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 June 30, 2022

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

 

74-3113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

 Identification Number)

 

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $0.001 per share

HTGC

New York Stock Exchange

6.25% Notes due 2033

HCXY

New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes ☐ No ☐

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

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

On July 22, 2022, there were 127,238,854 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 Statements of Assets and Liabilities as of June 30, 2022 (unaudited) and December 31, 2021

 

3

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)

 

4

 

 

 

Consolidated Statements of Changes in Net Assets for the three and six months ended June 30, 2022 and 2021 (unaudited)

 

5

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)

 

6

 

 

 

Consolidated Schedule of Investments as of June 30, 2022 (unaudited)

 

7

 

 

 

Consolidated Schedule of Investments as of December 31, 2021

 

18

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

29

Item 2.

 

 

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

 

61

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

77

Item 4.

 

 

Controls and Procedures

 

78

 

PART II. OTHER INFORMATION

 

79

 

Item 1.

 

Legal Proceedings

 

79

Item 1A.

 

 

Risk Factors

 

79

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

Item 3.

 

Defaults Upon Senior Securities

 

80

Item 4.

 

 

Mine Safety Disclosures

 

80

Item 5.

 

 

Other Information

 

80

Item 6.

 

 

Exhibits and Financial Statement Schedules

 

81

 

SIGNATURES

 

86

 

 

 

 


 

PART I: FINANCIAL INFORMATION

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

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except per share data)

 

June 30, 2022

 

 

December 31, 2021

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Investments, at fair value:

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $2,667,854 and $2,293,398, respectively)

 

$

2,632,403

 

 

$

2,351,560

 

Control investments (cost of $87,228 and $84,039, respectively)

 

 

82,875

 

 

 

73,504

 

Affiliate investments (cost of $8,245 and $13,547, respectively)

 

 

3,613

 

 

 

9,458

 

Total investments, at fair value (cost of $2,763,327 and $2,390,984, respectively; amounts related to a VIE $234,170 and $0, respectively)

 

 

2,718,891

 

 

 

2,434,522

 

Cash and cash equivalents

 

 

115,309

 

 

 

133,115

 

Restricted cash (amounts related to a VIE $3,371 and $0, respectively)

 

 

3,371

 

 

 

3,150

 

Interest receivable

 

 

22,112

 

 

 

17,365

 

Right of use asset

 

 

6,349

 

 

 

6,761

 

Other assets

 

 

3,691

 

 

 

5,100

 

Total assets

 

$

2,869,723

 

 

$

2,600,013

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Debt (net of debt issuance costs - Note 5; amounts related to a VIE $147,663 and $0, respectively)

 

$

1,498,612

 

 

$

1,236,303

 

Accounts payable and accrued liabilities

 

 

36,711

 

 

 

47,781

 

Operating lease liability

 

 

6,660

 

 

 

7,382

 

Total liabilities

 

$

1,541,983

 

 

$

1,291,466

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

Common stock, par value

 

$

128

 

 

$

117

 

Capital in excess of par value

 

 

1,242,618

 

 

 

1,091,907

 

Total distributable earnings

 

 

84,994

 

 

 

216,523

 

Total net assets

 

$

1,327,740

 

 

$

1,308,547

 

Total liabilities and net assets

 

$

2,869,723

 

 

$

2,600,013

 

 

 

 

 

 

 

 

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

 

 

127,285

 

 

 

116,619

 

Net asset value per share

 

$

10.43

 

 

$

11.22

 

 

 

See notes to consolidated financial statements

 

3


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

67,511

 

 

$

60,276

 

 

$

127,601

 

 

$

123,258

 

Control investments

 

 

1,144

 

 

 

1,029

 

 

 

2,259

 

 

 

1,828

 

Affiliate investments

 

 

76

 

 

 

1

 

 

 

1,123

 

 

 

2

 

Total interest income

 

 

68,731

 

 

 

61,306

 

 

 

130,983

 

 

 

125,088

 

Fee income:

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

3,367

 

 

 

8,238

 

 

 

6,256

 

 

 

13,207

 

Control investments

 

 

17

 

 

 

15

 

 

 

33

 

 

 

23

 

Total fee income

 

 

3,384

 

 

 

8,253

 

 

 

6,289

 

 

 

13,230

 

Total investment income

 

 

72,115

 

 

 

69,559

 

 

 

137,272

 

 

 

138,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

12,698

 

 

 

14,490

 

 

 

24,345

 

 

 

29,240

 

Loan fees

 

 

1,492

 

 

 

2,220

 

 

 

3,334

 

 

 

5,020

 

General and administrative

 

 

4,322

 

 

 

4,068

 

 

 

8,140

 

 

 

7,664

 

Tax expenses

 

 

1,821

 

 

 

1,746

 

 

 

2,533

 

 

 

3,184

 

Employee compensation:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

11,060

 

 

 

8,349

 

 

 

19,389

 

 

 

18,153

 

Stock-based compensation

 

 

3,661

 

 

 

2,926

 

 

 

8,085

 

 

 

5,670

 

Total employee compensation

 

 

14,721

 

 

 

11,275

 

 

 

27,474

 

 

 

23,823

 

Total gross operating expenses

 

 

35,054

 

 

 

33,799

 

 

 

65,826

 

 

 

68,931

 

Expenses allocated to the Adviser Subsidiary

 

 

(3,070

)

 

 

(1,204

)

 

 

(4,472

)

 

 

(2,137

)

Total net operating expenses

 

 

31,984

 

 

 

32,595

 

 

 

61,354

 

 

 

66,794

 

Net investment income

 

 

40,131

 

 

 

36,964

 

 

 

75,918

 

 

 

71,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) and net change in unrealized appreciation (depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

(2,133

)

 

 

47,861

 

 

 

(4,600

)

 

 

55,631

 

Affiliate investments

 

 

 

 

 

(62,143

)

 

 

3,772

 

 

 

(62,143

)

Loss on debt extinguishment

 

 

 

 

 

 

 

 

(3,686

)

 

 

 

Total net realized gain (loss)

 

 

(2,133

)

 

 

(14,282

)

 

 

(4,514

)

 

 

(6,512

)

Net change in unrealized appreciation (depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

(51,749

)

 

 

3,075

 

 

 

(90,698

)

 

 

21,097

 

Control investments

 

 

4,728

 

 

 

(5,255

)

 

 

6,182

 

 

 

(3,553

)

Affiliate investments

 

 

(1,295

)

 

 

62,229

 

 

 

(542

)

 

 

64,338

 

Total net change in unrealized appreciation (depreciation)

 

 

(48,316

)

 

 

60,049

 

 

 

(85,058

)

 

 

81,882

 

Total net realized gain (loss) and net change in unrealized appreciation (depreciation)

 

 

(50,449

)

 

 

45,767

 

 

 

(89,572

)

 

 

75,370

 

Net increase (decrease) in net assets resulting from operations

 

$

(10,318

)

 

$

82,731

 

 

$

(13,654

)

 

$

146,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Basic

 

$

0.32

 

 

$

0.32

 

 

$

0.62

 

 

$

0.62

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

0.71

 

 

$

(0.12

)

 

$

1.27

 

Diluted

 

$

(0.09

)

 

$

0.65

 

 

$

(0.12

)

 

$

1.21

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

124,255

 

 

 

114,654

 

 

 

121,292

 

 

 

114,480

 

Diluted

 

 

124,255

 

 

 

129,572

 

 

 

121,292

 

 

 

122,188

 

Distributions paid per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.39

 

 

$

0.96

 

 

$

0.76

 

 

 

See notes to consolidated financial statements

 

4


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(amounts in thousands)

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Net

 

For the Three Months Ended June 30, 2022

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)

 

 

Assets

 

Balance as of March 31, 2022

 

123,194

 

 

$

124

 

 

$

1,178,019

 

 

$

155,305

 

 

$

1,333,448

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

(10,318

)

 

 

(10,318

)

Public offering, net of offering expenses

 

4,061

 

 

 

4

 

 

 

61,851

 

 

 

 

 

 

61,855

 

Issuance of common stock due to stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares from net issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under restricted stock plan

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(54

)

 

 

 

 

 

(894

)

 

 

 

 

 

(894

)

Distributions reinvested in common stock

 

61

 

 

 

 

 

 

921

 

 

 

 

 

 

921

 

Distributions

 

 

 

 

 

 

 

 

 

 

(59,993

)

 

 

(59,993

)

Stock-based compensation (1)

 

 

 

 

 

 

 

2,721

 

 

 

 

 

 

2,721

 

Balance as of June 30, 2022

 

127,285

 

 

$

128

 

 

$

1,242,618

 

 

$

84,994

 

 

$

1,327,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

$

116,619

 

 

$

117

 

 

$

1,091,907

 

 

$

216,523

 

 

$

1,308,547

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

(13,654

)

 

 

(13,654

)

Public offering, net of offering expenses

 

8,921

 

 

 

9

 

 

 

147,095

 

 

 

 

 

 

147,104

 

Issuance of common stock due to stock option exercises

 

37

 

 

 

 

 

 

454

 

 

 

 

 

 

454

 

Retired shares from net issuance

 

(2

)

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

Issuance of common stock under restricted stock plan

 

788

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(180

)

 

 

 

 

 

(4,588

)

 

 

 

 

 

(4,588

)

Distributions reinvested in common stock

 

121

 

 

 

 

 

 

1,946

 

 

 

 

 

 

1,946

 

Issuance of common stock from conversion of 2022 Convertible Notes

 

981

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

(117,875

)

 

 

(117,875

)

Stock-based compensation (1)

 

 

 

 

 

 

 

5,838

 

 

 

 

 

 

5,838

 

Balance as of June 30, 2022

$

127,285

 

 

$

128

 

 

$

1,242,618

 

 

$

84,994

 

 

$

1,327,740

 

(1)
Stock-based compensation includes $36 thousand and $76 thousand of restricted stock and option expense related to director compensation for the three and six months ended June 30, 2022, respectively.

(amounts in thousands)

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Net

 

For the Three Months Ended June 30, 2021

 

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)

 

 

Assets

 

Balance as of March 31, 2021

 

 

115,768

 

 

$

116

 

 

$

1,160,519

 

 

$

154,759

 

 

$

1,315,394

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

82,731

 

 

 

82,731

 

Public offering, net of offering expenses

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Issuance of common stock due to stock option exercises

 

 

41

 

 

 

 

 

 

888

 

 

 

 

 

 

888

 

Retired shares from net issuance

 

 

(12

)

 

 

 

 

 

(486

)

 

 

 

 

 

(486

)

Issuance of common stock under restricted stock plan

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(33

)

 

 

 

 

 

(725

)

 

 

 

 

 

(725

)

Distributions reinvested in common stock

 

 

67

 

 

 

 

 

 

1,070

 

 

 

 

 

 

1,070

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(45,158

)

 

 

(45,158

)

Stock-based compensation (1)

 

 

 

 

 

 

 

 

2,647

 

 

 

 

 

 

2,647

 

Balance as of June 30, 2021

 

 

115,867

 

 

$

116

 

 

$

1,163,910

 

 

$

192,332

 

 

$

1,356,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

 

114,726

 

 

$

115

 

 

$

1,158,198

 

 

$

133,391

 

 

$

1,291,704

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

146,894

 

 

 

146,894

 

Public offering, net of offering expenses

 

 

 

 

 

 

 

 

(198

)

 

 

 

 

 

(198

)

Issuance of common stock due to stock option exercises

 

 

263

 

 

 

 

 

 

3,633

 

 

 

 

 

 

3,633

 

Retired shares from net issuance

 

 

(62

)

 

 

 

 

 

(1,089

)

 

 

 

 

 

(1,089

)

Issuance of common stock under restricted stock plan

 

 

960

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(154

)

 

 

 

 

 

(3,906

)

 

 

 

 

 

(3,906

)

Distributions reinvested in common stock

 

 

134

 

 

 

 

 

 

2,110

 

 

 

 

 

 

2,110

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(87,953

)

 

 

(87,953

)

Stock-based compensation (1)

 

 

 

 

 

 

 

 

5,163

 

 

 

 

 

 

5,163

 

Balance as of June 30, 2021

 

 

115,867

 

 

$

116

 

 

$

1,163,910

 

 

$

192,332

 

 

$

1,356,358

 

(1)
Stock-based compensation includes $25 thousand and $50 thousand of restricted stock and option expense related to director compensation for the three and six months ended June 30, 2021, respectively.

See notes to consolidated financial statements

 

5


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(amounts in thousands)

For the Six Months Ended June 30,

 

 

2022

 

 

2021

 

Cash flows used in operating activities:

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

$

(13,654

)

 

$

146,894

 

Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by (used in) operating activities:

 

 

 

 

 

Purchases of investments

 

(790,706

)

 

 

(629,146

)

Fundings assigned to Adviser Funds

 

189,806

 

 

 

75,286

 

Principal and fee repayments received and proceeds from the sale of debt investments

 

237,178

 

 

 

394,801

 

Proceeds from the sale of equity investments

 

7,749

 

 

 

70,596

 

Net unrealized (appreciation) depreciation

 

85,058

 

 

 

(81,882

)

Net realized (gain) loss on investments

 

828

 

 

 

6,512

 

Accretion of paid-in-kind principal

 

(9,943

)

 

 

(4,990

)

Accretion of loan discounts

 

(1,982

)

 

 

(1,789

)

Accretion of loan discount on convertible notes

 

112