Hercules Capital
Hercules Capital, Inc. (Form: 10-Q, Received: 11/03/2016 16:23:57)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For The Quarterly Period Ended September 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       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

 

  

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  

On October 31, 2016, there were 77,189,555 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 September 30, 2016 and December 31, 2015 (unaudited)

  

3

 

 

 

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

  

5

 

 

 

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

  

5

 

 

 

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

  

7

 

 

 

Consolidated Schedule of Investments as of September 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)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $1,352,633 and $1,238,539, respectively)

 

$

1,309,696

 

 

$

1,192,652

 

Control investments (cost of $22,285 and $0, respectively)

 

 

4,991

 

 

 

 

Affiliate investments (cost of $13,326 and $13,742, respectively)

 

 

5,923

 

 

 

7,986

 

Total investments, at value (cost of $1,388,244 and $1,252,281, respectively)

 

 

1,320,610

 

 

 

1,200,638

 

Cash and cash equivalents

 

 

69,012

 

 

 

95,196

 

Restricted cash

 

 

8,980

 

 

 

9,191

 

Interest receivable

 

 

10,861

 

 

 

9,239

 

Other assets

 

 

9,961

 

 

 

9,720

 

Total assets

 

$

1,419,424

 

 

$

1,323,984

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

16,649

 

 

$

17,241

 

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

 

 

 

 

 

17,478

 

Wells Facility

 

 

 

 

 

50,000

 

2021 Asset-Backed Notes, net (principal of $117,004 and $129,300, respectively) (1)

 

 

115,531

 

 

 

126,995

 

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

 

 

108,659

 

 

 

108,179

 

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

 

 

237,663

 

 

 

100,128

 

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

 

 

187,333

 

 

 

186,829

 

Total liabilities

 

$

665,835

 

 

$

606,850

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

77

 

 

 

73

 

Capital in excess of par value

 

 

802,521

 

 

 

752,244

 

Unrealized depreciation on investments (2)

 

 

(68,880

)

 

 

(52,808

)

Accumulated realized gains on investments

 

 

31,420

 

 

 

27,993

 

Distributions in excess of net investment income

 

 

(11,549

)

 

 

(10,368

)

Total net assets

 

$

753,589

 

 

$

717,134

 

Total liabilities and net assets

 

$

1,419,424

 

 

$

1,323,984

 

 

 

 

 

 

 

 

 

 

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

 

 

76,400

 

 

 

72,118

 

Net asset value per share

 

$

9.86

 

 

$

9.94

 

 

(1)

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

(2)

Amounts include $1.2 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, estimated taxes payable and Citigroup warrant participation agreement liabilities as of September 30, 2016 and December 31, 2015.

 

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)

 

September 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

$

8,980

 

 

$

9,191

 

Total investments, at value (cost of $245,868 and $258,748, respectively)

 

 

243,216

 

 

 

257,657

 

Total assets

 

$

252,196

 

 

$

266,848

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

2021 Asset-Backed Notes, net (principal of $117,004 and $129,300, respectively) (1)

 

$

115,531

 

 

$

126,995

 

Total liabilities

 

$

115,531

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

$

39,907

 

 

$

40,256

 

 

$

115,887

 

 

$

105,861

 

Control investments

 

15

 

 

 

 

 

 

15

 

 

 

 

Affiliate investments

 

30

 

 

 

83

 

 

 

145

 

 

 

278

 

Total interest income

 

39,952

 

 

 

40,339

 

 

 

116,047

 

 

 

106,139

 

Fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

5,149

 

 

 

6,793

 

 

 

11,531

 

 

 

11,611

 

Control investments

 

1

 

 

 

 

 

 

1

 

 

 

 

Affiliate investments

 

 

 

 

 

 

 

 

 

 

1

 

Total fees

 

5,150

 

 

 

6,793

 

 

 

11,532

 

 

 

11,612

 

Total investment income

 

45,102

 

 

 

47,132

 

 

 

127,579

 

 

 

117,751

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

8,717

 

 

 

7,818

 

 

 

23,306

 

 

 

23,243

 

Loan fees

 

1,432

 

 

 

1,072

 

 

 

3,698

 

 

 

4,166

 

General and administrative

 

4,114

 

 

 

4,504

 

 

 

12,095

 

 

 

12,190

 

Employee compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

5,621

 

 

 

7,969

 

 

 

15,637

 

 

 

17,621

 

Stock-based compensation

 

1,442

 

 

 

2,179

 

 

 

5,616

 

 

 

7,166

 

Total employee compensation

 

7,063

 

 

 

10,148

 

 

 

21,253

 

 

 

24,787

 

Total operating expenses

 

21,326

 

 

 

23,542

 

 

 

60,352

 

 

 

64,386

 

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

 

 

 

 

 

 

 

 

 

 

(1

)

Net investment income

 

23,776

 

 

 

23,590

 

 

 

67,227

 

 

 

53,364

 

Net realized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

7,870

 

 

 

6,366

 

 

 

3,427

 

 

 

8,424

 

Total net realized gain on investments

 

7,870

 

 

 

6,366

 

 

 

3,427

 

 

 

8,424

 

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

(1,387

)

 

 

(25,032

)

 

 

(11,005

)

 

 

(34,585

)

Control investments

 

 

 

 

 

 

 

(3,421

)

 

 

 

Affiliate investments

 

553

 

 

 

(849

)

 

 

(1,646

)

 

 

1,543

 

Total net unrealized depreciation on investments

 

(834

)

 

 

(25,881

)

 

 

(16,072

)

 

 

(33,042

)

Total net realized and unrealized gain (loss)

 

7,036

 

 

 

(19,515

)

 

 

(12,645

)

 

 

(24,618

)

Net increase in net assets resulting from operations

$

30,812

 

 

$

4,075

 

 

$

54,582

 

 

$

28,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.32

 

 

$

0.33

 

 

$

0.91

 

 

$

0.76

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.41

 

 

$

0.05

 

 

$

0.74

 

 

$

0.40

 

Diluted

$

0.41

 

 

$

0.05

 

 

$

0.74

 

 

$

0.40

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

74,122

 

 

 

71,462

 

 

 

72,685

 

 

 

68,897

 

Diluted

 

74,157

 

 

 

71,496

 

 

 

72,702

 

 

 

69,123

 

Dividend distributions declared per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.31

 

 

$

0.31

 

 

$

0.93

 

 

$

0.93

 

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

 

 

 

 

 

 

 

 

 

 

(33,042

)

 

 

8,424

 

 

 

53,364

 

 

 

 

 

 

28,746

 

Public offering, net of offering expenses

 

7,591

 

 

 

8

 

 

 

100,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100,092

 

Issuance of common stock due to stock option exercises

 

51

 

 

 

 

 

 

428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

428

 

Retired shares from net issuance

 

(29

)

 

 

 

 

 

(423

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(423

)

Issuance of common stock under restricted stock plan

 

676

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(595

)

 

 

(1

)

 

 

(3,997

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,998

)

Issuance of common stock as stock dividend

 

123

 

 

 

 

 

 

1,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,589

 

Dividend distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(65,238

)

 

 

 

 

 

(65,238

)

Stock-based compensation (1)

 

 

 

 

 

 

 

7,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,231

 

Balance at September 30, 2015

 

72,109

 

 

$

73

 

 

$

757,646

 

 

$

(50,118

)

 

$

22,503

 

 

$

(6,969

)

 

$

(342

)

 

$

722,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

(16,072

)

 

 

3,427

 

 

 

67,227

 

 

 

 

 

 

54,582

 

Public offering, net of offering expenses

 

4,273

 

 

 

4

 

 

 

50,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,177

 

Acquisition of common stock under repurchase plan

 

(450

)

 

 

(1

)

 

 

(4,789

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,790

)

Issuance of common stock due to stock option exercises

 

42

 

 

 

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

426

 

Retired shares from net issuance

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under restricted stock plan

 

552

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(240

)

 

 

 

 

 

(2,560

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,560

)

Issuance of common stock as stock dividend

 

111

 

 

 

 

 

 

1,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,343

 

Dividend distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(68,408

)

 

 

 

 

 

(68,408

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,685

 

Balance at September 30, 2016

 

76,400

 

 

$

77

 

 

$

802,521

 

 

$

(68,880

)

 

$

31,420

 

 

$

(11,207

)

 

$

(342

)

 

$

753,589

 

 

(1)

Stock-based compensation includes $69 and $65 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2016 and 2015, respectively.

 

See notes to consolidated financial statements.

6


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

$

54,582

 

 

$

28,746

 

Adjustments to reconcile net increase in net assets resulting from

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

 

 

 

 

 

 

 

Purchase of investments

 

(461,772

)

 

 

(532,048

)

Principal and fee payments received on investments

 

340,584

 

 

 

379,247

 

Proceeds from the sale of investments

 

16,701

 

 

 

16,523

 

Net unrealized depreciation on investments

 

16,072

 

 

 

33,042

 

Net realized loss (gain) on investments

 

(3,427

)

 

 

(8,424

)

Accretion of paid-in-kind principal

 

(5,317

)

 

 

(2,796

)

Accretion of loan discounts

 

(5,524

)

 

 

(6,369

)

Accretion of loan discount on Convertible Senior Notes

 

82

 

 

 

185

 

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

 

(16,679

)

 

 

(10,493

)

Change in deferred loan origination revenue

 

(253

)

 

 

1,275

 

Unearned fees related to unfunded commitments

 

(308

)

 

 

(271

)

Amortization of debt fees and issuance costs

 

2,987

 

 

 

3,498

 

Depreciation

 

152

 

 

 

152

 

Stock-based compensation and amortization of restricted stock grants (1)

 

5,685

 

 

 

7,231

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Interest and fees receivable

 

(1,622

)

 

 

925

 

Prepaid expenses and other assets

 

228

 

 

 

4,833

 

Accounts payable

 

56

 

 

 

171

 

Accrued liabilities

 

(729

)

 

 

6,065

 

Net cash used in operating activities

 

(58,502

)

 

 

(78,512

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of capital equipment

 

(227

)

 

 

(158

)

Reduction of restricted cash

 

211

 

 

 

7,302

 

Net cash (used in) provided by investing activities

 

(16

)

 

 

7,144

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of common stock, net

 

50,177

 

 

 

100,092

 

Repurchase of common stock, net

 

(4,790

)

 

 

(4,498

)

Retirement of employee shares

 

(2,134

)

 

 

(3,993

)

Dividend distributions paid

 

(67,065

)

 

 

(63,649

)

Issuance of 2024 Notes Payable

 

141,945

 

 

 

 

Repayments of 2019 Notes Payable

 

 

 

 

(20,000

)

Repayments of 2017 Asset-Backed Notes

 

 

 

 

(16,049

)

Repayments of 2021 Asset-Backed Notes

 

(12,296

)

 

 

 

Borrowings of credit facilities

 

193,276

 

 

 

53,365

 

Repayments of credit facilities

 

(243,276

)

 

 

(53,365

)

Cash paid for debt issuance costs

 

(4,858

)

 

 

 

Cash paid for redemption of Convertible Senior Notes

 

(17,604

)

 

 

(65

)

Fees paid for credit facilities and debentures

 

(1,041

)

 

 

(282