.5
billion to over 450 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
six outstanding bond issuances of:
Institutional Notes PAR $1000.00
Retail Notes (“Baby Bonds”) PAR $25.00
- 5.25% Notes due 2025 (NYSE: HCXZ)
- 6.25% Notes due 2033 (NYSE: HCXY)
Convertible Notes
- 4.375% Convertible Notes due 2022
Securitization Notes
- 4.605% Asset-backed Notes due 2027
- 4.703% Asset-backed Notes due 2028
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 (dollars in thousands,
except per share data) December 31, 2018
December 31, 2017 Assets Investments:
Non-control/Non-affiliate investments (cost of $1,830,725 and
$1,506,454, respectively) 1,801,258 1,491,458 Control investments
(cost of $64,799 and $25,419, respectively) 57,619 19,461 Affiliate
investments (cost of $85,000 and $87,956, respectively)
21,496 31,295 Total investments in securities,
at value (cost of $1,980,524 and $1,619,829, respectively)
1,880,373 1,542,214 Cash and cash equivalents 34,212 91,309
Restricted cash 11,645 3,686 Interest receivable 16,959 12,262
Other assets 2,002 5,244
Total
assets $ 1,945,191 $ 1,654,715
Liabilities Accounts payable and accrued liabilities $
25,961 $ 26,896 2021 Asset-Backed Notes, net (principal of $0 and
$49,153 respectively) (1) — 48,650 2027 Asset-Backed Notes, net
(principal of $200,000 and $0, respectively) (1) 197,265 — 2022
Convertible Notes, net (principal of $230,000 and $230,000,
respectively)(1) 225,051 223,488 2022 Notes, net (principal of
$150,000 and $150,000, respectively) (1) 147,990 147,572 2024
Notes, net (principal of $83,510 and $183,510, respectively) (1)
81,852 179,001 2025 Notes, net (principal of $75,000 and $0,
respectively)(1) 72,590 — 2033 Notes, net (principal of $40,000 and
$0, respectively)(1) 38,427 — SBA Debentures, net (principal of
$149,000 and $190,200, respectively) (1) 147,655 188,141 Credit
Facilities 52,956 —
Total
liabilities $ 989,747 $ 813,748
Net assets consist
of: Common stock, par value 96 85 Capital in excess of par
value 1,052,269 908,501 Total distributable earnings (loss) (92,859
) (67,619 )
Treasury Stock, at cost, 376,466 shares as
of December 31, 2108 and no shares as of December 31, 2017
(4,062 ) —
Total net assets $ 955,444
$ 840,967
Total liabilities and net assets $
1,945,191 $ 1,654,715
Shares of common
stock outstanding ($0.001 par value, 200,000,000 authorized)
96,501 84,424
Net asset value per share $ 9.90 $ 9.96
(1) The Company’s SBA Debentures, 2033
Notes, 2025 Notes, 2022, Notes, 2024 Notes, 2021 Asset-Backed
Notes, 2027 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.
HERCULES CAPITAL, INC. CONSOLIDATED STATEMENT OF
OPERATIONS (in thousands, except per share data)
Three Months Ended December 31,
Twelve Months Ended December 31, 2018
2017 2018
2017 Investment income: Interest income
Non-control/Non-affiliate investments $ 51,156 $ 45,375 $ 185,187 $
169,424 Control investments 1,043 466 3,391 1,971 Affiliate
investments 488 553 2,058
801 Total interest income 52,687
46,394 190,636 172,196 Fee
Income
Commitment, facility and loan fee
income:
Non-control/Non-affiliate investments 4,125 3,762 16,776 18,630
Control investments 4 — 5 11 Affiliate investments 73
42 336 43 Total Fee
Income 4,202 3,804 17,117
18,684
Total investment income 56,889 50,198
207,753 190,880
Operating expenses: Interest 10,720 9,811
39,435 37,857 Loan fees 1,221 3,228 7,260 8,728 General and
administrative 4,084 3,744 15,488 16,105 Employee compensation:
Compensation and benefits 6,993 7,279 25,062 24,555 Stock-based
compensation 3,281 1,618 11,779
7,191 Total employee compensation
10,274 8,897 36,841
31,746
Total operating expenses 26,299
25,680 99,024 94,436
Net investment income 30,590 24,518 108,729 96,444
Net
realized gain (loss) on investments Non-control/Non-affiliate
investments (606 ) 706 (4,721 ) (10,235 ) Control investments —
(487 ) (4,308 ) (16,476 ) Affiliate investments —
— (2,058 ) — Total net realized
gain (loss) on investments (606 ) 219
(11,087 ) (26,711 )
Net change in unrealized appreciation
(depreciation) on investments Non-control/Non-affiliate
investments (35,409 ) (1,623 ) (13,082 ) 43,796 Control investments
(4,937 ) (3,551 ) (1,222 ) 14,152 Affiliate investments
(6,776 ) (1,197 ) (6,842 ) (48,683 ) Total net
unrealized appreciation (depreciation) on investments
(47,122 ) (6,371 ) (21,146 ) 9,265
Total net realized and unrealized gain(loss) (47,728
) (6,152 ) (32,233 ) (17,446 )
Net
increase(decrease) in net assets resulting from operations $
(17,138 ) $ 18,366 $ 76,496 $ 78,998
Net investment income before investment gains and losses per common
share: Basic $ 0.32 $ 0.29 $ 1.19 $ 1.16
Change in net assets resulting from operations per common
share: Basic $ (0.18 ) $ 0.22 $ 0.83 $ 0.95
Diluted $ (0.18 ) $ 0.22 $ 0.83 $ 0.95
Weighted average shares outstanding Basic 96,357
83,843 90,929 82,519
Diluted 96,357 84,027 91,057
82,640 Distributions declared per common
share: Basic $ 0.31 $ 0.31 $ 1.26 $ 1.24
HERCULES
CAPITAL, INC.
NON GAAP FINANCIAL MEASURES
(in thousands, except per share
data)
Three Months Ended December 31,
Reconciliation of Net Investment Income to DNOI 2018
2017 Net investment income $ 30,590 $ 24,518
Stock-based compensation 3,281 1,618 DNOI $ 33,871 $
26,136 DNOI per share-weighted average common shares Basic $
0.35 $ 0.31 Weighted average shares outstanding Basic
96,357 83,843
Distributable Net Operating Income, “DNOI” represents net
investment income as determined in accordance with U.S. generally
accepted accounting principles, or 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 paid-in-kind, or 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)
December 31, 2018 Total Debt (Principal
Outstanding) $ 980,466 Long-term SBA Debentures $ (149,000 ) Cash
and cash equivalents 34,212
Numerator: net debt (total debt less cash
and cash equivalents and SBA Debentures)
$ 865,678 Denominator: Total net assets $ 955,444 Net Leverage
Ratio 90.6 %
Net leverage ratio is calculated by deducting the outstanding
cash of $34.2 million and long-term SBA debentures of $149.0
million, at December 31, 2018 from total principal outstanding of
$865.7 million divided by our total equity of $955.4 million,
resulting in a net leverage ratio of 90.6%. 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: https://www.businesswire.com/news/home/20190221005877/en/
Michael HaraInvestor Relations and Corporate
CommunicationsHercules Capital, Inc.650-433-5578mhara@htgc.com
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