Hercules Capital
HERCULES TECHNOLOGY GROWTH CAPITAL INC (Form: 10-Q, Received: 11/06/2014 17:02:24)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-00702

 

HERCULES TECHNOLOGY GROWTH

CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

 

743113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

 

94301

(Zip Code)

 

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

On November 3, 2014, there were 64,199,024 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 

 

 


 

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

3

 

Item 1.

 

 

Consolidated Financial Statements

  

3

 

 

 

Consolidated Statement of Assets and Liabilities as of September 30, 2014 (unaudited) and December 31, 2013

  

3

 

 

 

Consolidated Statement of Operations for the three and nine month periods ended September 30, 2014 and 2013 (unaudited)

  

5

 

 

 

Consolidated Statement of Changes in Net Assets for the three and nine month periods ended September 30, 2014 and 2013 (unaudited)

  

6

 

 

 

Consolidated Statement of Cash Flows for the nine month periods ended September 30, 2014 and 2013 (unaudited)

  

7

 

 

 

Consolidated Schedule of Investments as of September 30, 2014 (unaudited)

  

8

 

 

 

Consolidated Schedule of Investments as of December 31, 2013

  

20

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

32

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

58

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

93

Item 4.

 

 

Controls and Procedures

  

94

 

PART II. OTHER INFORMATION

  

95

 

Item 1.

 

Legal Proceedings

  

95

 

 

 

Item 1A. Risk Factors

  

95

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

97

Item 3.

 

 

Defaults Upon Senior Securities

  

97

Item 4.

 

 

Mine Safety Disclosures

  

97

Item 5.

 

 

Other Information

  

97

Item 6.

 

 

Exhibits

  

97

 

SIGNATURES

  

98

 

 

 

2


 

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise requires.

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

 

 

September 30, 2014

 

 

December 31, 2013

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $996,338 and $891,059, respectively)

 

$

990,068

 

 

$

899,314

 

Affiliate investments (cost of  $15,959 and $15,238, respectively)

 

 

8,845

 

 

 

10,981

 

Total investments, at value (cost of $1,012,297 and $906,297, respectively)

 

 

998,913

 

 

 

910,295

 

Cash and cash equivalents

 

 

158,627

 

 

 

268,368

 

Restricted cash

 

 

2,096

 

 

 

6,271

 

Interest receivable

 

 

9,146

 

 

 

8,962

 

Other assets

 

 

30,556

 

 

 

27,819

 

Total assets

 

$

1,199,338

 

 

$

1,221,715

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

11,613

 

 

$

14,268

 

Long-term Liabilities (Convertible Senior Notes)

 

 

40,012

 

 

 

72,519

 

Asset-Backed Notes

 

 

27,951

 

 

 

89,557

 

2019 Notes

 

 

170,364

 

 

 

170,364

 

2024 Notes

 

 

103,000

 

 

 

 

Long-term SBA Debentures

 

 

190,200

 

 

 

225,000

 

Total liabilities

 

$

543,140

 

 

$

571,708

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

65

 

 

 

62

 

Capital in excess of par value

 

 

670,711

 

 

 

656,594

 

Unrealized appreciation (depreciation) on investments

 

 

(14,706

)

 

 

3,598

 

Accumulated realized losses on investments

 

 

(2,233

)

 

 

(15,240

)

Undistributed net investment income

 

 

2,361

 

 

 

4,993

 

Total net assets

 

$

656,198

 

 

$

650,007

 

Total liabilities and net assets

 

$

1,199,338

 

 

$

1,221,715

 

Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized)

 

 

64,182

 

 

 

61,837

 

Net asset value per share

 

$

10.22

 

 

$

10.51

 

 

See notes to consolidated financial statements.

3


 

T he following table presents the assets and liabilities of our consolidated securitization trust for asset-backed notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statements of Assets and Liabilities above.

 

(Dollars in thousands)

 

September 30, 2014

 

 

December 31, 2013

 

ASSETS

 

 

 

 

 

 

 

 

Restricted Cash

 

$

2,096

 

 

$

6,271

 

Total investments, at value (cost of $87,405 and $166,513, respectively)

 

 

85,233

 

 

 

165,445

 

Total assets

 

$

87,329

 

 

$

171,716

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Asset-Backed Notes

 

$

27,951

 

 

$

89,557

 

Total liabilities

 

$

27,951

 

 

$

89,557

 

 

See notes to consolidated financial statements.

4


 

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

Three   Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Control/Non-Affiliate investments

$

33,210

 

 

$

35,623

 

 

$

92,975

 

 

$

93,722

 

Affiliate investments

 

130

 

 

 

561

 

 

 

1,747

 

 

 

1,684

 

Total interest income

 

33,340

 

 

 

36,184

 

 

 

94,722

 

 

 

95,406

 

Fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Control/Non-Affiliate investments

 

3,671

 

 

 

4,832

 

 

 

12,037

 

 

 

11,088

 

Affiliate investments

 

8

 

 

 

5

 

 

 

30

 

 

 

9

 

Total fees

 

3,679

 

 

 

4,837

 

 

 

12,067

 

 

 

11,097

 

Total investment income

 

37,019

 

 

 

41,021

 

 

 

106,789

 

 

 

106,503

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

6,495

 

 

 

7,587

 

 

 

20,177

 

 

 

22,788

 

Loan fees

 

1,364

 

 

 

1,072

 

 

 

4,531

 

 

 

3,341

 

General and administrative

 

2,397

 

 

 

2,176

 

 

 

6,984

 

 

 

6,831

 

Employee Compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

3,922

 

 

 

7,030

 

 

 

11,375

 

 

 

14,992

 

Stock-based compensation

 

2,823

 

 

 

1,596

 

 

 

6,849

 

 

 

4,349

 

Total employee compensation

 

6,745

 

 

 

8,626

 

 

 

18,224

 

 

 

19,341

 

Total operating expenses

 

17,001

 

 

 

19,461

 

 

 

49,916

 

 

 

52,301

 

Loss on debt extinguishment (Long-term Liabilities - Convertible Senior Notes)

 

(1,023

)

 

 

 

 

 

(1,023

)

 

 

 

Net investment income

 

18,995

 

 

 

21,560

 

 

 

55,850

 

 

 

54,202

 

Net realized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Control/Non-Affiliate investments

 

5,664

 

 

 

7,125

 

 

 

13,007

 

 

 

11,309

 

Total net realized gain on investments

 

5,664

 

 

 

7,125

 

 

 

13,007

 

 

 

11,309

 

Net increase in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Control/Non-Affiliate investments

 

(10,029

)

 

 

9,288

 

 

 

(15,447

)

 

 

10,506

 

Affiliate investments

 

547

 

 

 

(992

)

 

 

(2,857

)

 

 

(1,468

)

Total net unrealized appreciation (depreciation) on investments

 

(9,482

)

 

 

8,296

 

 

 

(18,304

)

 

 

9,038

 

Total net realized and unrealized gain (loss)

 

(3,818

)

 

 

15,421

 

 

 

(5,297

)

 

 

20,347

 

Net increase in net assets resulting from operations

$

15,177

 

 

$

36,981

 

 

$

50,553

 

 

$

74,549

 

Net investment income before investment gains and losses per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.30

 

 

$

0.35

 

 

$

0.89

 

 

$

0.91

 

Change in net assets per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.24

 

 

$

0.61

 

 

$

0.80

 

 

$

1.26

 

Diluted

$

0.23

 

 

$

0.59

 

 

$

0.78

 

 

$

1.23

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

62,356

 

 

 

60,522

 

 

 

61,444

 

 

 

58,206

 

Diluted

 

63,779

 

 

 

60,750

 

 

 

63,554

 

 

 

58,396

 

Dividends declared per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.31

 

 

$

0.31

 

 

$

0.93

 

 

$

0.86

 

 

See notes to consolidated financial statements.

5


 

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Accumulated

 

 

(Distributions

 

 

Provision for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Appreciation

 

 

Realized

 

 

in excess of

 

 

Income Taxes

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

(Depreciation)

 

 

Gains (Losses)

 

 

investment

 

 

on Investment

 

 

Net

 

 

Shares

 

 

Par   Value

 

 

of par value

 

 

on Investments

 

 

on Investments

 

 

income)

 

 

Gains

 

 

Assets

 

Balance at December 31, 2012

 

52,925

 

 

$

53

 

 

$

564,508

 

 

$

(7,947

)

 

$

(36,916

)

 

$

(3,388

)

 

$

(342

)

 

$

515,968

 

Net increase in net assets

   resulting from operations

 

 

 

 

 

 

 

 

 

 

9,038

 

 

 

11,309

 

 

 

54,202

 

 

 

 

 

 

74,549

 

Issuance of common stock

 

1,337

 

 

 

1

 

 

 

16,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,543

 

Issuance of common stock under

   restricted stock plan

 

472

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock as

   stock dividend

 

142

 

 

 

 

 

 

1,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,923

 

Retired shares from net issuance

 

(1,170

)

 

 

(1

)

 

 

(18,259

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,260

)

Public offering

 

8,050

 

 

 

8

 

 

 

95,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,537

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,292

)

 

 

 

 

 

(47,292

)

Stock-based compensation

 

 

 

 

 

 

 

4,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,408

 

Balance at September 30, 2013

 

61,756

 

 

$

62

 

 

$

664,650

 

 

$

1,091

 

 

$

(25,607

)

 

$

3,522

 

 

$

(342

)

 

$

643,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

61,837

 

 

$

62

 

 

$

656,594

 

 

$

3,598

 

 

$

(15,240

)

 

$

5,335

 

 

$

(342

)

 

$

650,007

 

Net increase (decrease) in net assets

   resulting from operations

 

 

 

 

 

 

 

 

 

 

(18,304

)

 

 

13,007

 

 

 

55,850

 

 

 

 

 

 

50,553

 

Issuance of common stock

 

256

 

 

 

 

 

 

2,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,873

 

Issuance of common stock under

   restricted stock plan

 

632

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock as

   stock dividend

 

76

 

 

 

 

 

 

1,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,152

 

Retired shares from net issuance

 

(193

)

 

 

 

 

 

(5,992

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,992

)

Public offering

 

1,574

 

 

 

2

 

 

 

9,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,182

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(58,482

)

 

 

 

 

 

(58,482

)

Stock-based compensation

 

 

 

 

 

 

 

6,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,905

 

Balance at September 30, 2014

 

64,182

 

 

$

65

 

 

$

670,711

 

 

$

(14,706

)

 

$

(2,233

)

 

$

2,703

 

 

$

(342

)

 

$

656,198

 

 

See notes to consolidated financial statements.

6


 

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

$

50,553

 

 

$

74,549

 

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

Purchase of investments

 

(415,399

)

 

 

(411,515

)

Principal payments received on investments

 

316,543

 

 

 

336,438

 

Proceeds from the sale of investments

 

17,977

 

 

 

29,459

 

Net unrealized depreciation (appreciation) on investments

 

18,304

 

 

 

(9,038

)

Net realized gain on investments

 

(13,007

)

 

 

(11,309

)

Accretion of paid-in-kind principal

 

(1,990

)

 

 

(2,269

)

Accretion of loan discounts

 

(7,690

)

 

 

(4,556

)

Accretion of loan discount on Convertible Senior Notes

 

738

 

 

 

812

 

Loss on conversion of Convertible Senior Notes

 

1,023

 

 

 

 

Accretion of loan exit fees

 

(754

)

 

 

(10,031

)

Change in deferred loan origination revenue

 

(616

)

 

 

2,540

 

Unearned fees related to unfunded commitments

 

(7,789

)

 

 

(364

)

Amortization of debt fees and issuance costs

 

4,131

 

 

 

2,918

 

Depreciation

 

161

 

 

 

162

 

Stock-based compensation and amortization of restricted stock grants

 

6,905

 

 

 

4,408

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Interest and fees receivable

 

(184

)

 

 

(641

)

Prepaid expenses and other assets

 

59

 

 

 

570

 

Accounts payable

 

1,126

 

 

 

(63

)

Accrued liabilities

 

(4,203

)

 

 

2,588

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(34,112

)

 

 

4,658

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of capital equipment

 

(94

)

 

 

(240

)

Reduction of (investment in) restricted cash

 

4,175

 

 

 

(3,632

)

Other long-term assets

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

4,081

 

 

 

(3,902

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance (repurchase of employee shares due to restricted stock vesting) of

   common stock, net

 

6,734

 

 

 

93,443

 

Dividends paid

 

(57,330

)

 

 

(45,368

)

Issuance of 2024 Notes, net

 

99,655

 

 

 

 

Repayments of Asset-Backed Notes

 

(61,606

)

 

 

(26,832

)

Repayments of Long-Term SBA Debentures

 

(34,800

)

 

 

 

Cash paid for redemption of Convertible Senior Notes

 

(31,577

)

 

 

 

Fees paid for credit facilities and debentures

 

(786

)

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(79,710

)

 

 

21,243

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(109,741

)

 

 

21,999

 

Cash and cash equivalents at beginning of period

 

268,368

 

 

 

182,994

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

158,627

 

 

$

204,993

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

Dividends Reinvested

$

1,152

 

 

$

1,923

 

Paid-in-Kind Principal

$

1,990

 

 

$

2,269

 

 

 

 

See notes to consolidated financial statements.

7


 

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2014

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment (1)

 

Maturity Date

 

Interest Rate and Floor

 

Principal

Amount

 

 

Cost (2)

 

 

Value (3)

 

Debt Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biotechnology Tools

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-5 Years Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Labcyte, Inc. (11)(13)(14)

 

Biotechnology Tools

 

Senior Secured

 

June 2016

 

Interest rate PRIME + 6.70% or Floor rate of 9.95%

 

$

3,104

 

 

$

3,252

 

 

$

3,262

 

Subtotal: 1-5 Years Maturity

 

 

 

 

 

 

 

 

 

 

 

 

3,252

 

 

 

3,262

 

Subtotal: Biotechnology Tools (0.50%)*

 

 

 

 

 

 

 

 

 

 

 

 

3,252

 

 

 

3,262

 

 

Communications & Networking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-5 Years Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OpenPeak, Inc. (11)(13)

 

Communications & Networking

 

Senior   Secured

 

April 2017

 

Interest rate PRIME + 8.75% or Floor rate of 12.00%

 

$

9,296

 

 

 

9,454

 

 

 

9,331

 

SkyCross, Inc.   (13)(14)

 

Communications & Networking

 

Senior Secured

<