Hercules Capital
Hercules Capital, Inc. (Form: 10-Q, Received: 08/04/2016 16:22:59)

 

 

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 June 30, 2016

OR

¨

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

Commission File Number: 814-00702

 

HERCULES 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 August 1, 2016, there were 74,844,969 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 

 

 


 

HERCULES 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 June 30, 2016 and December 31, 2015 (unaudited)

  

3

 

 

 

Consolidated Statement of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)

  

5

 

 

 

Consolidated Statement of Changes in Net Assets for the six months ended June 30, 2016 and 2015 (unaudited)

  

6

 

 

 

Consolidated Statement of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)

  

7

 

 

 

Consolidated Schedule of Investments as of June 30, 2016 (unaudited)

  

8

 

 

 

Consolidated Schedule of Investments as of December 31, 2015 (unaudited)

  

22

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

37

Item 2.

 

 

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

  

69

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

99

Item 4.

 

 

Controls and Procedures

  

100

 

PART II. OTHER INFORMATION

  

101

 

Item 1.

 

Legal Proceedings

  

101

Item 1A.

 

 

Risk Factors

 

101

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

102

Item 3.

 

 

Defaults Upon Senior Securities

  

102

Item 4.

 

 

Mine Safety Disclosures

  

102

Item 5.

 

 

Other Information

  

102

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

103

 

SIGNATURES

  

105

 

 

 

 

2


 

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts on or after February 25, 2016 and “Hercules Technology Growth Capital, Inc.” and its wholly owned subsidiaries and its affiliated securitization trusts prior to February 25, 2016 unless the context otherwise requires.

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $1,334,302 and $1,238,539, respectively)

 

$

1,292,934

 

 

$

1,192,652

 

Control investments (cost of $21,294 and $0, respectively)

 

 

4,000

 

 

 

 

Affiliate investments (cost of $13,799 and $13,742, respectively)

 

 

5,844

 

 

 

7,986

 

Total investments, at value (cost of $1,369,395 and $1,252,281, respectively)

 

 

1,302,778

 

 

 

1,200,638

 

Cash and cash equivalents

 

 

59,715

 

 

 

95,196

 

Restricted cash

 

 

3,605

 

 

 

9,191

 

Interest receivable

 

 

9,453

 

 

 

9,239

 

Other assets

 

 

19,620

 

 

 

9,720

 

Total assets

 

$

1,395,171

 

 

$

1,323,984

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

16,681

 

 

$

17,241

 

Long-Term Liabilities (Convertible Senior Notes), net (principal of $0 and $17,604) (1)

 

 

 

 

 

17,478

 

Wells Facility

 

 

 

 

 

50,000

 

2021 Asset-Backed Notes, net (principal of $129,300 and $129,300, respectively) (1)

 

 

127,461

 

 

 

126,995

 

2019 Notes, net (principal of $110,364 and $110,364, respectively) (1)

 

 

108,499

 

 

 

108,179

 

2024 Notes, net (principal of $244,945 and $103,000, respectively) (1)

 

 

237,570

 

 

 

100,128

 

Long-Term SBA Debentures, net (principal of $190,200 and $190,200, respectively) (1)

 

 

187,165

 

 

 

186,829

 

Total liabilities

 

$

677,376

 

 

$

606,850

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

75

 

 

 

73

 

Capital in excess of par value

 

 

774,339

 

 

 

752,244

 

Unrealized depreciation on investments (2)

 

 

(68,046

)

 

 

(52,808

)

Accumulated realized gains on investments

 

 

23,550

 

 

 

27,993

 

Distributions in excess of net investment income

 

 

(12,123

)

 

 

(10,368

)

Total net assets

 

$

717,795

 

 

$

717,134

 

Total liabilities and net assets

 

$

1,395,171

 

 

$

1,323,984

 

 

 

 

 

 

 

 

 

 

Shares of common stock outstanding ($0.001 par value, 200,000,000 and 100,000,000 authorized, respectively)

 

 

74,320

 

 

 

72,118

 

Net asset value per share

 

$

9.66

 

 

$

9.94

 

 

(1)

The Company’s SBA Debentures, 2019 Notes, 2024 Notes, 2021 Asset-Backed Notes, and Convertible Senior Notes, as each term is defined herein, are presented net of the associated debt issuance costs for each instrument. See “Note 2 – Summary of Significant Accounting Policies” and “Note 4 – Borrowings”.

(2)

Amounts include $1.4 million and $1.2 million, respectively, in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, estimated taxes payable and Citigroup warrant participation agreement liabilities.

 

See notes to consolidated financial statements.

3


 

T he following table presents the assets and liabilities of our consolidated securitization trust for the 2021 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 oblig ations 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 ar e included in the Consolidated Statement of Assets and Liabilities above.

 

(Dollars in thousands)

 

June 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

$

3,605

 

 

$

9,191

 

Total investments, at value (cost of $271,886 and $258,748, respectively)

 

 

269,452

 

 

 

257,657

 

Total assets

 

$

273,057

 

 

$

266,848

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

2021 Asset-Backed Notes, net (principal of $129,300 and $129,300, respectively) (1)

 

$

127,461

 

 

$

126,995

 

Total liabilities

 

$

127,461

 

 

$

126,995

 

 

(1)

The Company’s 2021 Asset-Backed Notes are presented net of the associated debt issuance costs for each instrument. See “Note 2 – Summary of Significant Accounting Policies” and “Note 4 – Borrowings”.

See notes to consolidated financial statements.

4


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

$

39,571

 

 

$

35,144

 

 

$

75,980

 

 

$

65,605

 

Affiliate investments

 

50

 

 

 

96

 

 

 

115

 

 

 

195

 

Total interest income

 

39,621

 

 

 

35,240

 

 

 

76,095

 

 

 

65,800

 

Fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

3,917

 

 

 

2,886

 

 

 

6,382

 

 

 

4,819

 

Affiliate investments

 

 

 

 

 

 

 

 

 

 

1

 

Total fees

 

3,917

 

 

 

2,886

 

 

 

6,382

 

 

 

4,820

 

Total investment income

 

43,538

 

 

 

38,126

 

 

 

82,477

 

 

 

70,620

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

7,572

 

 

 

7,571

 

 

 

14,589

 

 

 

15,425

 

Loan fees

 

1,278

 

 

 

1,580

 

 

 

2,267

 

 

 

3,093

 

General and administrative

 

4,401

 

 

 

4,069

 

 

 

7,980

 

 

 

7,687

 

Employee compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

5,331

 

 

 

5,857

 

 

 

10,016

 

 

 

9,653

 

Stock-based compensation

 

1,602

 

 

 

2,267

 

 

 

4,174

 

 

 

4,987

 

Total employee compensation

 

6,933

 

 

 

8,124

 

 

 

14,190

 

 

 

14,640

 

Total operating expenses

 

20,184

 

 

 

21,344

 

 

 

39,026

 

 

 

40,845

 

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

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Net investment income

 

23,354

 

 

 

16,781

 

 

 

43,451

 

 

 

29,774

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

25

 

 

 

(1,254

)

 

 

(4,443

)

 

 

2,058

 

Total net realized gain (loss) on investments

 

25

 

 

 

(1,254

)

 

 

(4,443

)

 

 

2,058

 

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

(8,159

)

 

 

(12,854

)

 

 

(9,618

)

 

 

(9,554

)

Control investments

 

(3,421

)

 

 

 

 

 

(3,421

)

 

 

 

Affiliate investments

 

(2,324

)

 

 

79

 

 

 

(2,199

)

 

 

2,392

 

Total net unrealized depreciation on investments

 

(13,904

)

 

 

(12,775

)

 

 

(15,238

)

 

 

(7,162

)

Total net realized and unrealized loss

 

(13,879

)

 

 

(14,029

)

 

 

(19,681

)

 

 

(5,104

)

Net increase in net assets resulting from operations

$

9,475

 

 

$

2,752

 

 

$

23,770

 

 

$

24,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.32

 

 

$

0.23

 

 

$

0.59

 

 

$

0.43

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.13

 

 

$

0.03

 

 

$

0.32

 

 

$

0.35

 

Diluted

$

0.13

 

 

$

0.03

 

 

$

0.32

 

 

$

0.35

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

72,746

 

 

 

71,368

 

 

 

71,959

 

 

 

67,596

 

Diluted

 

72,762

 

 

 

71,593

 

 

 

71,965

 

 

 

67,901

 

Dividend distributions declared per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.31

 

 

$

0.31

 

 

$

0.62

 

 

$

0.62

 

See notes to consolidated financial statements.

5


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/

 

 

Provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Accumulated

 

 

(Distributions

 

 

for Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Appreciation

 

 

Realized

 

 

in Excess of

 

 

Taxes on

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

(Depreciation)

 

 

Gains (Losses)

 

 

Investment

 

 

Investment

 

 

Net

 

 

Shares

 

 

Par Value

 

 

of par value

 

 

on Investments

 

 

on Investments

 

 

Income)

 

 

Gains

 

 

Assets

 

Balance at December 31, 2014

 

64,715

 

 

$

65

 

 

$

657,233

 

 

$

(17,076

)

 

$

14,079

 

 

$

4,905

 

 

$

(342

)

 

$

658,864

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

(7,162

)

 

 

2,058

 

 

 

29,774

 

 

 

 

 

 

24,670

 

Public offering, net of offering expenses

 

7,591

 

 

 

8

 

 

 

100,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100,092

 

Issuance of common stock due to stock option exercises

 

36

 

 

 

 

 

 

428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

428

 

Retired shares from net issuance

 

(28

)

 

 

 

 

 

(423

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(423

)

Issuance of common stock under restricted stock plan

 

603

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(514

)

 

 

(1

)

 

 

(3,399

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,400

)

Issuance of common stock as stock dividend

 

90

 

 

 

 

 

 

1,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,199

 

Dividend distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42,766

)

 

 

 

 

 

(42,766

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,027

 

Balance at June 30, 2015

 

72,493

 

 

$

73

 

 

$

760,148

 

 

$

(24,238

)

 

$

16,137

 

 

$

(8,087

)

 

$

(342

)

 

$

743,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

72,118

 

 

$

73

 

 

$

752,244

 

 

$

(52,808

)

 

$

27,993

 

 

$

(10,026

)

 

$

(342

)

 

$

717,134

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

(15,238

)

 

 

(4,443

)

 

 

43,451

 

 

 

 

 

 

23,770

 

Public offering, net of offering expenses

 

2,201

 

 

 

2

 

 

 

23,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,670

 

Acquisition of common stock under repurchase plan

 

(450

)

 

 

(1

)

 

 

(4,789

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,790

)

Issuance of common stock due to stock option exercises

 

11

 

 

 

 

 

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

118

 

Retired shares from net issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under restricted stock plan

 

547

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(192

)

 

 

 

 

 

(2,122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,122

)

Issuance of common stock as stock dividend

 

85

 

 

 

 

 

 

997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

997

 

Dividend distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45,206

)

 

 

 

 

 

(45,206

)

Stock-based compensation (1)

 

 

 

 

 

 

 

4,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,224

 

Balance at June 30, 2016

 

74,320

 

 

$

75

 

 

$

774,339

 

 

$

(68,046

)

 

$

23,550

 

 

$

(11,781

)

 

$

(342

)

 

$

717,795

 

 

(1)

Stock-based compensation includes $50,000 of restricted stock and option expense related to director compensation.

See notes to consolidated financial statements.

6


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

 

For the Six Months Ended June 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

$

23,770

 

 

$

24,670

 

Adjustments to reconcile net increase in net assets resulting from

operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Purchase of investments

 

(330,750

)

 

 

(373,422

)

Principal and fee payments received on investments

 

221,331

 

 

 

154,208

 

Proceeds from the sale of investments

 

6,041

 

 

 

7,494

 

Net unrealized depreciation on investments

 

15,238

 

 

 

7,162

 

Net realized loss (gain) on investments

 

4,443

 

 

 

(2,058

)

Accretion of paid-in-kind principal

 

(3,243

)

 

 

(1,584

)

Accretion of loan discounts

 

(3,776

)

 

 

(3,412

)

Accretion of loan discount on Convertible Senior Notes

 

82

 

 

 

123

 

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

 

 

 

 

1

 

Payment of loan discount on Convertible Senior Notes

 

 

 

 

(5

)

Accretion of loan exit fees

 

(10,968

)

 

 

(6,624

)

Change in deferred loan origination revenue

 

(44

)

 

 

1,758

 

Unearned fees related to unfunded commitments

 

(113

)

 

 

1,074

 

Amortization of debt fees and issuance costs

 

1,839

 

 

 

2,669

 

Depreciation

 

104

 

 

 

111

 

Stock-based compensation and amortization of restricted stock grants

 

4,224

 

 

 

5,027

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Interest and fees receivable

 

(214

)

 

 

227

 

Prepaid expenses and other assets

 

(9,041

)

 

 

2,744

 

Accounts payable

 

56

 

 

 

(732

)

Accrued liabilities

 

(879

)

 

 

200

 

Net cash used in operating activities

 

(81,900

)

 

 

(180,369

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of capital equipment

 

(146

)

 

 

(80

)

Reduction of restricted cash

 

5,586

 

 

 

850

 

Net cash provided by investing activities

 

5,440

 

 

 

770

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of common stock, net

 

23,670

 

 

 

100,092

 

Repurchase of common stock, net

 

(4,790

)

 

 

 

Retirement of employee shares

 

(2,004

)

 

 

(3,395

)

Dividend distributions paid

 

(44,209

)

 

 

(41,567

)

Issuance of 2024 Notes Payable

 

141,945

 

 

 

 

Repayments of 2019 Notes Payable

 

 

 

 

(20,000

)

Repayments of 2017 Asset-Backed Notes

 

 

 

 

(16,049

)

Borrowings of credit facilities

 

170,985

 

 

 

50,000

 

Repayments of credit facilities

 

(220,985

)

 

 

(378

)

Cash paid for debt issuance costs

 

(4,722

)

 

 

 

Cash paid for redemption of Convertible Senior Notes

 

(17,604

)

 

 

(65

)

Fees paid for credit facilities and debentures

 

(1,307

)

 

 

(168

)

Net cash provided by financing activities

 

40,979

 

 

 

68,470

 

Net decrease in cash and cash equivalents

 

(35,481

)

 

 

(111,129

)

Cash and cash equivalents at beginning of period

 

95,196

 

 

 

227,116

 

Cash and cash equivalents at end of period

$

59,715

 

 

$

115,987

 

 

 

 

 

 

 

 

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

Dividend distributions reinvested

$

997