Company Achieves Record Year for Total
Investment Income, Net Investment Income from Investment Portfolio,
Total Investment Assets and Total Debt Investments
Acquires $125.8 Million Strategic Venture Loan
Portfolio from Ares Capital
Highly Asset Sensitive Debt Investment
Portfolio Stands to Benefit From Any Further Rate Increases by the
Federal Reserve Benchmark Interest Rate
$23.0 Million, or $0.28 per Share, of Projected
2017 Earnings Spillover, for a Fourth Consecutive Year of Earnings
Spillover(1)
Q4 2017 Financial Achievements and Highlights
- Net Investment Income “NII” of $24.5
million, or $0.29 per share, which includes the one-time impact of
$2.4 million, or $0.03 per share, associated with the $75.0 million
2024 Notes redemption plus the non-recurring interest overlap due
to the 30-day redemption period
- Adjusted NII of $26.9 million, or
$0.32(2) per share
- Total Investment Income of $50.2
million, up 5.7% year-over-year
- New Debt and Equity Commitments of
$330.5 million, up 55.1% year-over-year
- Total Gross Fundings of $277.4 million,
up 26.6% year-over-year
- Unscheduled principal repayments or
“early loan pay-offs” of $124.2 million
- Distributable Net Operating Income
“DNOI,” a non-GAAP measure, of $26.1 million, or $0.31 per share
- Adjusted DNOI of $28.5 million, or
$0.34(3) per share
- 14.2% GAAP Effective Yields
- $286.3 million of available liquidity
for future portfolio and earnings growth, subject to existing terms
and covenants
- Regulatory leverage of 72.9% and net
regulatory leverage, a non-GAAP measure, of 62.0%(3)
- Total Shareholder Returns “TSR” of
1.8%, 165.8% and 222.8%, for one, five and seven-years,
respectively, as of December 31, 2017
- 12.0% Return on Average Equity “ROAE”
(NII/Average Equity)
- 6.3% Return on Average Assets “ROAA”
(NII/Average Assets)
Fiscal-Year 2017 Financial Achievements and
Highlights
- Record Total Investment Income of
$190.9 million, an increase of 9.0%, compared to $175.1 million in
the prior year
- NII of $96.4 million, or $1.16 per
share, compared to $100.3 million(4), or $1.34 per share, in the
prior year
- Record Total Investment Assets of $1.54
billion, at value, an increase of 8.3%, compared to $1.42 billion
in the prior year
- Record Total Debt Investments of $1.42
billion, at fair value, an increase of 6.6%, compared to $1.33
billion in the prior year
- Debt and Equity Commitments of $881.9
million, up 8.0% year-over-year
- Total Gross Fundings of $764.7 million,
up 12.4% year-over-year
- During 2017, the Company enhanced its
liquidity by:
- Raising $230.0 million in 4.375%
Convertible Notes due 2022
- Raising $150.0 million in its first
investment grade bond offering of 4.625% Notes due 2022 (the “2022
Notes”)
- Received reaffirmed investment grade
credit and corporate ratings of BBB- from Standard & Poor’s and
BBB+ from Kroll Bond Rating Agency
(1) Per share calculation based on weighted shares of common
stock outstanding of 83.8 million
(2) Excludes the one-time impact of $2.4 million, or $0.03 per
share, associated with the $75.0 million 2024 Notes redemption plus
the non-recurring interest overlap due to the 30-day notice
redemption period
(3) Net regulatory leverage is defined as regulatory leverage
less cash balance at period end
(4) Amount includes the one-time benefit of a litigation
settlement of $8.0 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 fourth quarter
and fiscal-year ended December 31, 2017.
The Company announced that its Board of Directors has declared a
fourth quarter cash distribution of $0.31 per share, that will be
payable on March 12, 2018, to shareholders of record as of March 5,
2018.
“2017 was an outstanding year for Hercules in which we
consistently delivered strong financial and operational results,”
said Manuel A. Henriquez, founder, chairman and chief executive
officer of Hercules. “Our success is a testament to the strength of
our team, our disciplined credit selection and strong brand
recognition. We finished the year with record results and earnings
spillover of $23.0 million, or $0.28 per share, for the fourth
consecutive year of earnings spillover. Notably, our total
investment income reached a record $190.9 million, driven by $1.42
billion in total debt investments and average effective yields for
the year of 14.2%. We finished strong with a remarkable fourth
quarter operating performance on both a GAAP and non-GAAP basis
with adjusted NII per share of $0.32, which excluded the one-time
cost of the partial redemption of $75.0 million of our 2024 Notes.
We also maintained an outstanding return on average equity “ROAE”
of 12.0%, driven by $330.5 million and $881.9 million in new
commitments, quarterly and annually, respectively. We finished 2017
with a very strong liquidity position and we remain well positioned
to continue growing our debt investment portfolio. This also gives
us the ability to pursue other strategic opportunities for growth,
subject of course, to continued favorable market conditions and
normalized levels of early loan payoffs.”
Henriquez continued, “While 2017 was challenging year for the
BDC industry overall in terms of portfolio growth, credit quality
and credit spreads compression driven by enormous excess liquidity,
I am very proud of the fact that we were able to deliver $881.9
million of new commitments and gross fundings of $764.7 million
while successfully absorbing and offsetting the adverse impact of a
record $505.6 million of early loan payoffs. We were able to
accomplish this while still maintaining our strong credit
underwriting focus and average funding spreads. This achievement
speaks to our team’s capabilities and the strength of our platform
as the largest BDC venture lender.”
Q4 2017 Review and Operating Results
Growth of Debt Investment Portfolio
Hercules achieved another strong quarter, having successfully
extended new debt and equity commitments and fundings to twenty
(20) new companies and five (5) existing companies, totaling $330.5
million, and $277.4 million, respectively.
During the quarter, Hercules realized higher-than-anticipated
early loan pay-offs of $124.2 million, along with normal scheduled
amortization of $26.5 million, or $150.7 million in total debt
repayments.
Net debt investment portfolio growth during the fourth quarter,
on a cost basis, was $125.7 million, driven by a higher volume of
newly funded commitments coupled with the acquisition of select
venture debt investments from Ares Capital.
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
2017 to Q4 2017
(in
millions)
Debt
Equity
Warrants
Total Portfolio
Balances at Cost at 9/30/17 $ 1,314.3
$ 135.2 $ 39.5 $
1,489.0 New fundings(a) 271.2 2.2 4.0 277.4 Warrants
not related to Q4 2017 fundings - - 0.2 0.2 Early payoffs(b) (124.2
) - - (124.2 ) Principal payments received on investments (26.5 ) -
- (26.5 ) Net changes attributed to conversions, liquidations, and
fees 5.2 (1.2 ) (0.1 ) 3.9
Net activity during Q4 2017 125.7 1.0
4.1 130.8
Balances at Cost at
12/31/17 $ 1,440.0 $ 136.2
$ 43.6 $ 1,619.8
Balances at Value at
9/30/17 $ 1,300.1 $ 84.3
$ 32.7 $ 1,417.1
Net activity during Q4 2017 125.7 1.0 4.1 130.8 Net change in
unrealized appreciation / (depreciation) (9.8 ) 4.1
- (5.7 ) Net activity during Q4 2017
115.9 5.1 4.1
125.1
Balances at Value at 12/31/17 $
1,416.0 $ 89.4 $
36.8 $ 1,542.2 (a)New
fundings amount includes $4.8 million total new fundings associated
with revolver loans during Q4 2017 (b)Unscheduled paydowns include
$10.2 million paydown on revolvers during Q4 2017
Total Investment Portfolio: Q4
2016 to Q4 2017
(in
millions)
Debt
Equity
Warrants
Total Portfolio
Balances at Cost at 12/31/16 $ 1,384.9
$ 81.6 $ 45.0 $
1,511.5 New fundings(a) 751.0 6.7 7.1 764.8 Warrants
not related to 2017 fundings - - 0.6 0.6 Early payoffs(b) (505.6 )
- - (505.6 ) Principal payments received on investments (119.5 ) -
- (119.5 ) Net changes attributed to conversions, liquidations, and
fees (70.8 ) 47.9 (9.1 ) (32.0 )
Net activity during 2017 55.1 54.6
(1.4 ) 108.3
Balances at Cost at
12/31/17 $ 1,440.0 $ 136.2
$ 43.6 $ 1,619.8
Balances at Value at
12/31/16 $ 1,328.8 $ 67.7
$ 27.5 $ 1,423.9
Net activity during 2017 55.1 54.6 (1.4 ) 108.3 Net change in
unrealized appreciation / (depreciation) 32.1
(32.8 ) 10.7 10.0
Balances at Value
at 12/31/17 $ 1,416.0 $ 89.4
$ 36.8 $ 1,542.2
(a)New fundings amount includes $25.0 million total new
fundings associated with revolver loans during 2017. (b)Unscheduled
paydowns include $20.7 million paydown on revolvers during 2017.
Debt Investment Portfolio Balance
(in millions) Q4 2017
Q3 2017 Q2
2017 Q1 2017
Q4 2016 Ending Balance at Cost
$1,440.0 $1,314.3 $1,324.0 $1,399.2 $1,384.9
Weighted
Average Balance $1,413.0 $1,300.0 $1,298.0 $1,381.0 $1,322.0
As of December 31, 2017, 79.9% 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 14.2%
during Q4 2017, up slightly from the previous quarter of 14.1%, due
to a higher level of early loan pay-offs. We had $124.2 million of
early loan pay-offs in Q4 2017 compared to $114.7 million in Q3
2017, or an increase of 8.3%. Our effective portfolio yields
generally include the effects of fees and income accelerations
attributed to early loan payoffs, and other one-time events. Our
effective yields are materially impacted by elevated levels of
early loan pay-offs 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 were 12.5% during Q4 2017, at the high end of our
2017 expected normalized levels of 11.5% to 12.5%, and relatively
flat compared to Q3 2017 core yields of 12.6%. 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 5.7% for Q4 2017 to $50.2
million, compared to $47.5 million in Q4 2016. The increase is
primarily attributable to debt investment portfolio growth, a
greater weighted average principal outstanding of the Company’s
debt investment portfolio between the periods, and higher than
expected levels of early loan pay-offs.
Non-interest and fee expenses increased to $12.6 million in Q4
2017 versus $12.3 million for Q4 2016. This was primarily due to an
increase in variable compensation related to origination activities
and stock-based compensation.
Interest expense and fees were $13.0 million in Q4 2017,
compared to $10.1 million in Q4 2016. The increase was primarily
due to the one-time non-cash acceleration of unamortized fees
associated with the $75.0 million 2024 Notes redemption plus the
non-recurring interest overlap due to the 30-day notice redemption
period, totaling $2.4 million, or $0.03 per share.
The Company had a weighted average cost of borrowings comprised
of interest and fees, of 6.4% in Q4 2017 versus 5.9% during Q4
2016. The increase between comparative periods was primarily driven
by the impact of the accelerations of unamortized deferred
financing costs from the full and partial redemptions on our 7.00%
notes due 2019, 6.25% notes due 2024 (the “2024 Notes”) and fixed
rate asset-backed notes 2021, respectively.
NII – Net Investment Income
NII for Q4 2017 was $24.5 million, or $0.29 per share, based on
83.8 million basic weighted average shares outstanding, compared to
$33.1 million, or $0.43 per share, based on 76.9 million basic
weighted average shares outstanding in Q4 2016.
Adjusted NII for Q4 2017 was $26.9 million, or $0.32 per share,
which excludes the one-time cost associated with the $75.0 million
redemption of the 2024 Notes plus the additional 30-day notice
interest expense, compared to adjusted NII for Q4 2016 of $25.1
million, or $0.33 per share, which excludes the one-time benefit of
the litigation income of $8.0 million, which was a 7.0% increase
over Q4 2016.
This change in NII and adjusted NII is primarily attributable to
the increase in the weighted average loan balance and higher than
expected levels of early loan pay-offs year-over-year.
DNOI - Distributable Net Operating Income
DNOI, a non-GAAP measure, for Q4 2017 was $26.1 million or $0.31
per share, compared to $34.5 million, or $0.45 per share, in Q4
2016.
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, 2017, (including net loan, warrant and equity activity) on
investments, totaled ($29.0) million, on a GAAP basis, spanning 14
years of investment activities.
When compared to total new debt investment commitments during
the same period of over $7.3 billion, the total realized
gain/(loss) since inception of ($29.0) million represents
approximately 40 basis points “bps,” or 0.40%, of cumulative debt
commitments, or an effective annualized loss rate of 3 bps, or
0.03%.
Realized Gains/(Losses)
During Q4 2017, Hercules had a net realized gain of $0.2
million, which included gross realized gains of $1.3 million. These
gains were offset by gross realized losses of $1.1 million
primarily from the write-off of a debt investment in one (1)
portfolio company.
Unrealized Appreciation/ (Depreciation)
A break-down of the net unrealized appreciation/(depreciation)
in the investment portfolio is highlighted below:
Three Months Ended December 31, 2017 (in
millions)
Debt
Equity
Warrants
Total
Collateral Based Impairments $ (8.0 ) $ (1.4 ) $ (0.1 ) $ (9.5 )
Reversals of Prior Period Collateral Based Impairments 1.7 — 0.1
1.8 Reversals due to Debt Payoffs & Warrant/Equity Sales
0.2 0.9 — 1.1
Sub-total Impairments and Reversals (6.1 )
(0.5 ) — (6.6 ) Fair
Value Market/Yield Adjustments* Level 1 & 2 Assets — 1.8 1.2
3.0 Level 3 Assets (3.7 ) 2.8 (1.2 )
(2.1 )
Sub-total Fair Value Market/Yield Adjustments
(3.7 ) 4.6 —
0.9
Total Net Unrealized Appreciation/(Depreciation)
$ (9.8 ) $ 4.1 —
$ (5.7 ) *Excludes unrealized
depreciation from escrow receivable and taxes payable
During Q4 2017, we recorded $5.7 million of net unrealized
depreciation from our debt, equity, and warrant investments.
Approximately $9.8 million was attributed to net unrealized
depreciation on our debt investments which was primarily related to
$8.0 million in unrealized depreciation for collateral-based
impairments.
Approximately $4.1 million was attributed to net unrealized
appreciation on our equity investments which was primarily related
to $4.6 million of appreciation in fair market value adjustments on
our public equity portfolio related to portfolio company
performance.
Portfolio Asset Quality
As of December 31, 2017, the weighted average grade of the debt
investment portfolio continued to show signs of improvement of
2.17, on a cost basis, compared to 2.24 as of September 30, 2017,
based on a scale of 1 to 5, with 1 being the highest quality.
Hercules’ policy is to generally adjust the grading down on its
portfolio companies as they approach the need for additional equity
capital, thereby increasing our Grade 3-rated investments.
Additionally, we may downgrade our portfolio companies, from
time to time, if they are not meeting our financing criteria,
underperforming relative to their respective business plans, or
approaching an additional round of new equity capital investment.
It is expected that venture growth stage companies typically
require multiple additional rounds of equity capital, generally
every 9-14 months, since they are not generating positive cash
flows for their operations. Various companies in our portfolio will
require additional rounds of funding from time to time to maintain
their operations.
As of December 31, 2017, grading of the debt investment
portfolio at fair value, excluding warrants and equity investments,
was as follows:
Credit Grading at Fair Value, Q4 2017 - Q4 2016 ($ in
millions)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Grade 1 - High $ 345.2
24.4 % $
190.0 14.6 %
$ 267.1 20.7 %
$ 260.2 19.8 %
$ 275.8 20.8 %
Grade
2 $ 583.0 41.2 % $ 696.2 53.6 % $ 613.7 47.6 % $ 591.7 45.1 % $
590.5 44.4 %
Grade 3 $ 443.8 31.3 % $ 370.9 28.5 % $ 315.2
24.5 % $ 356.9 27.2 % $ 329.4 24.8 %
Grade 4 $ 41.7 2.9 % $
43.0 3.3 % $ 87.0 6.8 % $ 78.9 6.0 % $ 58.9 4.4 %
Grade 5 -
Low $ 2.3 0.2 % $ - 0.0 % $ 4.6 0.4 % $ 24.2 1.9 % $ 74.2 5.6 %
Weighted Avg.
2.17
2.24
2.27
2.43
2.41
Non-Accruals
Non-accruals stayed relatively flat for the fourth quarter of
2017. As of December 31, 2017, the Company had five (5) debt
investments on non-accrual with a cumulative investment cost and
fair value of approximately $14.8 million and $0.3 million,
respectively, or 0.9% and 0.0% as a percentage of our total
investment portfolio at cost and value, respectively. Compared to
September 30, 2017, the Company had five (5) debt investments on
non-accrual with cumulative investment cost and fair value of
approximately $14.0 million and $3.0 million, respectively, or 0.9%
and 0.2% as a percentage of our total investment portfolio at cost
and value, respectively.
Q4
2017 Q3 2017
Q2 2017 Q1
2017 Q4 2016 Total
Investments at Cost $1,619.8 $1,489.0 $1,501.1 $1,525.1
$1,511.5
Loans on non-accrual as a % of Total
Investments at Value
0.0% 0.2% 0.3% 1.3% 0.4%
Loans on non-accrual as a % of Total
Investments at Cost
0.9% 0.9% 2.9% 7.0% 2.9%
Liquidity and Capital Resources
The Company ended Q4 2017 with $286.3 million in available
liquidity, including $91.3 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.
On October 23, 2017, the Company issued $150.0 million in
aggregate principal amount of 2022 Notes. The 2022 Notes were
issued pursuant to an Indenture, dated October 23, 2017, between
Hercules and U.S. Bank, National Association, as trustee. The sale
of the 2022 Notes generated net proceeds of approximately $147.5
million, including a public offering discount of $826,500.
Aggregate estimated offering expenses in connection with the
transaction, including the underwriter’s discount and commissions
of approximately $975,000, were approximately $1.7 million.
On October 24, 2017, the Company announced a partial redemption
of $75.0 million of outstanding aggregate principal amount of the
2024 Notes. The Company redeemed this portion of the 2024 Notes on
November 23, 2017. The one-time impact was $2.4 million, or $0.03
per share, associated with the $75.0 million 2024 Notes redemption
plus the non-recurring interest overlap due to the 30 day-notice
redemption period.
Subsequent to December 31, 2017, and as of February 16, 2018,
the Company sold 478,000 shares of common stock for total
accumulated net proceeds of approximately $6.2 million, including
$56,000 of offering expenses, under the Equity Distribution
Agreement. As of February 16, 2018, approximately 9.9 million
shares remain available for issuance and sale under the equity ATM
program.
Bank Facilities
As of December 31, 2017, Hercules has two committed credit
facilities with Wells Fargo Capital Finance, 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 December 31,
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 December 31,
2017.
Leverage
Hercules’ regulatory leverage, or debt to equity ratio,
excluding our Small Business Administration “SBA” debentures, was
72.9% and net regulatory leverage (excluding cash of approximately
$91.3 million), a non-GAAP measure, was 62.0%, as of December 31,
2017. Hercules’ GAAP leverage ratio, including our SBA debentures,
was 84.6%, as of December 31, 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 $228.3
million to its balance sheet as of December 31, 2017, bringing the
maximum potential leverage to approximately $1.0 billion, or 122.6%
(1.23:1), if it had access to such additional leverage.
Available Unfunded Commitments – Representing only 5.1% 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 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 December 31, 2017, the Company had $73.6 million of
available unfunded commitments at the request of the portfolio
company and unencumbered by any milestones, including undrawn
revolving facilities, representing 5.1% of Hercules’ debt
investment balance, at cost. This increased from the previous
quarter of $46.3 million of available unfunded commitments at the
request of the portfolio company or 3.5% of Hercules’ debt
investment balance, at cost.
Existing Pipeline and Signed Term Sheets
After closing $330.5 million in new commitments in Q4 2017,
Hercules finished Q4 2017 with $122.0 million in signed non-binding
term sheets outstanding. Since the close of Q4 2017 and as of
February 20, 2018, Hercules closed debt and equity commitments of
$52.4 million to new and existing portfolio companies and funded
$48.0 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, 2017, the Company’s net assets were $841.0
million, compared to $836.3 million at the end of Q3 2017. NAV per
share decreased to $9.96 on 84.4 million outstanding shares as of
December 31, 2017, compared to $10.00 on 83.6 million outstanding
shares as of September 30, 2017. The decrease in NAV per share was
primarily attributed to an increase in shares outstanding between
the two periods.
High Asset Sensitivity – Expected Increase in Prime Rate Will
Benefit Hercules Significantly – Will 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 96.4% of our debt investment portfolio being priced at
floating interest rates as of December 31, 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 Hercules’ Consolidated Statement of Assets and
Liabilities as of December 31, 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
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 $3.2 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 $ 3,152 $ - $ 3,152 $ 0.04 50 $ 6,368 $ - $ 6,368 $ 0.08
75 $ 9,605 $ - $ 9,605 $ 0.11 100 $ 12,937 $ - $ 12,937 $ 0.15 200
$ 26,683 $ - $ 26,683 $ 0.32 300 $ 40,322 $ - $ 40,322 $ 0.48
(1)Source: Hercules Capital Form 10-K for
Q4 2017
(2)EPS calculated on basic weighted shares
outstanding of 83,843. 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 52 portfolio companies with a
fair value of $89.4 million and a cost basis of $136.2 million as
of December 31, 2017. On a fair value basis, 26.0% or $22.8 million
is related to existing public equity positions, at December 31,
2017.
Warrant Portfolio
Hercules held warrant positions in 137 portfolio companies with
a fair value of $36.8 million and a cost basis of $43.6 million as
of December 31, 2017.
Portfolio Company IPO and M&A Activity in Q4 2017
For the year ended 2017, Hercules Capital portfolio companies
achieved 19 completed or announced M&A deals and 3 IPOs, for a
total of 22 liquidity events.
IPO Activity
1. In December 2017, Hercules’
Portfolio company Quanterix Corporation (NASDAQ: QTRX), a
company digitizing biomarker analysis to advance the science of
precision health, completed its IPO and raised $64.1 million by
offering more than 4.3 million shares of common stock at $15.00 per
share. Hercules held 84,778 shares of common stock and warrants for
66,039 shares of common stock, respectively, as of December 31,
2017, which represents an unrealized gain of approximately $1.2
million as of the closing price of $21.47 for Quanterix on December
29, 2017.
2. In November 2017, Hercules’ portfolio
company Aquantia Corporation (NYSE: AQ), a leader in the
design, development and marketing of advanced, high-speed
communications ICs for Ethernet connectivity, raised approximately
$61.3 million by offering 6.8 million shares of its common stock at
$9.00 per share. Hercules held warrants for 19,683 shares of common
stock, as of December 31, 2017, which represents an unrealized gain
of approximately $5,000 as of the closing price of $11.33 for
Aquantia on December 29, 2017.
3. In October 2017, Hercules’ portfolio
company ForeScout Technologies, Inc. (NASDAQ: FSCT), a
leading Internet of Things security company, completed its IPO and
raised approximately $117.0 million by offering 5.3 million shares
of its common stock at $22.00 per share. Hercules held 199,844
shares of common stock, respectively, as of December 31, 2017,
which represents an unrealized gain of approximately $5.8 million
as of the closing price of $31.89 for ForeScout on December 29,
2017.
As of December 31, 2017, Hercules held warrant and equity
positions in two (2) portfolio companies that had filed
Registration Statements confidentially under the JOBS Act in
contemplation of a potential IPO.
There can be no assurances that companies that have yet to
complete their IPOs will do so.
M&A 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 deal closed on November 6,
2017. Melinta Therapeutics commenced trading on November 6, 2017 on
the NASDAQ Global Market under the symbol “MLNT.” 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 held 43,840 shares
of common stock and warrants for 31,655 shares of common stock as
of December 31, 2017.
2. In September 2017, Hercules’ portfolio
company PeerApp Ltd., a leading provider of content delivery
platforms, was acquired by ESW Capital, LLC, a private equity firm
that specializes in buying and growing mature business software
companies. Terms of the transaction were not disclosed. Hercules
initially committed $3.0 million in venture debt financing in May
2010 and held warrants for 298,779 shares of Preferred Series B
stock as of December 31, 2017.
3. In November 2017, Hercules’ portfolio
company Sonian Inc., a leading provider of public cloud
archiving and business insights, was acquired by Barracuda
Networks, Inc. (NYSE: CUDA), a leading provider of cloud-enabled
security and data protection solutions. Terms of the transaction
were not disclosed. Hercules initially committed $5.5 million in
venture debt financing in December 2013 and held warrants for
185,949 shares of Preferred Series C stock as of September 30,
2017. As a result of the transaction, Hercules’ warrants were
no longer outstanding as of December 31, 2017.
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. In January 2018, Evofem
completed the reverse merger acquisition of Neothetics. The merged
company will operate as Evofem Biosciences, Inc. Upon closing of
the transaction, Neothetics will be renamed Evofem Biosciences,
Inc. The stock began trading on the Nasdaq Capital Market under the
ticker symbol “EVFM.” 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 December 31, 2017.
Distributions
The Board of Directors has declared a fourth quarter cash
distribution of $0.31 per share. This distribution would
represent the Company’s 50th consecutive distribution declaration
since its IPO, bringing the total cumulative distribution declared
to date to $14.02 per share. The following shows the key dates of
our fourth quarter 2017 distribution payment:
Record Date March 5, 2018
Payment Date March 12, 2018
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 December 31, 2017,
100% were distributions derived from the Company’s current and
accumulated earnings and profits.
Details of Distributions in 2017
The amounts shown in the table below represent the final
accounting of the Company’s 2017 distributions. This information
supersedes any estimated information that may have been provided
during the year. These distributions were classified as
follows:
Total Paid Ordinary Income Long Term Capital Interest –
Related Record Date Payable Date Per
Share Per Share
Gains Per Share(1)
Dividends(2)
3/6/2017 3/13/2017 $0.3100 $0.3100 $0.0000 100.00% 5/15/2017
5/22/2017 $0.3100 $0.3100 $0.0000 100.00% 8/14/2017 8/21/2017
$0.3100 $0.1510 $0.1590 100.00% 11/13/2017 11/20/2017 $0.3100
$0.3100 $0.0000 100.00% $1.2400
$1.0810 $0.1590
% of Total Dividends
Per Share 100.0000% 87.1619% 12.8381%
(1)The Company hereby designates these
distributions as amounts eligible for treatment as capital gain
dividends in accordance with IRC Sections 852(b)(3) and 854(a).
(2)The Company hereby designates the above
percentages of each of the total dividends by payment date as
Interest-Related dividends in accordance with IRC Section
871(k).
This press release is not intended to constitute tax, legal,
investment, or other professional advice. This is general
information and should not be relied upon for tax purposes.
Shareholders should consult their tax advisor for tax guidance
pertinent to specific facts and circumstances.
Subsequent Events
1. As of February 16, 2018, Hercules has:
a. Closed debt and equity commitments of
$52.4 million to new and existing portfolio companies, and funded
$48.0 million since the close of the fourth quarter.
b. Pending commitments (signed non-binding
term sheets) of $205.0 million.
The table below summarizes our year-to-date closed and pending
commitments as follows:
Closed Commitments and Pending Commitments (in
millions) Q1 2018 Closed Commitments (as of February 16,
2018)(a) $52.4 Q1 2018 Pending
Commitments (as of February 16, 2018)(b)
$205.0
Year-to-date Closed and Pending
Commitments $257.4
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. In September 2017, Hercules’ portfolio
company Inotek Pharmaceuticals Corporation (NASDAQ: ITEK), a
clinical-stage biopharmaceutical company focused on the discovery,
development and commercialization of therapies for ocular diseases,
and Rocket Pharmaceuticals Ltd. (NASDAQ: RCKT), a leading US-based
gene therapy company, announced they had entered into a definitive
merger agreement. The deal was completed and announced on January
4, 2018. The combined company will be named Rocket Pharmaceuticals,
Inc. and is now listed on the NASDAQ Global Market under the symbol
“RCKT” and began trading on January 5, 2018. Hercules committed
$1.5 million in venture debt financing to Inotek in August 2007 and
held 3,778 shares of common stock as of December 31, 2017.
3. Subsequent to December 31, 2017, and as of
February 16, 2018, the Company sold 478,000 shares of common stock
for total accumulated net proceeds of approximately $6.2 million,
including $56,000 of offering expenses, under the Equity
Distribution Agreement. As of February 16, 2018, approximately 9.9
million shares remain available for issuance and sale under the
equity ATM program.
Conference Call
Hercules has scheduled its fourth quarter and full-year 2017
financial results conference call for February 22, 2018 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: 2785408 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
2785408.
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 $7.3
billion to over 410 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)
December 31, 2017 December 31, 2016
Assets Investments: Non-control/Non-affiliate investments
(cost of $1,506,454 and $1,475,918, respectively) 1,491,458
1,414,210 Control investments (cost of $25,419 and $22,598,
respectively) 19,461 4,700 Affiliate investments (cost of $87,956
and $13,010, respectively) 31,295 5,032
Total investments in securities, at value (cost of $1,619,829 and
$1,511,526, respectively) 1,542,214 1,423,942 Cash and cash
equivalents 91,309 13,044 Restricted cash 3,686 8,322 Interest
receivable 12,262 11,614 Other assets 5,244
7,282
Total assets $ 1,654,715 $ 1,464,204
Liabilities Accounts payable and accrued
liabilities $ 26,896 $ 21,463 Credit Facilities — 5,016 2021
Asset-Backed Notes, net (principal of $49,153 and $109,205,
respectively) (1) 48,650 107,972 Convertible Notes, net (principal
of $230,000 and $0, respectively)(1) 223,488 — 2019 Notes, net
(principal of $0 and $110,364, respectively) (1) — 108,818
2022 Notes, net (principal of $150,000 and
$0, respectively) (1)
147,572 — 2024 Notes, net (principal of $183,510 and $252,873,
respectively) (1) 179,001 245,490 Long-Term SBA Debentures, net
(principal of $190,200 and $190,200, respectively) (1)
188,141 187,501
Total liabilities $
813,748 $ 676,260
Net assets consist of: Common
stock, par value 85 80 Capital in excess of par value 908,501
839,657 Unrealized depreciation on investments(2) (79,760 ) (89,025
) Accumulated undistributed realized gains (losses) on investments
(20,374 ) 14,314 Undistributed net investment income 32,515
22,918
Total net assets $ 840,967
$ 787,944
Total liabilities and net assets $
1,654,715 $ 1,464,204
Shares of common
stock outstanding ($0.001 par value, 200,000,000 authorized)
84,424 79,555
Net asset value per share $ 9.96 $ 9.90
(1)The Company’s SBA Debentures, 2019
Notes, 2022, 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 $2.1 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 December 31,
Year Ended
December 31,
2017 2016
2017 2016 Investment
income: Interest and PIK interest income Interest income:
Non-control/Non-affiliate investments $ 42,743 $ 40,485 $ 160,131 $
150,705 Control investments 311 31 1,304 38 Affiliate investments
553 15 801 160
Total interest income 43,607 40,531
162,236 150,903 PIK interest
income: Non-control/Non-affiliate investments 2,632 2,117 9,293
7,784 Control investments 155 32
667 40 Total PIK interest income 2,787
2,149 9,960 7,824
Total interest and PIK interest income 46,394
42,680 172,196 158,727 Fee
Income: Non-control/Non-affiliate investments 3,762 4,787 18,630
16,318 Control investments — 5 11 6 Affiliate investments 42
— 43 — Total fee
income 3,804 4,792 18,684
16,324
Total investment income 50,198 47,472
190,880 175,051
Operating expenses: Interest 9,811 8,710
37,857 32,016 Loan fees 3,228 1,345 8,728 5,042 General and
administrative Legal Expenses 780 823 4,572 4,823 Other Expenses
2,964 3,187 11,533
11,283 Total General and administrative 3,744 4,010 16,105
16,106 Employee compensation: Compensation and benefits 7,279 6,863
24,555 22,500 Stock-based compensation 1,618
1,427 7,191 7,043 Total employee
compensation 8,897 8,290 31,746
29,543
Total operating expenses 25,680
22,355 94,436 82,707 Other income (loss) —
8,000 — 8,000
Net investment
income 24,518 33,117 96,444 100,344
Net realized gain (loss)
on investments Non-control/Non-affiliate investments 706 1,148
(10,235 ) 4,576 Control investments (487 ) —
(16,476 ) — Total net realized gain (loss) on
investments 219 1,148 (26,711 )
4,576
Net change in unrealized appreciation
(depreciation) on investments Non-control/Non-affiliate
investments (1,623 ) (18,964 ) 43,796 (29,970 ) Control investments
(3,551 ) (604 ) 14,152 (4,025 ) Affiliate investments (1,197
) (576 ) (48,683 ) (2,222 )
Total net unrealized appreciation
(depreciation) on investments
(6,371 ) (20,144 ) 9,265 (36,217
)
Total net realized and unrealized loss (6,152 )
(18,996 ) (17,446 ) (31,641 )
Net increase
in net assets resulting from operations $ 18,366 $
14,121 $ 78,998 $ 68,703 Net investment
income before investment gains and losses per common share: Basic $
0.29 $ 0.43 $ 1.16 $ 1.34 Change in net
assets resulting from operations per common share: Basic $ 0.22
$ 0.18 $ 0.95 $ 0.91 Diluted $ 0.22
$ 0.18 $ 0.95 $ 0.91 Weighted average
shares outstanding Basic 83,843 76,931
82,519 73,753 Diluted 84,027
76,968 82,640 73,775
Distributions declared per common share:
Basic
$ 0.31 $ 0.31 $ 1.24 $ 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
2017 2016 Net investment income $ 24,518 $
33,117 Stock-based compensation 1,618 1,427 DNOI $
26,136 $ 34,544 DNOI per share-weighted average common
shares Basic $ 0.31 $ 0.45 Weighted average shares
outstanding Basic 83,843 76,931
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, 2017 Total Debt (Principal
Outstanding) $ 802,863 Long-term SBA Debentures $ (190,200 ) Cash
and cash equivalents (91,309 )
Numerator: net debt (total debt less cash
and cash equivalents and SBA Debentures)
$ 521,354
Denominator: Total net assets $ 840,967 Net Leverage Ratio 62.0 %
Net leverage ratio is calculated by deducting the outstanding
cash of $91.3 million and long-term SBA debentures of $190.2
million, at December 31, 2017 from total principal outstanding of
$802.9 million divided by our total equity of $841.0 million,
resulting in a net leverage ratio of 62.0%. 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/20180222006400/en/
Hercules Capital, Inc.Michael Hara, 650-433-5578Investor
Relations and Corporate Communicationsmhara@htgc.com
Hercules Capital (NYSE:HTGC)
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