New Debt and Equity Commitments of $235.1
Million, up 52.3% Year-over-Year
Net Investment Income of $0.31 per Share
provides 100% Coverage of Regular Distribution Payout
Declared Supplemental Distribution of $0.02 per
Share
Increased Net Asset Value (“NAV”) per Share to
$10.38, up 1.6% from Q2 2018
Received BBB Investment Grade Credit and
Corporate Rating from DBRS, Inc.
Q3 2018 Financial Achievements and Highlights
- Net Investment Income “NII” of $29.3
million, or $0.31 per share, an increase of 22.2% year-over-year
- Total Investment Income of $52.6
million, an increase of 14.7% year-over-year
- Distributable Net Operating Income(1)
“DNOI,” a non-GAAP measure, of $32.6 million, or $0.34 per
share
- New debt and equity commitments of
$235.1 million, up 52.3% year-over-year
- Total gross fundings of $142.4
million
- Unscheduled early principal repayments
or “early loan pay-offs” of $64.9 million
- $137.3 million of available liquidity
for future portfolio and earnings growth, subject to existing terms
and covenants
- Regulatory leverage of 66.0% and net
regulatory leverage, a non-GAAP measure, of 61.7%(2)
- 13.5% GAAP Effective Yields and 12.7%
Core Yields(3), a non-GAAP measure
- 12.7% Return on Average Equity “ROAE”
(NII/Average Equity)
- 6.9% Return on Average Assets “ROAA”
(NII/Average Assets)
Year-to-date ending September 30, 2018 Financial
Highlights
- NII increased 8.5% to $78.1 million for
nine months ending September 30, 2018, or $0.87 per share, as
compared to $71.9 million for the nine months ending September 30,
2017
- Total Investment Income of $150.9
million, up 7.2% year-over-year
- New Equity and Debt Commitments
increased 74.8% to $963.8 million, as compared to $551.4 million
for the nine months ending September 30, 2017
- Total Gross Fundings increased 44.9% to
$706.1 million, as compared to $487.4 million for the nine months
ending September 30, 2017
- Unscheduled early principal repayments
of $422.7 million
(1) 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.
(2) Net regulatory leverage is defined as regulatory leverage
less cash balance at period end
(3) Core Yield excludes Early Loan Pay-offs and One-Time Fees,
and includes income and fees from expired commitments
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, 2018.
The Company announced that its Board of Directors has declared a
third quarter base and supplemental cash distribution of $0.31 and
$0.02 per share, respectively, that will each be payable on
November 19, 2018, to shareholders of record as of November 12,
2018.
“We delivered strong Q3 2018 financial results, exceeding all of
our key operating metrics, delivering portfolio growth, fully
covering the dividend from NII and declaring a special supplemental
distribution of $0.02 per share,” stated Manuel A. Henriquez,
chairman and chief executive officer of
Hercules. “During the quarter, we benefitted from our
industry-leading venture debt platform and market leadership
position, which resulted in total debt and equity commitments of
$235.1 million and total gross fundings $142.4 million. This
investment performance was especially gratifying since it occurred
in the third quarter, which is typically the slowest period of the
year. The Company achieved a new historical record with $963.8
million in total new commitments just in the first nine months of
2018 and has already surpassed $1.0 billion in total new
commitments year-to-date.”
Henriquez continued, “Our balance sheet continues to be highly
asset sensitive and our debt investment portfolio continues to
benefit from the various rise in short-term rates, delivering
strong core yields above normalized levels of 12.7% and reduced
early loan pay-offs in the quarter, which were below our
expectations. In addition, we ended the quarter with a
record debt investment portfolio balance of $1.60
billion. We finished Q3 2018 with a strong liquidity
position of $137.3 million, and we remain well positioned to fund
our expected loan portfolio growth for the remainder of the year.
Finally, we remain very active in the capital markets, having
recently completed our third securitization, recently raising
$200.0 million. This transaction caps off a remarkable
year for Hercules in which we raised approximately $458.0 million
of new debt and equity capital year-to-date, expanding and
diversifying our sources of capital and providing long-dated
maturities to help support our growth and deliver increased
earnings in 2018 and beyond.”
Q3 2018 Review and Operating Results
Debt Investment Portfolio
Hercules achieved another strong quarter, having successfully
extended new debt and equity commitments to eight (8) new companies
and 11 existing companies, totaling $235.1 million, and gross
fundings of $142.4 million.
During the quarter, Hercules realized early loan pay-offs of
$64.9 million, which along with normal scheduled amortization of
$20.4 million, totaled $85.3 million in debt repayments.
The strong new debt investment origination and funding
activities lead to net debt investment portfolio growth of $53.8
million during the third 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: Q2 2018 to Q3 2018
(in millions) Debt
Equity Warrants
Total Portfolio Balances at Cost at 6/30/18
$ 1,554.2 $ 164.2
$ 39.2 $ 1,757.6 New
fundings(a) 136.2 5.4 0.8 142.4 Warrants not related to Q3 2018
fundings — — — - Early payoffs(b) (20.4 ) — — (20.4 ) Principal
payments received on investments (64.9 ) — — (64.9 ) Net changes
attributed to conversions, liquidations, and fees 2.9
(1.0 ) (3.5 ) (1.6 ) Net activity during Q3
2018 53.8 4.4 (2.7 ) 55.5
Balances at Cost at 9/30/18 $ 1,608.0
$ 168.6 $ 36.5
$ 1,813.1
Balances at Value at 6/30/18 $ 1,546.0
$ 121.5 $ 34.4 $
1,701.9 Net activity during Q3 2018 53.8 4.4 (2.7 )
55.5 Net change in unrealized appreciation (depreciation)
3.5 1.5 (1.9 ) 3.1 Total
net activity during Q3 2018 57.3 5.9
(4.6 ) 58.6
Balances at Value at
9/30/18 $ 1,603.3 $ 127.4
$ 29.8 $ 1,760.5
(a) New fundings amount does not include
revolver loans during Q3 2018.
(b) Unscheduled paydowns include $1M
paydown on revolvers during Q3 2018.
Debt Investment Portfolio Balances by
Quarter
(in millions) Q3 2018
Q2 2018 Q1 2018
Q4 2017 Q3 2017
Ending Balance at Cost $ 1,608.0
$ 1,554.2 $ 1,368.6 $ 1,440.0 $ 1,314.3
Weighted Average
Balance $ 1,555.0 $ 1,470.0 $ 1,364.0 $ 1,413.0 $ 1,300.0
As of September 30, 2018, 84.4% 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 Q3 2018, the same level as Q2 2018. The Company
realized $64.9 million of early loan pay-offs in Q3 2018 compared
to $114.3 million in Q2 2018, or a decrease of 43.2%. The early
loan pay-offs in Q3 2018 experienced a higher level of
accelerations as compared to Q2 2018. Effective portfolio yields
generally include the effects of fees and income accelerations
attributed to early loan payoffs, and other one-time events.
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 12.7% during Q3 2018, exceeding the upper end
of the Company’s 2018 expected range of 11.5% to 12.5%, and at the
same level as Q2 2018. Hercules defines core yield as yields that
generally exclude any benefit from income related to early pay-offs
attributed to the acceleration of unamortized income and prepayment
fees and includes income from expired commitments.
Income Statement
Total investment income increased to $52.6 million for Q3 2018,
compared to $45.9 million in Q3 2017, an increase of 14.7%
year-over-year. The increase is primarily attributable
to a higher average debt investment balance between periods along
with a slight increase in the core yield from 12.6% in Q3 2017 to
12.7% in Q3 2018.
Non-interest and fee expenses increased to $12.3 million in Q3
2018 versus $11.4 million for Q3 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 $11.0 million in Q3 2018,
compared to $10.5 million in Q3 2017. The increase was due to the
higher weighted average borrowings from the issuance of 4.625%
Notes due 2022 in October 2017, 5.25% Notes due 2025 in April 2018,
6.25% Notes due 2033 in October 2018, and interest related to the
Company’s credit facilities during the period.
The Company had a weighted average cost of borrowings comprised
of interest and fees, of 5.6% in Q3 2018, the same level as Q3
2017.
NII – Net Investment Income
NII for Q3 2018 was $29.3 million, or $0.31 per share, based on
95.5 million basic weighted average shares outstanding, compared to
$24.0 million, or $0.29 per share, based on 82.5 million basic
weighted average shares outstanding in Q3 2017, an increase of
22.2% year-over-year.
DNOI - Distributable Net Operating Income
DNOI, a non-GAAP measure, for Q3 2018 was $32.6 million or $0.34
per share, compared to $25.8 million, or $0.31 per share, in Q3
2017. The increase is primarily attributable to a higher average
debt investment balance between periods along with a slight
increase in the core yield from 12.6% in Q3 2017 to 12.7% in Q3
2018.
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 September
30, 2018, (including net loan, warrant and equity activity) on
investments, totaled ($39.5) million, on a GAAP basis, spanning
nearly 15 years of investment activities.
When compared to total new debt investment commitments during
the same period of over $8.2 billion, the total realized
gain/(loss) since inception of ($39.5) million represents
approximately 48 basis points “bps,” or 0.48%, of cumulative debt
commitments, or an effective annualized loss rate of 3 bps, or
0.03%.
Realized Gains/(Losses)
During Q3 2018, Hercules had gross realized gains/(losses) of
$3.3 million primarily from gross realized gains of $4.6 million,
offset by the liquidation or write-off of warrant and equity
investments in seven (7) portfolio companies and a debt investment
in one portfolio company, of ($1.3) million.
Unrealized Appreciation/(Depreciation)
During Q3 2018, we recorded $3.0 million of net unrealized
appreciation which was mainly from debt, equity and warrant
investments. Hercules recorded $3.5 million of net unrealized
appreciation on its debt investments which was attributable to $4.2
million of unrealized appreciation on the debt portfolio, including
$0.3 million of unrealized appreciation on collateral-based
impairments on four (4) portfolio companies, along with $0.7
million of unrealized depreciation primarily due to the reversal of
unrealized appreciation upon pay-off of three (3) portfolio
companies.
Hercules recorded $1.5 million of net unrealized appreciation on
equity investments and $1.9 million of net unrealized depreciation
on warrant investments during the three months ended September 30,
2018. This net unrealized depreciation of $0.4 million was
primarily attributable to $1.3 million of unrealized depreciation
due to the reversal of unrealized appreciation upon acquisition or
liquidation of equity and warrant investments. This is partially
offset by $0.9 million of unrealized appreciation on the equity and
warrant portfolio investments.
Portfolio Asset Quality
As of September 30, 2018, the weighted average grade of the debt
investment portfolio materially improved to 2.23, on a cost basis,
compared to 2.21 as of June 30, 2018, based on a scale of 1 to 5,
with 1 being the highest quality. Hercules’ policy is to generally
adjust the credit grading down on its portfolio companies as they
approach their expected additional growth equity capital to fund
their respective operations for the next 9-14 months.
Additionally, Hercules may selectively downgrade portfolio
companies, from time to time, if they are not meeting the Company’s
financing criteria, underperforming relative to their respective
business plans, or approaching an additional round of new equity
capital investment. It is expected that venture growth stage
companies typically require multiple additional rounds of equity
capital, generally every 9-14 months, since they are not generating
positive cash flows for their operations. Various companies in the
portfolio will require additional rounds of funding from time to
time to maintain their operations.
As of September 30, 2018, grading of the debt investment
portfolio at fair value, excluding warrants and equity investments,
was as follows:
Credit Grading at Fair Value, Q3 2018 - Q3 2017 ($ in
millions)
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Grade 1 - High $ 150.2 9.4 %
$ 247.5 16.0 %
$ 141.8 10.6 %
$ 345.2 24.4 % $
190.0 14.6 %
Grade 2 $ 987.5 61.6 % $ 791.9
51.2 % $ 599.8 44.9 % $ 583.0 41.2 % $ 696.2 53.6 %
Grade 3
$ 420.2 26.2 % $ 463.7 30.0 % $ 548.0 41.0 % $ 443.8 31.3 % $ 370.9
28.5 %
Grade 4 $ 44.5 2.7 % $ 42.0 2.7 % $ 33.6 2.5 % $ 41.7
2.9 % $ 43.0 3.3 %
Grade 5 - Low $ 0.9 0.1 % $ 0.9 0.1 % $
13.2 1.0 % $ 2.3 0.2 % $ - 0.0 %
Weighted Avg.
2.23
2.21
2.43
2.17
2.24
Non-Accruals
Non-accruals remained the same for the third quarter of 2018. As
of September 30, 2018, the Company had two (2) debt investments on
non-accrual with a 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 Company’s total investment
portfolio at cost and value, respectively.
Compared to June 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.
Q3 2018 Q2 2018
Q1 2018
Q4 2017 Q3 2017
Total
Investments at Cost $ 1,813.1 $ 1,757.6 $ 1,576.3 $ 1,619.8 $
1,489.0
Loans on non-accrual as a % of Total
Investments at Value 0.0 % 0.0 % 0.0 % 0.0 % 0.2 %
Loans on non-accrual as a % of Total
Investments at Cost
0.2
%
0.2
%
0.8
%
0.9
%
0.9
%
Liquidity and Capital Resources
The Company ended Q3 2018 with $137.3 million in available
liquidity, including $43.2 million in unrestricted cash and cash
equivalents, and $94.1 million in available credit facilities,
subject to existing terms and advance rates and regulatory and
covenant requirements.
In September 2018, the Company issued $40.0 million in aggregate
principal amount of 6.25% notes due 2033 (the “2033 Notes”) to fund
debt and equity investment growth. The 2033 Notes are listed on the
NYSE under the symbol “HCXY.”
On July 13, 2018, the Company completed repayment of the $41.2
million outstanding debentures of Hercules Technology II, L.P. and
subsequently surrendered the SBA license.
During Q3 2018, the Company sold 2.4 million shares of common
stock, which were issued under the equity ATM program, for total
accumulated net proceeds of approximately $30.9 million, including
$540,000 of offering expenses.
For the nine months ended September 30, 2018, the Company sold
5.0 million shares of common stock under the equity ATM program for
total accumulated net proceeds of approximately $62.3 million,
including $1.4 million of offering expenses.
On November 1, 2018, the Company completed a term debt
securitization in connection with which an affiliate of the Company
made an offering of $200,000,000 in aggregate principal amount of
fixed-rate asset-backed notes (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.
Bank Facilities
As of September 30, 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 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, 2018 under the Wells Fargo
Facility and Union Bank Facility were both LIBOR+3.25%, and no
floor, respectively. There were $42.4 million in outstanding
borrowings under the Union Bank Facility and $38.5 million in
outstanding borrowings under the Wells Fargo Facility, for a total
of $80.9 million at September 30, 2018.
On July 31, 2018, the Company entered into an amendment to the
Wells Facility to extend the maturity date and fully repay the
pro-rata portion of outstanding balances of Alostar Bank of
Commerce and Everbank Commercial Finance Inc., thereby resigning
both as lenders and terminating their commitments thereunder.
On October 26, 2018, the Company entered into a further
amendment to the Wells Facility to, among other things, extend the
maturity date.
Leverage
Hercules’ GAAP leverage ratio, including its SBA debentures, was
80.9%, as of September 30, 2018. Hercules’ regulatory leverage, or
debt to equity ratio, excluding our Small Business Administration
“SBA” debentures, was 66.0% and net regulatory leverage, a non-GAAP
measure (excluding cash of approximately $43.2 million), was 61.7%,
as of September 30, 2018. Hercules’ net leverage ratio, including
its SBA debentures, was 76.6%, as of September 30, 2018.
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 $149.0 million, providing the
Company with the potential capacity to add leverage of $341.3
million to its balance sheet as of September 30, 2018, bringing the
maximum potential leverage to approximately $1.15 billion, or
114.8% (1.15:1), if it had access to such additional leverage.
On September 4, 2018, Hercules’ Board of Directors approved the
application to reduce its asset coverage requirement from 200% to
150% under the Small Business Credit Availability Act (“SBCAA”),
which passed into law on March 23, 2018. This change will go into
effect on September 4, 2019. The Company and the Board of Directors
unanimously determined that the best course of action is to seek
stockholder approval to accelerate the application of the reduced
asset coverage requirements to the Company at a Special Meeting to
be held on December 6, 2018.
If the proposal is approved by stockholders at the Special
Meeting, the Company would become subject to an asset coverage
ratio of at least 150% the day after the Special Meeting instead of
September 4, 2019.
Available Unfunded Commitments – Representing 10.7% of debt
investment balance, at cost
The Company’s unfunded commitments and contingencies consist
primarily of unused commitments to extend credit in the form of
loans to select portfolio companies. A portion of these unfunded
contractual commitments are dependent upon the portfolio company
reaching certain milestones in order to gain access to additional
funding. Furthermore, our credit agreements contain customary
lending provisions that allow us relief from funding obligations
for previously made commitments. In addition, since a portion of
these commitments may also expire without being drawn, unfunded
contractual commitments do not necessarily represent future cash
requirements.
As of September 30, 2018, the Company had $171.9 million of
available unfunded commitments at the request of the portfolio
company and unencumbered by any milestones, including undrawn
revolving facilities, representing 10.7% of Hercules’ debt
investment balance, at cost. This increased from the previous
quarter of $129.7 million of available unfunded commitments at the
request of the portfolio company or 8.3% of Hercules’ debt
investment balance, at cost.
Existing Pipeline and Signed Term Sheets
After closing $235.1 million in new debt and equity commitments
in Q3 2018, Hercules has pending commitments of $31.0 million in
signed non-binding term sheets outstanding as of October 29, 2018.
Since the close of Q3 2018 and as of October 29, 2018, Hercules
closed debt and equity commitments of $53.0 million to new and
existing portfolio companies and funded $90.0 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 September 30, 2018, the Company’s net assets were $1.0
billion, compared to $963.7 million at the end of Q2 2018. NAV per
share increased 1.6% to $10.38 on 96.8 million outstanding shares
of common stock as of September 30, 2018, compared to $10.22 on
94.3 million outstanding shares of common stock as of June 30,
2018. The increase in NAV per share was primarily attributed to a
change in unrealized depreciation and realized and unrealized
gains, and accretive proceeds from our ATM activity during the
quarter.
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 97.0% of our debt investment portfolio being priced at
floating interest rates as of September 30, 2018, with a Prime or
LIBOR-based interest rate floor, coupled with 90.0% 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 September 30, 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 $4.3 million, or $0.04 per share, of net investment
income annually.
(in thousands)Basis Point
Change
InterestIncome(1)
InterestExpense
NetIncome
EPS(2)
25 $ 4,303 $ 46 $ 4,257 $ 0.04 50 $ 7,921 $ 93 $ 7,828 $ 0.08 75 $
11,720 $ 139 $ 11,581 $ 0.12 100 $ 15,518 $ 186 $ 15,332 $ 0.16 200
$ 31,188 $ 372 $ 30,816 $ 0.32 300 $ 45,681 $ 558 $ 45,123 $ 0.47
(1) Source: Hercules Capital Form 10-Q for
Q3 2018
(2) EPS calculated on basic weighted
shares outstanding of 95,460. 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 52 portfolio companies with a
fair value of $127.4 million and a cost basis of $168.6 million as
of September 30, 2018. On a fair value basis, 31.0% or $39.2
million is related to existing public equity positions, at
September 30, 2018.
Warrant Portfolio
Hercules held warrant positions in 130 portfolio companies with
a fair value of $29.8 million and a cost basis of $36.5 million as
of September 30, 2018.
Portfolio Company IPO and M&A Activity in Q3 2018
IPO Activity
As of September 30, 2018, Hercules held warrant and equity
positions in two (2) portfolio companies that had filed
Registration Statements in contemplation of a potential IPO,
including:
• Stealth Bio Therapeutics filed a public registration with the
Hong Kong Exchange (HKEX) in contemplation of a potential public
offering.
• One (1) 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
- In August 2018, Hercules’ portfolio
company NuGEN Technologies, Inc., a leading provider for
innovative next-generation sequencing kits and genomic sample
preparation solutions for the fastest growing field within the
genomics area, was acquired by the Tecan Group (SIX Swiss Exchange:
TECN), a leading global provider of laboratory instruments and
solutions in biopharmaceuticals, forensics and clinical
diagnostics. Terms of the acquisition were not disclosed. Hercules
initially committed $3.5 million in venture debt financing
beginning in April 2007.
- In August 2018, Hercules’ portfolio
company Avnera Corporation, a fabless semiconductor firm
making custom Analog System-on-Chip (ASoC) solutions for audio,
voice, speech, sensor and artificial intelligence (AI)
applications, was acquired by Skyworks Solutions, Inc. (NASDAQ:
SWKS), an innovator of high-performance analog semiconductors
connecting people, places and things. Skyworks paid $405.0 million
in cash to Avnera equity holders at closing with up to an
additional $20.0 million if certain performance targets are
exceeded over a 12-month period post-closing period. Hercules
initially committed $12.5 million in venture debt financing
beginning in March 2014.
- In September 2018, Hercules’ portfolio
company INXPO, Inc., a provider of feature-rich webcasting
and online events for the enterprise, announced it has entered into
an agreement to be acquired by West Corporation, a leading
technology enablement company that connects people around the
world, making companies more efficient and improving lives. Terms
of the acquisition were not disclosed. The closing of the
transaction is subject to customary closing conditions. Hercules
initially committed $6.0 million in venture debt financing
beginning in March 2011.
- In September 2018, Hercules’ portfolio
company NewVoiceMedia Limited, a leading global provider of
cloud contact center technology that enables businesses to create
exceptional, emotive customer experiences to serve better and sell
more, announced it has entered into an agreement to be acquired by
Vonage Holding Corporation (NYSE: VG), a internet telephony service
provider, providing business and residential telecommunication
services based on voice over Internet Protocol, for $350.0 million
in cash. The closing of the transaction is expected to close in the
fourth quarter of 2018 and is subject to standard regulatory review
and customary closing conditions. Hercules initially committed
$25.0 million in venture debt financing beginning in December 2014,
and currently holds 669,173 shares of Preferred Series E common
stock and warrants for 225,586 shares of Preferred Series E stock
as of September 30, 2018.
- In September 2018, Hercules’ portfolio
company Clustrix, a leading provider of distributed
relational NewSQL databases for transactional big-data
applications, was acquired by MariaDB Corporation, a developer of
open source database technology. Terms of the acquisition were not
disclosed. Hercules initially committed $4.0 million in venture
debt financing beginning in November 2012.
Distributions
The Board of Directors declared a third quarter cash
distribution of $0.31 per share. This distribution would
represent the Company’s 53rd consecutive distribution declaration
since its IPO, bringing the total cumulative distribution declared
to date to $14.95 per share. In addition, the Board of Directors
declared a supplemental cash distribution of $0.02 per share. The
following shows the key dates of each of our third quarter 2018
distribution payments:
Record Date November 12, 2018
Payment Date November 19, 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, 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 September 30, 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 2018 distributions to stockholders
will be.
Subsequent Events
- As of October 29, 2018, Hercules has:a.
Closed debt and equity commitments of $53.0 million to new and
existing portfolio companies and funded $90.0 million since the
close of the third quarter.b. Pending commitments (signed
non-binding term sheets) of $31.0 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, 2018 Closed Commitments(a)
$963.8 Q4
2018 Closed Commitments (as of October 29, 2018)(a)
$53.0
Total Year-to-Date 2018 Closed Commitments(a)
$1016.8 Q4 2018 Pending Commitments (as of October 29, 2018)(b)
$31.0
Year-to-date 2018 Closed and Pending
Commitments
$1,047.8 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.
- On November 1, 2018, the Company
completed a term debt securitization in connection with which an
affiliate of the Company made an offering of $200,000,000 in
aggregate principal amount of 2027 Asset-Backed Notes. The 2027
Asset-Backed Notes were rated A(sf) by 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 October 26, 2018, the Company
entered into a further amendment to the Wells Facility to, among
other things, extend the maturity date.
- In July 2018, changes in the payment
schedule of obligors in the 2021 Asset-Backed Notes collateral pool
triggered a rapid amortization event in accordance with the sale
and servicing agreement for the 2021 Asset-Backed Notes. Due to
this event, the 2021 Asset-Backed Notes were fully repaid as of
October 16, 2018.
Conference Call
Hercules has scheduled its third quarter 2018 financial results
conference call for November 1, 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: 2699117 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 2699117.
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 $8.2
billion to over 440 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
five outstanding bond issuances of 6.25% Notes due 2024 (NYSE:
HTGX), 4.375% Convertible Notes due 2022, 4.625% Notes due 2022,
5.25% Notes due 2025 (NYSE: HCXZ) and 6.25% Notes due 2033 (NYSE:
HCXY).
Forward-Looking Statements
This press release may contain “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act
of 1995. You should understand that under Section 27A(b)(2)(B) of
the Securities Act of 1933, as amended, and Section 21E(b)(2)(B) of
the Securities Exchange Act of 1934, as amended, or the Exchange
Act, the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995 do not apply to forward-looking
statements made in periodic reports we file under the Exchange
Act.
The information disclosed in this press release is made as of
the date hereof and reflects Hercules’ most current assessment of
its historical financial performance. Actual financial results
filed with the SEC may differ from those contained herein due to
timing delays between the date of this release and confirmation of
final audit results. These forward-looking statements are not
guarantees of future performance and are subject to uncertainties
and other factors that could cause actual results to differ
materially from those expressed in the forward-looking statements
including, without limitation, the risks, uncertainties, including
the uncertainties surrounding the current market volatility, and
other factors the Company identifies from time to time in its
filings with the SEC. Although Hercules believes that the
assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate
and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. You should not place undue
reliance on these forward-looking statements. The forward-looking
statements contained in this release are made as of the date
hereof, and Hercules assumes no obligation to update the
forward-looking statements for subsequent events.
HERCULES CAPITAL, INC. CONSOLIDATED STATEMENT OF
ASSETS AND LIABILITIES (unaudited) (dollars in
thousands, except per share data) September
30, 2018 December 31,
2017 Assets Investments: Non-control/Non-affiliate
investments (cost of $1,663,658 and $1,506,454, respectively)
1,670,034 1,491,458 Control investments (cost of $64,630 and
$25,419, respectively) 62,387 19,461 Affiliate investments (cost of
$84,821 and $87,956, respectively) 28,095
31,295 Total investments in securities, at value (cost of
$1,813,109 and $1,619,829, respectively) 1,760,516 1,542,214 Cash
and cash equivalents 43,212 91,309 Restricted cash 2,429 3,686
Interest receivable 15,722 12,262 Other assets 1,175
5,244
Total assets $ 1,823,054 $
1,654,715
Liabilities Accounts payable and
accrued liabilities $ 21,473 $ 26,896 2021 Asset-Backed Notes, net
(principal of $3,515 and $49,153 respectively) (1) 3,423 48,650
2022 Convertible Notes, net (principal of $230,000 and $230,000,
respectively)(1) 224,660 223,488 2022 Notes, net (principal of
$150,000 and $150,000, respectively) (1) 147,859 147,572 2024
Notes, net (principal of $83,510 and $183,510, respectively) (1)
81,791 179,001 2025 Notes, net (principal of $75,000 and $0,
respectively)(1) 72,495 — 2033 Notes, net (principal of $40,000 and
$0, respectively)(1) 38,752 — SBA Debentures, net (principal of
$149,000 and $190,200, respectively) (1) 147,527 188,141 Credit
Facilities 80,894 —
Total
liabilities $ 818,874 $ 813,748
Net assets consist
of: Common stock, par value 96 85 Capital in excess of par
value 1,060,875 908,501 Unrealized appreciation(depreciation) on
investments(2) (53,784 ) (79,760 ) Accumulated undistributed
realized gains (losses) on investments (30,855 ) (20,374 )
Undistributed net investment income 27,848
32,515
Total net assets $ 1,004,180 $ 840,967
Total liabilities and net assets $ 1,823,054 $
1,654,715
Shares of common stock outstanding
($0.001 par value, 200,000,000 authorized) 96,751 84,424
Net
asset value per share $ 10.38 $ 9.96
(1) The Company’s SBA Debentures, 2033
Notes, 2025 Notes, 2022, Notes, 2024 Notes, 2021 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.
(2) Amounts include $1.2 million and $2.1
million, respectively, in net unrealized depreciation on other
assets and accrued liabilities, including escrow receivables, and
estimated taxes payable as of September 30, 2018 and December 31,
2017, respectively.
HERCULES CAPITAL, INC. CONSOLIDATED
STATEMENT OF OPERATIONS (unaudited) (in thousands,
except per share data) Three Months
Ended September 30, Nine
Months Ended September 30, 2018
2017 2018
2017 Investment income: Interest
income Non-control/Non-affiliate investments $ 47,662 $ 41,725 $
134,031 $ 124,049 Control investments 921 464 2,348 1,505 Affiliate
investments 509 246 1,570
248 Total interest income 49,092
42,435 137,949 125,802 Fee
Income Commitment, facility and loan fee income:
Non-control/Non-affiliate investments 1,858 2,239 6,228 7,613
Control investments 1 1 1 11 Affiliate investments 71
2 263 2 Total commitment,
facility and loan fee income 1,930 2,242
6,492 7,626 One-time fee Income:
Non-control/Non-affiliate investments 1,580
1,188 6,423 7,254 Total one-time
fee income 1,580 1,188 6,423
7,254
Total fee income
3,510
3,430
12,915
14,880
Total investment income 52,602 45,865 150,864 140,682
Operating expenses: Interest 9,451 9,185 28,715 28,046 Loan
fees 1,502 1,314 6,039 5,500 General and administrative Legal
Expenses 677 925 1,889 3,792 Other Expenses 3,044
2,623 9,515 8,570 Total
general and administrative 3,721 3,548
11,404 12,362 Employee compensation:
Compensation and benefits 5,294 6,014 18,069 17,276 Stock-based
compensation 3,332 1,831 8,498
5,573 Total employee compensation 8,626
7,845 26,567 22,849
Total operating expenses 23,300
21,892 72,725 68,757
Net
investment income 29,302 23,973 78,139 71,925
Net realized
gain (loss) on investments Non-control/Non-affiliate
investments 3,350 (8,911 ) (4,115 ) (10,940 ) Control investments —
(15,543 ) (4,308 ) (15,989 ) Affiliate investments —
— (2,058 ) — Total net realized
gain (loss) on investments 3,350 (24,454 )
(10,481 ) (26,929 )
Net change in unrealized
appreciation (depreciation) on investments
Non-control/Non-affiliate investments 3,967 11,320 22,327 45,420
Control investments 378 17,624 3,715 17,703 Affiliate investments
(1,368 ) 4,609 (66 ) (47,486 )
Total net unrealized appreciation (depreciation) on investments
2,977 33,553 25,976
15,637
Total net realized and unrealized
gain(loss) 6,327 9,099
15,495 (11,292 )
Net increase(decrease) in net
assets resulting from operations $ 35,629 $ 33,072
$ 93,634 $ 60,633 Net investment income
before investment gains and losses per common share: Basic $ 0.31
$ 0.29 $ 0.87 $ 0.87 Change in net
assets resulting from operations per common share: Basic $ 0.37
$ 0.40 $ 1.04 $ 0.73 Diluted $ 0.37
$ 0.40 $ 1.04 $ 0.73 Weighted average
shares outstanding Basic 95,460 82,496
89,100 82,073 Diluted 95,671
82,607 89,212 82,173
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 2018
2017 Net investment income $ 29,302 $ 23,973
Stock-based compensation 3,332 1,831 DNOI $ 32,634 $
25,804 DNOI per share-weighted average common shares Basic $
0.34 $ 0.31 Weighted average shares outstanding Basic
95,460 82,496
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, 2018 Total Debt (Principal Outstanding)
$ 811,919 Long-term SBA Debentures $ (149,000 ) Cash and cash
equivalents (43,212 )
Numerator: net debt (total debt less cash
and cash equivalents and SBA Debentures)
$ 619,707 Denominator: Total net assets $ 1,004,180 Net Leverage
Ratio 61.7 %
Net leverage ratio is calculated by deducting the outstanding
cash of $43.2 million and long-term SBA debentures of $149.0
million, at September 30, 2018 from total principal outstanding of
$811.9 million divided by our total equity of $1.0 billion,
resulting in a net leverage ratio of 61.7%. 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/20181101006025/en/
Hercules Capital, Inc.Michael Hara, 650-433-5578Investor
Relations and Corporate Communicationsmhara@htgc.com
Hercules Capital (NYSE:HTGC)
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