Second Consecutive Quarter of Net Investment
Income “NII” Exceeding Dividend Distribution at 103% Coverage and
Generating 12.9% Return on Average Equity “ROAE”
Q3 2016 Net Realized Gains of $7.9 Million
Q3 2016 Financial Highlights
- $0.32 per share, or $23.8 million of
Net Investment Income “NII”
- New Equity and Debt Commitments of
$178.0 million for Q3 2016
- Total Gross Fundings of $130.7 million
for Q3 2016
- Total Investment Income of $45.1
million for Q3 2016
- $0.34 per share, or $25.2 million of
Distributable Net Operating Income “DNOI,” a non-GAAP measure
- 12.9% Return on Average Equity “ROAE”
(NII/Average Equity) for Q3 2016
- 6.9% Return on Average Assets “ROAA”
(NII/Average Assets) for Q3 2016
- Net Asset Value “NAV” increased to
$9.86 from $9.66, up 2.1% from Q2 2016
- 14.6% GAAP Effective Yields
- $264.0 million of available liquidity
for future portfolio and earnings growth, subject to existing terms
and covenants
- 62.7% Regulatory Leverage for Q3 2016,
as compared to 67.5% at Q2 2016
Year-to-date 2016 Financial Highlights
- Net Investment Income “NII” of $67.2
million for nine months ending Q3 2016, or $0.91 per share, an
increase of 25.8%, as compared to $53.4 million for nine months
ending Q3 2015, or $0.76 per share
- New Equity and Debt Commitments of
$603.0 million
- Total Gross Fundings of $461.5
million
- Total Investment Income of $127.6
million
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, 2016.
The Company also announced that its Board of Directors has
declared a third quarter cash dividend of $0.31 per share, that
will be payable on November 21, 2016, to shareholders of record as
of November 14, 2016.
“Our strong third quarter financial results are a testament to
our differentiated business model within the BDC industry,” stated
Manuel A. Henriquez, chairman and chief executive officer of
Hercules. “This proven model culminated in generating our second
consecutive quarter of 103.0% NII coverage, appreciation in our
NAV, strong and above average seasonal pace of new origination
activities and consistent high investment yields while maintaining
our historical exceptional credit underwriting and quality. In
addition to the strong quarterly income and NII growth, our debt
investment portfolio is now approaching our critical targeted
inflection point of $1.35 billion, which assuming effective yields
in excess of 13.5% (currently at 14.6%) and maintaining NII margins
of 52.0% or better (currently 52.7%), we expect to generate NII
income at or in excess of our existing ‘dividend’ distribution of
$0.31 and find ourselves in a very advantageous position of having
a substantial and growing war chest of undistributed earnings
spillover rolling into 2017, assuming no unexpected credit events
before year end.”
Henriquez continued, “Our team of investment professionals
continues to deliver outstanding performance and results, as we
pursue our proven ‘slow and steady’ march towards our desired
target of a $1.30 to $1.35 billion debt investment portfolio, which
we anticipate achieving by year-end or early January 2017, subject
to market conditions and favorable market election outcomes. We
ended Q3 with a debt investment portfolio of $1.28 billion, on a
cost basis, slightly under our expected target for Q3 and impacted
by higher than anticipated early repayments, however, given our
existing pipeline of signed term sheets, coupled with our current
pipeline of transactions being evaluated, we believe that we are
within striking distance of our targeted debt investment portfolio
goal which should allow us to achieve or maybe even exceed our
target of $1.35 billion by year-end or early January 2017, subject
to market conditions.”
Henriquez concluded, “Hercules has ample liquidity and is well
positioned with a strong and liquid balance sheet, with nearly
$264.0 million, or ‘dry powder’ for new investments. The company
also has plenty of headroom to grow our regulatory leverage, which
currently stands at 62.7%. Our ability to access multiple different
sources of liquidity has afforded us a competitive advantage of
maintaining a level of flexibility to grow our debt investment
portfolio while many others find themselves unable to grow or gain
access to either the debt or equity capital markets.”
Q3 2016 Review and Operating Results
Growth of Debt Investment Portfolio
Hercules had a seasonally strong Q3 2016, having successfully
entered debt and equity commitments to thirteen (13) companies,
five (5) of which were to new companies, totaling $178.0 million,
and gross fundings of $130.7 million.
During the quarter, Hercules realized higher-than-anticipated
unscheduled early principal repayments of $84.2 million, along with
normal scheduled amortization of $32.4 million, or $116.6 million
in total debt repayments.
Net debt investment portfolio growth during the third quarter,
on a cost basis, was $20.0 million, slightly lower than our desired
target, driven by a higher volume of unscheduled early principal
repayments.
The Company’s total investment portfolio, (at cost and fair
value) by category, quarter-over-quarter, are highlighted
below:
(dollars in millions) Debt
Equity Warrants
Total Portfolio Balances at Cost at 6/30/16 $
1,255.9 $ 70.2 $
43.3 $ 1,369.4 New fundings(a)
129.9 - 0.8 130.7 Warrants not related to Q3 2016 fundings - - 0.1
0.1 Unscheduled paydowns(b) (84.2 ) - - (84.2 ) Principal reduction
on investments (32.4 ) - - (32.4 ) Net changes attributed to
conversions, liquidations, and fees 6.7 (1.1 )
(1.0 ) 4.6 Net activity during Q3 2016
20.0 (1.1 ) (0.1 ) 18.8
Balances at Cost at 9/30/16 $ 1,275.9
$ 69.1 $ 43.2 $
1,388.2 Balances at
Value at 6/30/16 $ 1,211.8 $
65.9 $ 25.1 $
1,302.8 Net activity during Q3 2016 20.0 (1.1 ) (0.1
) 18.8 Net change in unrealized appreciation / (depreciation)
(7.7 ) 4.0 2.7 (1.0 )
Balances at Value at 9/30/16 $ 1,224.1
$ 68.8 $ 27.7 $
1,320.6
(a)
New fundings amount includes $1.7 million
total new fundings associated with revolver loans during Q3
2016.
(b)
Unscheduled paydowns include $6.4M paydown
on revolvers during Q3 2016.
Weighted Average Debt Investment Portfolio Balance, at
Cost
Q3 2015 Q4 2015
Q1 2016 Q2 2016
Q3 2016
Ending Balance at Cost $1,109.2 $1,152.3
$1,241.8 $1,255.9 $1,275.9
Weighted Average Balance
$1,152.9 $1,107.1 $1,180.1
$1,209.0 $1,236.0
As of September 30, 2016, 91.2% 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 was 14.6%
during Q3 2016, up slightly from the previous quarter of 14.4%, due
to higher early pay-off activities. Our effective portfolio yields
generally include the effects of fees and income accelerations
attributed to early payoffs, as well as other activities, or
one-time event fees. 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 steady at 13.2% during Q3 2016, and well within
our expected normalized levels of 12.5% to 13.5%. Hercules defines
Core Yield as yields which generally exclude any benefits from
income related to early debt repayments attributed to the
acceleration of unamortized origination fees and income as well as
prepayment fees, and includes income from expired commitments.
Income Statement
Total investment income for Q3 2016 was $45.1 million, compared
to $47.1 million in Q3 2015. The decrease is primarily attributable
to the decrease in unscheduled early debt repayment fees and
accelerations.
Non-interest and fees expenses was down 23.8% to $11.2 million
in Q3 2016 versus $14.7 million for Q3 2015. The decrease was
primarily due to changes in variable compensation related to
origination activities and stock-based compensation, and a slight
decrease in general and administrative expenses.
Interest expense and financing fees were $10.1 million, compared
to $8.9 million in Q3 2015. The increase was primarily due to the
recent issuance of $141.9 million of our 6.25% 2024 Notes in Q2
2016, offset by the retirement of our Convertible Debt in Q2
2016.
Total operating expenses, which includes financing expenses, for
Q3 2016, was $21.3 million, down 9.4%, compared to $23.5 million
for Q3 2015.
The Company had a weighted average cost of borrowings comprised
of interest and fees, of 6.0% in Q3 2016 versus 5.6% during Q3
2015. The increase was primarily driven by the issuances of our
6.25% 2024 Notes above, offset by the retirement of our Convertible
Debt within 2016.
NII – Net Investment Income
NII for Q3 2016 was up slightly to $23.8 million, or $0.32 per
share, based on 74.1 million basic weighted average shares
outstanding, compared to $23.6 million, $0.33 per share, based on
much lower shares of 71.5 million basic weighted average shares
outstanding in Q3 2015, compared to 74.1 million shares in Q3 2016.
The increase is primarily attributable to the increase in the
weighted average loan balance and the decrease in total operating
expenses offset by decrease in unscheduled early debt repayment
fees and accelerations compared to the prior year period.
DNOI - Distributable Net Operating Income
DNOI, a non-GAAP measure, for Q3 2016 was $25.2 million or $0.34
per share, compared to $25.8 million, or $0.36 per share, in Q3
2015. The slight decrease is primarily attributable to the increase
in the weighted average loan balance offset by decrease in
unscheduled early debt repayment fees and accelerations, as well as
a slightly lower 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 Hercules’ first origination activities commencing in
October 2004, the aggregate net realized gains/(losses) on
investments, through September 30, 2016, totaled net ($3.4) million
in cumulative total net losses, on a GAAP basis. When compared to
cumulative new debt commitments during the same period of over $6.3
billion, the net cumulative realized gains/(losses) since inception
represents approximately 5 basis points “bps” or 0.05% of 1.0% of
cumulative debt commitments, or an effective approximate annualized
loss rate of 0 bps or 0.00%.
Realized Gains/(Losses)
During Q3 2016, Hercules had net realized gains of $7.9 million,
which consisted of gross realized gains of $9.4 million primarily
from the partial sale of our investment in Box, Inc., and the sale
or acquisitions of the Company’s holdings in three additional
portfolio companies. These gains were partially offset by gross
realized losses of ($1.5) million primarily from the write-off of
one debt investment, and write-off of warrants and equity
investments.
Unrealized Appreciation/ (Depreciation)
A break-down of the net unrealized appreciation/ (depreciation)
in the investment portfolio is highlighted below:
Three Months Ended September 30, 2016 (in
millions) Debt Equity
Warrants Total Collateral Based
Impairments $ (14.1 ) $ (0.1 ) $ (0.3 ) $ (14.5 ) Reversals of
Prior Period Collateral Based Impairments 1.3 — —
1.3 Reversals due to Debt Payoffs & Warrant/Equity Sales
0.3 (4.7 ) (2.0 ) (6.4 ) Fair Value
Market/Yield Adjustments* Level 1 & 2 Assets 0.3 6.5 (0.8 ) 6.0
Level 3 Assets 4.5 2.3 5.8
12.6
Sub-total Fair Value Market/Yield
Adjustments 4.8 8.8 5.0 18.6
Total Unrealized
Appreciation/(Depreciation)* $ (7.7 )
$ 4.0 $ 2.7 $
(1.0 ) *Excludes unrealized depreciation from
escrow receivable and taxes payable
During Q3 2016, we recorded $1.0 million of net unrealized
depreciation from our debt, equity and warrant investments.
Approximately ($7.7) million was net unrealized depreciation on our
debt investments which primarily relates to ($14.1) million of
unrealized depreciation for collateral based impairments on 12
portfolio companies offset by the reversal of $1.3 million
unrealized depreciation for prior period collateral based
impairments on one portfolio company and $4.8 million of unrealized
appreciation from our current market yield analysis related to
industry performance.
Approximately $4.0 million was attributed to net unrealized
appreciation on our equity investments which primarily relates to
$6.5 million unrealized appreciation on our public equity portfolio
with the largest concentration in our investment in Box, Inc. and
$2.3 million of unrealized appreciation on our private portfolio
companies related to portfolio company performance. Approximately
$2.7 million was attributed to net unrealized appreciation on our
warrant investments primarily due to $5.8 million of unrealized
appreciation on our private portfolio companies offset by the
reversal of approximately $2.0 million of unrealized appreciation
upon being realized as a gain due to the acquisition of our warrant
investments in two portfolio companies.
Liquidity and Capital Resources
The Company ended Q3 2016 with $264.0 million in available
liquidity, including $69.0 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 2016, Hercules sold 2.1 million shares of common stock
under its At-the-Market “ATM” equity distribution agreement, for
total accumulated net proceeds of $26.5 million, all accretive to
net asset value representing approximately $0.07 in NAV EPS.
Bank Facilities
As of September 30, 2016, Hercules has two committed credit
facilities with Wells Fargo Capital Finance (“WFCF”), part of
Wells Fargo & Company (NYSE: WFC) and Union Bank 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,
2016 under the Wells Fargo Facility and Union Bank
Facility were both LIBOR+3.25% with no LIBOR floor.
Leverage
Hercules’ regulatory leverage, or debt to equity ratio,
excluding our SBA debentures was 62.7%, as of September 30, 2016.
Hercules’ GAAP leverage ratio, including our SBA debentures, was
87.9%, as of September 30, 2016.
Hercules has an SEC order 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 $281.3 million to its balance sheet, bringing the maximum
potential leverage to $943.8 million, or 125.2% (1.25:1), as of
September 30, 2016, if it had access to such additional
leverage.
As of September 30, 2016, the Company’s asset coverage ratio
under our regulatory requirements as a business development company
was 259.6%, excluding the SBIC debentures, as a result of our
exemptive order from the SEC. This improved from 248.1% in Q2 2016,
which was primarily due to the ATM equity distribution and paydowns
on our securitization.
Available Unfunded Commitments – Representing only 5.8% of
loan 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 Company’s 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, 2016, the Company had $73.9 million of
available unfunded commitments at the request of the portfolio
company and unencumbered by any milestones, including undrawn
revolving facilities, representing 5.8% of Hercules’ debt
investment balance, at cost.
Existing Pipeline and Signed Term Sheets
Hercules finished Q3 2016 with $55.0 million in signed
non-binding term sheets outstanding to six new and existing
companies. Since the close of Q3 2016 and as of October 31, 2016,
Hercules closed debt and equity commitments of $40.0 million to new
and existing portfolio companies, and funded $51.1 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, 2016, the Company’s net assets were $753.6
million, compared to $717.8 million at the end of Q2 2016.
As of September 30, 2016, net asset value per share was $9.86 on
76.4 million outstanding shares, compared to $9.66 on 74.3 million
outstanding shares as of June 30, 2016, up 2.1%. The change in NAV
per share was primarily attributed to the change in unrealized
depreciation in the third quarter and the accretive issuance of
equity under our ATM program above NAV, which added approximately
$0.07 to NAV.
Portfolio Asset Quality
As of September 30, 2016, the weighted average grade of the debt
investment portfolio, on a cost basis, was 2.32, compared to 2.33
as of September 30, 2015 and 2.11 as of June 30, 2016, based on a
scale of 1 to 5, with 1 being the highest quality. Hercules’ policy
is to generally adjust the grading down on its portfolio companies
as they approach the need for additional equity capital, thereby
increasing our Grade 3 rated investments.
Our policy is to lower the grading on our portfolio companies as
they approach the point in time when they will require additional
equity capital. Additionally, we may downgrade our portfolio
companies if they are not meeting our financing criteria or are
underperforming relative to their respective business plans.
Various companies in our portfolio will require additional funding
in the near term or have not met their business plans and therefore
have been downgraded until their funding is complete or their
operations improve.
The change in weighted average investment grading as of
September 30, 2016 from June 30, 2016 is due to eight portfolio
companies being removed from Grade 1 through Grade 2, and mostly
added to Grade 3.
As of September 30, 2016, grading of the debt investment
portfolio at fair value, excluding warrants and equity investments,
was as follows:
Credit Grading at Fair Value, Q3 2015 - Q3 2016 ($ in
millions) Q3 2015
Q4 2015 Q1
2016 Q2 2016
Q3 2016 Grade 1 - High
198.7 18.4% 215.2
19.4% 287.4 23.8%
328.1 27.1% 269.8
22.0%
Grade 2 636.5 59.1% 759.3 68.4% 636.0
52.7% 602.9 49.8% 516.5 42.3%
Grade 3 99.0 9.2% 44.8 4.0%
202.2 16.8% 226.9 18.7% 372.0 30.4%
Grade 4 59.7 5.5% 34.2
3.1% 40.4 3.4% 43.0 3.5% 40.8 3.3%
Grade 5 - Low 83.7 7.8%
56.7 5.1% 39.7 3.3% 10.9 0.9% 25.1 2.0%
Weighted Avg.
2.33 2.16
2.17
2.11
2.32
As of September 30, 2016, the Company had six debt investments
on non-accrual with a cumulative investment cost and approximate
fair value of $46.2 million and $9.3 million, respectively, or 3.3%
and 0.7% as a percentage of our total investment portfolio at cost
and value, respectively. As of June 30, 2016, the Company had six
debt investments on non-accrual with cumulative investment cost and
fair value of approximately $34.5 million and $2.8 million,
respectively.
Q3 2015 Q4 2015
Q1 2016 Q2 2016
Q3 2016
Total Investments at Cost $1,200.0 $1,252.3 $1,344.3
$1,369.4 $1,388.2
Loans on non-accrual as a % of Total
Investments at Value
2.7% 1.9% 2.1% 0.2% 0.7%
Loans on non-accrual as a % of Total
Investments at Cost
4.1% 3.8% 3.7% 2.5%
3.3%
High Asset Sensitivity - Expected Increase in PRIME Rate Will
Benefit Hercules Significantly - Will Help Drive Earnings
Growth
We are well positioned and have 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 92.9% of our debt investment
portfolio being priced at floating interest rates or floating
interest rates as of September 30, 2016, with a Prime or
LIBOR-based interest rate floor, which coupled with 100% of our
outstanding debt borrowings bearing fixed interest rates, would
potentially lead to higher net investment income to our
shareholders.
Based on our Consolidated Statement of Assets and Liabilities as
of September 30, 2016, 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.
We expect each 25 bps increase in the Prime Rate to contribute
approximately $1.8 million, or $0.02 per share, of net investment
income.
(in
thousands) Interest Interest Net
EPS(1) Basis Point Change Income
Expense Income 25 $ 1,848 $ - $ 1,848 $ 0.02
50 $ 3,695 $ - $ 3,695 $ 0.05 75 $ 5,543 $ - $ 5,543 $ 0.07 100 $
7,391 $ - $ 7,391 $ 0.10 200 $ 17,693 $ - $ 17,693 $ 0.24 300 $
29,107 $ - $ 29,107 $ 0.39 (1) EPS calculated on basic
weighted shares outstanding of 74,122
Existing Equity and Warrant Portfolio – Potential Future
Additional Returns to Shareholders
Equity Portfolio
Hercules held equity positions in 53 portfolio companies with a
fair value of $68.8 million and a cost basis of $69.1 million as of
September 30, 2016. On a fair value basis, 30.8% or $21.2 million
is related to existing public equity positions, primarily
concentrated in Box, Inc., which had a fair value of $10.2 million,
compared to a cost basis of $4.8 million, at September 30, 2016. As
of September 30, 2016, the potential unrealized gain in Box was
approximately $5.4 million, or $0.07 in EPS.
Warrant Portfolio
Hercules held warrant positions in 138 portfolio companies with
a fair value of $27.7 million and a cost basis of $43.2 million as
of September 30, 2016. Hercules’ historical realized gross
warrant/equity multiples generally range from 1.0x to 29.2x, with
an average historical gross warrant/equity multiple of 3.74x and a
weighted average fully realized internal rate of return (“IRR”) of
approximately 24.2%.
Portfolio Company IPO and M&A Activity in Q3 2016
IPO Activity
- In July 2016, Hercules’ portfolio
company, TPI Composites, Inc., (NASDAQ: TPIC) completed its
IPO and raised $69.0 million by offering 6.25 million shares of its
common stock at $11.00 per share.
- As of September 30, 2016, Hercules held
warrant and equity positions in four (4) portfolio companies that
had filed Registration Statements in contemplation of a potential
IPO, including:
- Four 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
- Celator Pharmaceuticals, Inc.
(NASDAQ: CPXX), a pharmaceutical company developing new and more
effective therapies to treat cancer, was acquired by Jazz
Pharmaceuticals, Inc. (NASDAQ: JAZZ), an international
biopharmaceutical company focused on improving patients’ lives by
identifying, developing and commercializing meaningful products
that address unmet medical needs, for $30.25 per share. The
transaction closed on July 12, 2016. Hercules initially committed
$15.0 million in venture debt financing to Celator Pharmaceuticals
in May 2014. The Company recognized a net realized gain of
approximately $1.5 million from the sale of shares, generating a
fully realized IRR of approximately 19.8% from its loan repayments
and equity/warrant gains.
- ReachLocal, Inc. (NASDAQ: RLOC),
a leader in powering online marketing, helping local businesses
grow and operate their business better with leading technology and
expert service, was acquired by Gannett Co., Inc., (NYSE: GCI), a
next-generation media company committed to strengthening
communities across the company’s network, for $4.60 per share in
cash, via a tender offer. The transaction closed on August 9, 2016.
Hercules initially committed $25.0 million in venture debt
financing to ReachLocal in April 2015. The Company recognized a net
realized gain of $610,000 from the transaction, generating a fully
realized IRR of approximately 24.1% from its loan repayments and
equity/warrant gains.
- TouchCommerce, a technology
partner and leader in digital customer service and engagement
solutions, was acquired by Nuance Communications, Inc. (NASDAQ:
NUAN), a leading provider of voice and language solutions for
businesses and consumers around the world, for $215.0 million in
total consideration. The transaction closed on August 16, 2016.
Hercules committed a total of $18.0 million in three (3) venture
debt financings to TouchCommerce beginning in June 2013. Hercules
held warrants for 2.3 million shares of Preferred Series E stock,
as of June 30, 2016, which represents a realized gain of
approximately $698,000 and an unrealized gain of approximately
$770,000, excluding any market discounts as of the closing price of
$14.50 for Nuance Communications on September 30, 2016.
- IronPlanet, a leading online
marketplace for used heavy equipment and other durable assets,
announced that it had entered into a definitive agreement on August
29, 2016 under which Ritchie Bros. Auctioneers Incorporated (NYSE
& TSX: RBA), the world’s largest industrial auctioneer and a
leading equipment distributor, is expected to acquire IronPlanet
for approximately US $758.5 million, subject to customary closing
adjustments. Hercules initially committed $37.5 million in venture
debt financing to IronPlanet in October 2014. Hercules currently
holds warrants for 1.2 million shares of Preferred Series D stock,
as of September 30, 2016.
Dividends
The Board of Directors has declared a third quarter cash
dividend of $0.31 per share. This dividend would represent the
Company’s 45th consecutive dividend declaration since its IPO,
bringing the total cumulative dividend declared to date to $12.47
per share. The following shows the key dates of our third quarter
2016 dividend payment:
Record Date November 14,
2016 Payment Date November 21, 2016
Hercules' Board of Directors maintains a variable dividend
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
dividend, or fifth dividend, so that the Company may distribute
approximately all of 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 dividend
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
dividends declared during the quarter ended September 30, 2016,
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 2016 distributions to stockholders
will actually be.
Subsequent Events
1. As of October 31, 2016, Hercules has:
a. Closed debt and equity commitments of
$40.0 million to new and existing portfolio companies, and funded
$51.1 million since the close of the third quarter.
b. Pending commitments (signed non-binding
term sheets) of $150.0 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, 2016 Closed Commitments(a)
$603.0 Q4-16 Closed Commitments (as of October 31, 2016)(a)
$40.0 Total Year-to-date 2016 Closed
Commitments (a) $643.0 Q4-16 Pending
Commitments (as of October 31, 2016) (b)
$150.0
Year-to-date 2016 Closed and Pending Commitments
$793.0
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. Subsequent to September 30, 2016 and as of October 31, 2016,
the Company sold 786,000 shares of common stock for total
accumulated net proceeds of approximately $10.6 million under its
ATM equity distribution agreement. As of October 31, 2016
approximately 2.4 million shares remain available for issuance and
sale under the equity distribution agreement.
3. On October 11, 2016, the Company entered in an At-the-Market
“ATM” Debt Distribution Agreement, pursuant to which we may offer
for sale, from time to time, up to $150.0 million in aggregate
principal amount of 6.25% notes due 2024 through FBR Capital
Markets & Co. acting as our sales agent. As of October 31, 2016
the Company sold 137,250 bonds for total gross proceeds of
approximately $3.5 million.
4. In October 2016, Napo Pharmaceuticals, a company that focuses
on the development and commercialization of proprietary
pharmaceuticals for the global marketplace in collaboration with
local partners, signed a non-binding letter-of-intent (“LOI”) to
merge with Hercules’ portfolio company Jaguar Animal Health,
Inc. (NASDAQ: JAGX)
Conference Call
Hercules has scheduled its third quarter 2016 financial results
conference call for November 3, 2016 at 2:00 p.m. PST (5:00 p.m.
EST). To listen to the call, please dial (877) 304-8957 (or (408)
427-3709 internationally) and reference Conference ID: 93820644 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 93820644.
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 $6.3
billion to over 360 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:
- 7.00% Unsecured Notes due April 2019
(NYSE: HTGZ)
- 7.00% Unsecured Notes due September
2019 (NYSE: HTGY)
- 6.25% Unsecured Notes due July 2024
(NYSE: HTGX)
Forward-Looking Statements
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, 2016 December 31, 2015
Assets Investments: Non-control/Non-affiliate investments
(cost of $1,352,633 and $1,238,539, respectively) 1,309,696
1,192,652 Control investments (cost of $22,285 and $0,
respectively) 4,991 - Affiliate investments (cost of $13,326 and
$13,742, respectively) 5,923 7,986
Total investments, at value (cost of $1,388,244 and $1,252,281,
respectively) 1,320,610 1,200,638 Cash and cash equivalents 69,012
95,196 Restricted cash 8,980 9,191 Interest receivable 10,861 9,239
Other assets 9,961 9,720
Total
assets $ 1,419,424 $ 1,323,984
Liabilities Accounts payable and accrued liabilities $
16,649 $ 17,241 Long-Term Liabilities (Convertible Senior Notes),
net (principal of $0 and $17,604) (1) - 17,478 Wells Facility -
50,000 2021 Asset-Backed Notes, net (principal of $117,004 and
$129,300, respectively) (1) 115,531 126,995 2019 Notes, net
(principal of $110,364 and $110,364, respectively) (1) 108,659
108,179 2024 Notes, net (principal of $244,945 and $103,000,
respectively) (1) 237,663 100,128 Long-Term SBA Debentures, net
(principal of $190,200 and $190,200, respectively) (1)
187,333 186,829
Total liabilities $
665,835 $ 606,850
Net assets consist of: Common
stock, par value 77 73 Capital in excess of par value 802,521
752,244 Unrealized depreciation on investments(2) (68,880 ) (52,808
) Accumulated realized gains on investments 31,420 27,993
Distributions in excess of net investment income (11,549 )
(10,368 )
Total net assets $ 753,589 $ 717,134
Total liabilities and net assets $ 1,419,424 $
1,323,984
Shares of common stock outstanding
($0.001 par value, 200,000,000 and 100,000,000 authorized,
respectively) 76,400 72,118
Net asset value per share $
9.86 $ 9.94
(1)
The Company’s SBA Debentures, 2019 Notes,
2024 Notes, 2021 Asset-Backed Notes, and Convertible Senior Notes,
as each term is defined herein, are presented net of the associated
debt issuance costs for each instrument.
(2)
Amounts include $1.2 million and $1.2
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,
2016 2015 2016 2015 Investment
income: Interest income Non-control/Non-affiliate investments $
39,907 $ 40,256 $ 115,887 $ 105,861 Control investments 15 — $ 15 —
Affiliate investments 30 83 145
278 Total interest income 39,952
40,339 116,047 106,139
Fees Non-control/Non-affiliate investments 5,149 6,793 11,531
11,611 Control investments 1 — 1 — Affiliate investments —
— — 1
Total fees
5,150 6,793 11,532
11,612
Total investment income 45,102 47,132 127,579
117,751
Operating expenses: Interest 8,717 7,818 23,306
23,243 Loan fees 1,432 1,072 3,698 4,166 General and administrative
4,114 4,504 12,095 12,190 Employee compensation: Compensation and
benefits 5,621 7,969 15,637 17,621 Stock-based compensation
1,442 2,179 5,616 7,166
Total employee compensation 7,063
10,148 21,253 24,787
Total
operating expenses 21,326 23,542 60,352 64,386 Loss on debt
extinguishment (Long-Term Liabilities - Convertible Senior Notes)
— — — (1 )
Net
investment income 23,776 23,590 67,227 53,364
Net realized
gain on investments Non-control/Non-affiliate investments
7,870 6,366 3,427
8,424 Total net realized gain on investments 7,870
6,366 3,427 8,424
Net change in unrealized appreciation (depreciation) on
investments Non-control/Non-affiliate investments (1,387 )
(25,032 ) (11,005 ) (34,585 ) Control investments — — (3,421 ) —
Affiliate investments 553 (849 ) (1,646
) 1,543 Total net unrealized depreciation on
investments (834 ) (25,881 ) (16,072 )
(33,042 )
Total net realized and unrealized gain (loss)
7,036 (19,515 ) (12,645 )
(24,618 )
Net increase in net assets resulting from
operations $ 30,812 $ 4,075 $ 54,582 $
28,746 Net investment income before investment gains
and losses per common share: Basic $ 0.32 $ 0.33 $
0.91 $ 0.76 Change in net assets resulting from
operations per common share: Basic $ 0.41 $ 0.05 $
0.74 $ 0.40 Diluted $ 0.41 $ 0.05 $
0.74 $ 0.40 Weighted average shares outstanding Basic
74,122 71,462 72,685
68,897 Diluted 74,157 71,496
72,702 69,123 Dividend
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 2016
2015 Net investment income $ 23,776 $ 23,590
Stock-based compensation 1,442 2,179 DNOI $ 25,218 $
25,769 DNOI per share-weighted average common shares Basic $
0.34 $ 0.36 Weighted average shares outstanding Basic
74,122 71,462
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)
September 30, 2016 Total Debt (Principal Outstanding)
$ 662,513 Cash and cash equivalents (69,012 ) Numerator: net
debt (total debt less cash and cash equivalents) $ 593,501
Denominator: Total net assets $ 753,589 Net Leverage Ratio 78.8 %
Net leverage ratio is calculated by deducting the outstanding
cash at September 30, 2016 of $69.0 million from total debt of
$662.5 million divided by our total equity of $753.6 million,
resulting in a net leverage ratio of 78.8%. 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/20161103006639/en/
Hercules Capital, Inc.Michael Hara, 650-433-5578 HT-HNInvestor
Relations and Corporate Communicationsmhara@htgc.com
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