Table of Contents

 

 

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, 2013

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   (IRS Employer
Incorporation or Organization)   Identification No.)

 

400 Hamilton Ave., Suite 310  
Palo Alto, California   94301
(Address of Principal Executive Offices)   (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   ¨       Accelerated Filer   x
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 4, 2013, there were 61,736,693 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 

 


Table of Contents

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, 2013 (unaudited) and December 31, 2012

     3   
  

Consolidated Statement of Operations for the three and nine month periods ended September  30, 2013 and 2012 (unaudited)

     5   
  

Consolidated Statement of Changes in Net Assets for the nine month periods ended September  30, 2013 and 2012 (unaudited)

     6   
  

Consolidated Statement of Cash Flows for the nine month periods ended September  30, 2013 and 2012 (unaudited)

     7   
  

Consolidated Schedule of Investments as of September 30, 2013 (unaudited)

     8   
  

Consolidated Schedule of Investments as of December 31, 2012

     24   
  

Notes to Consolidated Financial Statements (unaudited)

     39   

Item 2.

  

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

     63   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     94   

Item 4.

  

Controls and Procedures

     95   

PART II. OTHER INFORMATION

     96   

Item 1.

  

Legal Proceedings

     96   

Item 1A.

  

Risk Factors

     96   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     100   

Item 3.

  

Defaults Upon Senior Securities

     100   

Item 4.

  

Mine Safety Disclosures

     100   

Item 5.

  

Other Information

     100   

Item 6.

  

Exhibits

     100   

SIGNATURES

     101   

 

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Table of Contents

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,
2013
    December 31,
2012
 

Assets

    

Investments:

    

Non-control/Non-affiliate investments (cost of $965,490 and $896,031, respectively)

   $ 970,530      $ 894,428   

Affiliate investments (cost of $17,546 and $18,307, respectively)

     12,897        11,872   
  

 

 

   

 

 

 

Total investments, at value (cost of $983,036 and $914,338, respectively)

     983,427        906,300   

Cash and cash equivalents

     204,993        182,994   

Restricted Cash

     3,632        —     

Interest receivable

     10,275        9,635   

Other assets

     25,186        24,714   
  

 

 

   

 

 

 

Total assets

   $ 1,227,513      $ 1,123,643   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued liabilities

   $ 14,051      $ 11,575   

Long-term Liabilities (Convertible Senior Notes)

     72,248        71,436   

Asset-Backed Notes

     102,474        129,300   

2019 Notes

     170,364        170,364   

Long-term SBA Debentures

     225,000        225,000   
  

 

 

   

 

 

 

Total liabilities

   $ 584,137      $ 607,675   

Commitments and Contingencies (Note 10)

    

Net assets consist of:

    

Common stock, par value

   $ 62      $ 53   

Capital in excess of par value

     664,650        564,508   

Unrealized appreciation/(depreciation) on investments

     1,091        (7,947

Accumulated realized losses on investments

     (25,607     (36,916

Undistributed net investment income/(Distributions in excess of net investment income)

     3,180        (3,730
  

 

 

   

 

 

 

Total net assets

   $ 643,376      $ 515,968   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,227,513      $ 1,123,643   
  

 

 

   

 

 

 

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

     61,756        52,925   

Net asset value per share

   $ 10.42      $ 9.75   

See notes to consolidated financial statements.

 

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Table of Contents

The following table presents the assets and liabilities of our consolidated securitization trust for an 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,
2013
     December 31,
2012
 

ASSETS

     

Restricted Cash

   $ 3,632       $ —     

Total investments, at value (cost of $189,917 and $226,844, respectively)

     185,244         226,997   
  

 

 

    

 

 

 

Total assets

   $ 188,876       $ 226,997   
  

 

 

    

 

 

 

LIABILITIES

     

Asset-Backed Notes

   $ 102,474       $ 129,300   
  

 

 

    

 

 

 

Total liabilities

   $ 102,474       $ 129,300   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

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,  
          2013             2012             2013             2012      

Investment income:

        

Interest Income

        

Non-Control/Non-Affiliate investments

   $ 35,623      $ 21,512      $ 93,722      $ 62,502   

Affiliate investments

     561        238        1,684        686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     36,184        21,750        95,406        63,188   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fees

        

Non-Control/Non-Affiliate investments

     4,832        2,150        11,088        6,936   

Affiliate investments

     5        1        9        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fees

     4,837        2,151        11,097        6,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     41,021        23,901        106,503        70,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Interest

     7,587        4,908        22,788        13,309   

Loan fees

     1,072        1,169        3,341        2,977   

General and administrative

     2,176        2,445        6,831        6,126   

Employee Compensation:

        

Compensation and benefits

     7,030        2,919        14,992        9,566   

Stock-based compensation

     1,596        1,109        4,349        3,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     8,626        4,028        19,341        12,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,461        12,550        52,301        35,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     21,560        11,351        54,202        35,036   

Net realized gain/(loss) on investments

        

Non-Control/Non-Affiliate investments

     7,125        (9,091     11,309        2,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain/(loss) on investments

     7,125        (9,091     11,309        2,049   

Net unrealized appreciation (depreciation) on investments

        

Non-Control/Non-Affiliate investments

     9,288        2,372        10,506        (12,922

Affiliate investments

     (992     113        (1,468     (2,265
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     8,296        2,485        9,038        (15,187
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (unrealized) gain (loss)

     15,421        (6,606     20,347        (13,138
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 36,981      $ 4,745      $ 74,549        21,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.35      $ 0.23      $ 0.91      $ 0.71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share:

        

Basic

   $ 0.61      $ 0.09      $ 1.26      $ 0.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.59      $ 0.09      $ 1.23      $ 0.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     60,522        48,750        58,206        48,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     60,750        48,808        58,396        48,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

    Common Stock     Capital  in
excess

of par value
    Unrealized
Appreciation

on Investments
    Accumulated
Realized
Gains(Losses)

on Investments
    Distributions
in Excess of
Investment

Income
    Provision for
Income Taxes
on Investment

Gains
    Net
Assets
 
    Shares     Par Value              

Balance at December 31, 2011

    43,853      $ 44      $ 484,244      $ (3,431   $ (43,042   $ (6,432   $ (342   $ 431,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

    —          —          —          (15,187     2,049        35,036        —          21,898   

Issuance of common stock

    574        1        3,252        —          —          —          —          3,253   

Issuance of common stock under restricted stock plan

    530        1        (1     —          —          —          —          —     

Issuance of common stock as stock dividend

    155        —          1,649        —          —          —          —          1,649   

Retired shares from net issuance

    (327     —          (4,254     —          —          —          —          (4,254

Public Offering

    5,000        5        47,649        —          —          —          —          47,654   

Dividends declared

    —          —          —          —          —          (35,292     —          (35,292

Stock-based compensation

    —          —          3,168        —          —          —          —          3,168   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    49,785      $ 51      $ 535,707      $ (18,618   $ (40,993   $ (6,688   $ (342   $ 469,117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     For the Nine Months Ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations.

   $ 74,549      $ 21,898   

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

    

Purchase of investments

     (411,515     (302,662

Principal payments received on investments

     336,438        165,157   

Proceeds from sale of investments

     29,459        21,265   

Net unrealized (appreciation) / depreciation on investments

     (9,038     15,187   

Net realized gain on investments

     (11,309     (2,049

Net unrealized appreciation due to lender

     —          —     

Accretion of paid-in-kind principal

     (2,269     (834

Accretion of loan discounts

     (4,556     (4,221

Accretion of loan discount on Convertible Senior Notes

     812        812   

Accretion of loan exit fees

     (10,031     (2,998

Change in deferred loan origination revenue

     2,540        1,026   

Unearned fees related to unfunded commitments

     (364     (1,865

Amortization of debt fees and issuance costs

     2,918        1,391   

Depreciation

     162        212   

Stock-based compensation and amortization of restricted stock grants

     4,408        3,168   

Common stock issued in lieu of Director compensation

     —          —     

Change in operating assets and liabilities:

    

Interest and fees receivable

     (641     (1,955

Prepaid expenses and other assets

     570        (938

Accounts payable

     (63     99   

Income tax receivable (payable)

     —          —     

Accrued liabilities

     2,588        (1,289
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,658        (88,596

Cash flows from investing activities:

    

Purchases of capital equipment

     (240     (85

Investment in restricted cash

     (3,632     —     

Other long-term assets

     (30     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,902     (85

Cash flows from financing activities:

    

Proceeds from issuance of common stock, net

     93,443        46,594   

Stock repurchase program

     —          —     

Dividends paid

     (45,368     (33,643

Issuance of Notes Payable

     —          159,490   

Borrowings of credit facilities

     —          39,250   

Repayments of credit facilities

     (26,832     (74,303

Issuance of Class A2 Notes

     —          —     

Cash paid for debt issuance costs

     —          (6,088

Fees paid for credit facilities and debentures

     —          —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     21,243        131,300   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     21,999        42,619   

Cash and cash equivalents at beginning of period

     182,994        64,474   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 204,993      $ 107,093   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Loan

               

Biotechnology Tools

               

1-5 Years Maturity

               

Cleveland BioLabs, Inc(3)

  Biotechnology Tools     Senior Secured   January 2017   Interest rate PRIME + 6.20% or Floor rate of 10.45%   $ 6,000      $ 5,865      $ 5,865   

Labcyte, Inc.(11)

  Biotechnology Tools     Senior Secured   June 2016   Interest rate PRIME + 6.70% or Floor rate of 9.95%   $ 4,640        4,655        4,628   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          10,520        10,493   
             

 

 

   

 

 

 

Subtotal: Biotechnology Tools (1.63%)*

          10,520        10,493   
             

 

 

   

 

 

 

Clean Tech

               

Under 1 Year Maturity

               

Brightsource Energy, Inc.

  Clean Tech     Senior Secured   January 2014   Interest rate PRIME + 8.25% or Floor rate of 11.50%   $ 35,000        35,398        35,398   

Enphase Energy, Inc.(11)

  Clean Tech     Senior Secured   June 2014   Interest rate PRIME + 5.75% or Floor rate of 9.00%   $ 1,947        1,981        1,963   
             

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          37,379        37,361   
             

 

 

   

 

 

 

1-5 Years Maturity

               

Agrivida, Inc.

  Clean Tech     Senior Secured   December 2016   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 6,000        5,835        5,835   

Alphabet Energy, Inc.

  Clean Tech     Senior Secured   February 2015   Interest rate PRIME + 5.75% or Floor rate of 9.00%   $ 1,340        1,296        1,296   

American Superconductor Corporation(3)(11)

  Clean Tech     Senior Secured   December 2014   Interest rate PRIME + 7.25% or Floor rate of 11.00%   $ 5,769        6,073        6,073   

APTwater, Inc

  Clean Tech     Senior Secured   April 2017   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 18,000        17,756        17,756   

BioAmber, Inc.(5)(10)

  Clean Tech     Senior Secured   June 2016   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 25,000        24,835        24,835   

Enphase Energy, Inc.

  Clean Tech     Senior Secured   August 2016   Interest rate PRIME + 8.25% or Floor rate of 11.50%   $ 7,400        7,396        7,281   

Fluidic, Inc.

  Clean Tech     Senior Secured   March 2016   Interest rate PRIME + 8.00% or Floor rate of 11.25%   $ 5,000        4,884        4,884   

Fulcrum Bioenergy, Inc.(11)

  Clean Tech     Senior Secured   November 2016   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 10,000        9,907        9,907   

Glori Energy, Inc.(11)

  Clean Tech     Senior Secured   June 2015   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 6,222        6,289        6,305   

Polyera Corporation

  Clean Tech     Senior Secured   June 2016   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 3,000        3,008        2,925   

SCIEnergy, Inc.(4)

  Clean Tech     Senior Secured   September 2015   Interest rate PRIME + 8.75% or Floor rate of 12.00%   $ 4,805        4,863        4,928   

Scifiniti (pka Integrated Photovoltaics, Inc.)

  Clean Tech     Senior Secured   February 2015   Interest rate PRIME + 7.38% or Floor rate of 10.63%   $ 1,751        1,723        1,702   

Stion Corporation(4)

  Clean Tech     Senior Secured   February 2015   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 5,102        5,274        5,168   

 

See notes to consolidated financial statements.

 

8


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

TAS Energy, Inc.

  Clean Tech     Senior Secured   February 2015   Interest rate PRIME + 6.25% or Floor rate of 9.50%   $ 4,503      $ 4,344      $ 4,306   

TAS Energy, Inc.

  Clean Tech     Senior Secured   February 2015   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 15,000        15,028        15,261   
             

 

 

   

 

 

 

Total TAS Energy, Inc.

                19,372        19,567   

TPI Composites, Inc.

  Clean Tech     Senior Secured   June 2016   Interest rate PRIME + 8.00% or Floor rate of 11.25%   $ 15,000        14,771        14,770   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          133,282        133,232   
             

 

 

   

 

 

 

Subtotal: Clean Tech (26.52%)*

          170,661        170,593   
             

 

 

   

 

 

 

Communications & Networking

         

1-5 Years Maturity

               

Bridgewave Communications(8)

  Communications & Networking     Senior Secured   March 2016   Interest rate FIXED + 8.00%, PIK Interest 8.00%   $ 7,753        7,433        2,007   

OpenPeak, Inc.(11)

  Communications & Networking     Senior Secured   July 2015   Interest rate PRIME + 8.75% or Floor rate of 12.00%   $ 11,440        11,984        11,984   

PointOne(8)

  Communications & Networking     Senior Secured   January 2017   Interest rate LIBOR + 11.00% or Floor rate of 13.50%   $ 2,128        2,128        —     

PointOne(8)

  Communications & Networking     Senior Secured   April 2015   Interest rate LIBOR + 11.00% or Floor rate of 13.50%   $ —          (100     100   

PointOne(8)

  Communications & Networking     Senior Secured   September 2015   Interest rate LIBOR + 11.00% or Floor rate of 13.50%   $ —          (4     —     
             

 

 

   

 

 

 

Total PointOne

                2,024        100   

Spring Mobile Solutions

  Communications & Networking     Senior Secured   November 2016   Interest rate PRIME + 8.00% or Floor rate of 11.25%   $ 20,000        19,553        19,835   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          40,994        33,926   
             

 

 

   

 

 

 

Subtotal: Communications & Networking (5.27%)

          40,994        33,926   
             

 

 

   

 

 

 

Diagnostic

               

1-5 Years Maturity

               

Tethys Bioscience, Inc.(8)(11)

  Diagnostic     Senior Secured   December 2015   Interest rate PRIME + 8.40% or Floor rate of 11.65%   $ 4,032        4,242        1,033   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          4,242        1,033   
             

 

 

   

 

 

 

Subtotal: Diagnostic (0.16%)*

              4,242        1,033   
             

 

 

   

 

 

 

Drug Delivery

               

Under 1 Year Maturity

               

Alexza Pharmaceuticals, Inc(3)

  Drug Delivery     Senior Secured   October 2013   Interest rate PRIME + 6.50% or Floor rate of 10.75%   $ 561        1,003        1,003   
             

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          1,003        1,003   
             

 

 

   

 

 

 

1-5 Years Maturity

               

AcelRx Pharmaceuticals, Inc.(3)(11)

  Drug Delivery     Senior Secured   December 2014   Interest rate PRIME + 3.25% or Floor rate of 8.50%   $ 5,278        5,327        5,240   

AcelRx Pharmaceuticals, Inc.(3)

  Drug Delivery     Senior Secured   December 2014   Interest rate PRIME + 3.25% or Floor rate of 8.50%   $ 5,278        5,317        5,228   
             

 

 

   

 

 

 

Total AcelRx Pharmaceuticals,
Inc.

                10,644        10,468   

 

See notes to consolidated financial statements.

 

9


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

BIND Therapeutics, Inc.(3)

  Drug Delivery     Senior Secured   September 2016   Interest rate PRIME + 7.00% or Floor rate of 10.25%   $ 4,500      $ 4,391      $ 4,391   

Intelliject, Inc.(11)

  Drug Delivery     Senior Secured   June 2016   Interest rate PRIME + 5.75% or Floor rate of 11.00%   $ 15,000        15,013        15,269   

NuPathe, Inc.(3)

  Drug Delivery     Senior Secured   May 2016   Interest rate PRIME +3.25% or Floor rate of 9.85%   $ 8,500        8,326        8,293   

Revance Therapeutics, Inc.

  Drug Delivery     Senior Secured   March 2015   Interest rate PRIME + 6.60% or Floor rate of 9.85%   $ 1,161        1,189        1,160   

Revance Therapeutics, Inc.

  Drug Delivery     Senior Secured   March 2015   Interest rate PRIME + 6.60% or Floor rate of 9.85%   $ 11,607        11,785        11,600   
             

 

 

   

 

 

 

Total Revance Therapeutics, Inc.

                12,974        12,760   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          51,348        51,181   
             

 

 

   

 

 

 

Subtotal: Drug Delivery (8.11%)*

              52,351        52,184   
             

 

 

   

 

 

 

Drug Discovery & Development

               
               

1-5 Years Maturity

               

ADMA Biologics, Inc.

  Drug Discovery &
Development
    Senior Secured   April 2016   Interest rate PRIME +2.75% or Floor rate of 8.50%   $ 5,000        4,921        4,756   

Anacor Pharmaceuticals, Inc.(3)

  Drug Discovery & Development     Senior Secured   July 2017   Interest rate PRIME + 6.40% or Floor rate of 11.65%   $ 15,000        14,498        14,498   

Anacor Pharmaceuticals, Inc.(3)

  Drug Discovery & Development     Senior Secured   July 2017   Interest rate PRIME + 6.40% or Floor rate of 11.65%   $ 15,000        14,498        14,498   
             

 

 

   

 

 

 

Total Anacor Pharmaceuticals, Inc.

                28,996        28,996   

Aveo Pharmaceuticals, Inc.(3)(11)

  Drug Discovery & Development     Senior Secured   September 2015   Interest rate PRIME + 7.15% or Floor rate of 11.90%   $ 10,348        10,348        10,452   

Aveo Pharmaceuticals, Inc.(3)

  Drug Discovery & Development     Senior Secured   September 2015   Interest rate PRIME + 7.15% or Floor rate of 11.90%   $ 11,492        11,492        11,607   
             

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

                21,840        22,059   

Cell Therapeutics, Inc.(3)(11)

  Drug Discovery & Development     Senior Secured   October 2016   Interest rate PRIME + 9.00% or Floor rate of 12.25%   $ 10,000        9,889        10,091   

Cempra, Inc.(3)(11)

  Drug Discovery & Development     Senior Secured   June 2017   Interest rate PRIME + 6.30% or Floor rate of 9.55%   $ 9,762        9,592        9,456   

Cempra, Inc.(3)

  Drug Discovery & Development     Senior Secured   June 2017   Interest rate PRIME + 6.30% or Floor rate of 9.55%   $ 5,238        5,147        5,075   
             

 

 

   

 

 

 

Total Cempra, Inc.

                14,739        14,531   

Concert Pharmaceuticals, Inc.(4)

  Drug Discovery & Development     Senior Secured   October 2015   Interest rate PRIME + 3.25% or Floor rate of 8.50%   $ 16,967        16,764        16,270   

Coronado Biosciences, Inc.(3)(11)

  Drug Discovery & Development     Senior Secured   March 2016   Interest rate PRIME + 6.00% or Floor rate of 9.25%   $ 15,000        14,993        14,606   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development     Senior Secured   January 2015   Interest rate PRIME + 4.40% or Floor rate of 10.15%   $ 6,101        6,048        5,970   

Insmed, Incorporated(11)

  Drug Discovery & Development     Senior Secured   January 2016   Interest rate PRIME + 4.75% or Floor rate of 9.25%   $ 10,000        9,888        9,782   

 

See notes to consolidated financial statements.

 

10


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Insmed, Incorporated

  Drug Discovery & Development     Senior Secured   January 2016   Interest rate PRIME + 4.75% or Floor rate of 9.25%   $ 10,000      $ 9,807      $ 9,701   
             

 

 

   

 

 

 

Total Insmed, Incorporated

                19,695        19,483   

Merrimack Pharmaceuticals, Inc.(3)

  Drug Discovery & Development     Senior Secured   May 2016   Interest rate PRIME + 5.30% or Floor rate of 10.55%   $ 40,000        40,175        39,239   

Neuralstem, Inc.(3)

  Drug Discovery & Development     Senior Secured   June 2016   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 8,000        7,800        7,904   

Paratek Pharmaceuticals, Inc.(9)

  Drug Discovery & Development     Senior Secured  

N/A

  Interest rate FIXED + 10.00%   $ 36        36        36   

Paratek Pharmaceuticals, Inc.(9)

  Drug Discovery & Development     Senior Secured   N/A  

N/A

  $ 28        28        28   

Paratek Pharmaceuticals, Inc.(9)

  Drug Discovery & Development     Senior Secured   N/A   Interest rate FIXED + 10.00%   $ 45        45        45   
             

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc.

                109        109   

uniQure B.V.(5)(10)

  Drug Discovery & Development     Senior Secured   October 2016   Interest rate PRIME + 8.60% or Floor rate of 11.85%     $10,000        9,660        9,660   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          195,629        193,674   
             

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (30.10%)*

        195,629        193,674   
             

 

 

   

 

 

 

Electronics & Computer Hardware

               
               

1-5 Years Maturity

               

Clustrix, Inc.

  Electronics & Computer Hardware     Senior Secured   December 2015   Interest rate PRIME + 6.50% or Floor rate of 9.75%   $ 582        577        577   

Identive(3)(11)

  Electronics & Computer Hardware     Senior Secured   November 2015   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 6,621        6,524        6,609   

OCZ Technology Group, Inc.

  Electronics & Computer Hardware     Senior Secured   April 2016   Interest rate PRIME + 8.75% or Floor rate 12.50%, PIK Interest 3.00%   $ 10,121        11,624        11,624   

Plures Technologies, Inc.(3)

  Electronics & Computer Hardware     Senior Secured   October 2016   Interest rate PRIME + 12.75% or Floor rate 16.00%, PIK Interest 4.00%   $ 2,026        1,926        1,926   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          20,651        20,736   
             

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (3.22%)*

        20,651        20,736   
             

 

 

   

 

 

 

Healthcare Services, Other

               

1-5 Years Maturity

               

InstaMed Communications, LLC

  Healthcare Services, Other     Senior Secured   December 2016   Interest rate PRIME + 7.25% or Floor rate of 10.50%   $ 3,000        2,950        2,950   

MDEverywhere, Inc.

  Healthcare Services, Other     Senior Secured   June 2016   Interest rate LIBOR + 9.50% or Floor rate of 10.75%   $ 2,000        1,871        1,871   

Orion Healthcorp, Inc.

  Healthcare Services, Other     Senior Secured   June 2017   Interest rate LIBOR + 10.50% or Floor rate of 12.00%, PIK Interest 3.00%   $ 6,541        6,410        6,410   

Orion Healthcorp, Inc.

  Healthcare Services, Other     Senior Secured   June 2016   Interest rate LIBOR + 8.25% or Floor rate of 9.50%   $ 2,000        461        461   

Orion Healthcorp, Inc.

  Healthcare Services, Other     Senior Secured   June 2017   Interest rate LIBOR + 9.50% or Floor rate of 11.00%   $ 9,000        8,823        8,823   
             

 

 

   

 

 

 

Total Orion Healthcorp, Inc.

                15,694        15,694   

 

See notes to consolidated financial statements.

 

11


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Pacific Child & Family Associates

  Healthcare Services, Other     Senior Secured   January 2015   Interest rate LIBOR + 9.00% or Floor rate of 11.50%   $ 2,104      $ 2,159      $ 2,117   

Pacific Child & Family Associates

  Healthcare Services, Other     Senior Secured   January 2015   Interest rate LIBOR + 11.00% or Floor rate 14.00%, PIK Interest 3.75%   $ 6,772        6,790        6,687   
               
             

 

 

   

 

 

 

Total Pacific Child & Family Associates

                8,949        8,804   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          29,464        29,320   
             

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (4.56%)*

          29,464        29,320   
             

 

 

   

 

 

 

Information Services

               

1-5 Years Maturity

               

Eccentex Corporation(11)

  Information Services     Senior Secured   May 2015   Interest rate PRIME + 7.00% or Floor rate of 10.25%   $ 763        759        370   

InXpo, Inc.

  Information Services     Senior Secured   April 2016   Interest rate PRIME + 7.50% or Floor rate of 10.75%   $ 2,550        2,467        2,337   

Jab Wireless, Inc.

  Information Services     Senior Secured   November 2017   Interest rate PRIME + 6.75% or Floor rate of 8.00%   $ 2,000        1,996        1,996   

Jab Wireless, Inc.

  Information Services     Senior Secured   November 2017   Interest rate PRIME + 6.75% or Floor rate of 8.00%   $ 7,574        7,526        7,526   

Jab Wireless, Inc.

  Information Services     Senior Secured   November 2017   Interest rate PRIME + 6.75% or Floor rate of 8.00%   $ 22,426        22,286        22,286   
             

 

 

   

 

 

 

Total Jab Wireless, Inc.

                31,808        31,808   

Womensforum.com(11)

  Information Services     Senior Secured   October 2016   Interest rate LIBOR + 6.50% or Floor rate of 9.25%   $ 7,200        7,080        6,772   

Womensforum.com(11)

  Information Services     Senior Secured   October 2016   Interest rate LIBOR + 7.50% or Floor rate of 10.25%, PIK Interest 2.00%   $ 4,592        4,515        4,151   
             

 

 

   

 

 

 

Total Womensforum.com

                11,595        10,923   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          46,629        45,437   
             

 

 

   

 

 

 

Subtotal: Information Services (7.06%)*

          46,629        45,437   
             

 

 

   

 

 

 

Internet Consumer & Business Services

               

Under 1 Year Maturity

               

Tectura Corporation

  Internet Consumer & Business Services     Senior Secured   December 2013   Interest rate LIBOR + 10.00% or Floor rate of 13.00%   $ 563        563        563   

Tectura Corporation

  Internet Consumer & Business Services     Senior Secured   December 2013   Interest rate LIBOR + 10.00% or Floor rate of 13.00%   $ 6,468        6,461        6,461   

Tectura Corporation

  Internet Consumer & Business Services     Senior Secured   December 2013   Interest rate LIBOR + 8.00% or Floor rate of 11.00%   $ 18,312        18,276        18,276   

Tectura Corporation

  Internet Consumer & Business Services     Senior Secured   December 2013   Interest rate LIBOR + 10.00% or Floor rate of 13.00%   $ 5,000        6,870        6,870   
             

 

 

   

 

 

 

Total Tectura Corporation

                32,170        32,170   
             

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          32,170        32,170   
             

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

12


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

1-5 Years Maturity

               

Ahhha, Inc.(8)

  Internet Consumer & Business Services     Senior Secured   January 2015   Interest rate FIXED + 12.00%   $ 350      $ 346      $ —     

Blurb, Inc.

  Internet Consumer & Business Services     Senior Secured   December 2015   Interest rate PRIME + 5.25% or Floor rate of 8.50%   $ 7,069        6,900        6,812   

CashStar, Inc.

 

Internet Consumer & Business

Services

    Senior Secured   June 2016   Interest rate PRIME + 6.25% or Floor rate 10.50%, PIK Interest 1.00%   $ 4,008        3,921        3,921   

Education Dynamics

  Internet Consumer & Business Services     Senior Secured   March 2016   Interest rate FIXED + 12.50%, PIK Interest 1.50%   $ 17,765        17,484        17,025   

Education Dynamics

  Internet Consumer & Business Services     Senior Secured   March 2016   Interest rate FIXED +12.50%, PIK Interest 1.50%   $ 7,822        7,684        7,482   
             

 

 

   

 

 

 

Total Education Dynamics

              25,168        24,507   

Gazelle

 

Internet Consumer & Business

Services

    Senior Secured   April 2016   Interest rate PRIME + 7.00% or Floor rate 10.25%, PIK Interest 2.50%   $ 12,287        12,190        12,433   

Gazelle

 

Internet Consumer & Business

Services

    Senior Secured   October 2014   Interest rate PRIME + 6.50% or Floor rate of 9.75%   $ 754        724        739   
             

 

 

   

 

 

 

Total Gazelle

                12,914        13,172   

Just Fabulous, Inc.

  Internet Consumer & Business Services     Senior Secured   August 2016   Interest rate PRIME + 8.00% or Floor rate of 11.25%   $ 5,000        4,581        4,581   

Just Fabulous, Inc.

  Internet Consumer & Business Services     Senior Secured   February 2017   Interest rate PRIME + 8.25% or Floor rate of 11.50%   $ 5,000        4,806        4,806   
             

 

 

   

 

 

 

Total Just Fabulous, Inc.

              9,387        9,387   

Just.Me, Inc.(8)

  Internet Consumer & Business Services     Senior Secured   June 2015   Interest rate PRIME + 5.00% or Floor rate of 8.25%   $ 662        650        —     

Just.Me, Inc.(8)

  Internet Consumer & Business Services     Senior Secured   June 2015   Interest rate PRIME + 5.25% or Floor rate of 5.75%   $ 661        653        —     
             

 

 

   

 

 

 

Total Just.Me, Inc.

                1,303        —     

NetPlenish(8)

  Internet Consumer & Business Services     Senior Secured   April 2015   Interest rate FIXED + 10.00%   $ 483        475        —     

Reply! Inc.

  Internet Consumer & Business Services     Senior Secured   February 2016   Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK Interest 2.00%   $ 3,015        3,021        3,111   

Reply! Inc.(11)

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate PRIME + 6.88% or Floor rate of 10.13%, PIK Interest 2.00%   $ 10,295        10,095        10,198   

Reply! Inc.(11)

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate PRIME + 7.25% or Floor rate of 11.00%, PIK Interest 2.00%   $ 2,010        2,014        2,054   
             

 

 

   

 

 

 

Total Reply! Inc.

                15,130        15,363   

ShareThis, Inc.

  Internet Consumer & Business Services     Senior Secured   June 2016   Interest rate PRIME + 7.50% or Floor rate of 10.75%   $ 15,000        14,503        14,575   

 

See notes to consolidated financial statements.

 

13


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Trulia, Inc.(3)(11)

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate PRIME + 5.50% or Floor rate of 8.75%   $ 4,090      $ 4,047      $ 3,898   

Trulia, Inc.(3)(11)

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate PRIME + 2.75% or Floor rate of 6.00%   $ 4,062        4,020        3,973   
             

 

 

   

 

 

 

Total Trulia, Inc.

                8,067        7,871   

Vaultlogix

  Internet Consumer & Business Services     Senior Secured   September 2016   Interest rate LIBOR + 8.50% or Floor rate 10.00%, PIK Interest 2.50%   $ 7,932        7,869        7,390   

Vaultlogix

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate LIBOR + 7.00% or Floor rate of 8.50%   $ 8,242        8,230        7,797   
             

 

 

   

 

 

 

Total Vaultlogix

                16,099        15,187   

WaveMarket, Inc.(11)

  Internet Consumer & Business Services     Senior Secured   September 2015   Interest rate PRIME + 5.75% or Floor rate of 9.50%   $ 10,000        9,914        9,754   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          124,127        120,549   
             

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (23.74%)*

        156,297        152,719   
             

 

 

   

 

 

 

Media/Content/Info

               

1-5 Years Maturity

               

Westwood One

  Media/Content/Info     Senior Secured   October 2016   Interest rate LIBOR + 6.50% or Floor rate of 8.00%   $ 5,113        4,824        4,824   

Westwood One

  Media/Content/Info     Senior Secured   October 2016   Interest rate LIBOR + 6.50% or Floor rate of 8.00%   $ 12,782        11,951        11,951   
             

 

 

   

 

 

 

Total Westwood One

                16,775        16,775   

Zoom Media and Marketing

  Media/Content/Info     Senior Secured   December 2014   Interest rate PRIME + 5.25% or Floor rate of 8.50%   $ 4,000        3,820        3,727   

Zoom Media and Marketing

  Media/Content/Info     Senior Secured   December 2015   Interest rate PRIME + 7.25% or Floor rate 10.50%, PIK Interest 3.75%   $ 4,695        4,488        4,423   
             

 

 

   

 

 

 

Total Zoom Media and Marketing

                8,308        8,150   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          25,083        24,925   
             

 

 

   

 

 

 

Subtotal: Media/Content/Info (3.87%)

          25,083        24,925   
             

 

 

   

 

 

 

Medical Devices & Equipment

             

Under 1 Year Maturity

             

Novasys Medical, Inc(9)

 

Medical Devices &

Equipment

    Senior Secured   June 2013  

Interest rate FIXED of +

8.00%

  $ 35        34        34   

Optiscan Biomedical, Corp(6)

  Medical Devices & Equipment     Senior Secured   December 2013   Interest rate PRIME + 8.20% or Floor rate of 11.45%   $ 8,260        9,704        9,704   

Oraya Therapeutics, Inc.(9)

  Medical Devices & Equipment     Senior Secured   December 2013   Interest rate FIXED + 7.00%   $ 500        500        500   
             

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          10,238        10,238   
             

 

 

   

 

 

 

1-5 Years Maturity

               

Home Dialysis Plus

  Medical Devices & Equipment     Senior Secured   April 2017   Interest rate PRIME + 6.35% or Floor rate of 9.60%   $ 10,000        9,661        9,661   

Lanx, Inc.

  Medical Devices & Equipment     Senior Secured   October 2015   Interest rate (PRIME -5.25%) + 9.60% or Floor rate of 10.25%   $ 5,500        5,280        5,138   

Lanx, Inc.

  Medical Devices & Equipment     Senior Secured   October 2016   Interest rate PRIME + 8.50% or Floor rate of 11.75%, PIK Interest 2.00%   $ 13,184        12,835        13,092   
             

 

 

   

 

 

 

Total Lanx, Inc.

                18,115        18,230   

 

See notes to consolidated financial statements.

 

14


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

     

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Medrobotics Corporation

  Medical Devices & Equipment     Senior Secured   March 2016   Interest rate PRIME + 7.85% or Floor rate of 11.10%   $ 5,000      $ 4,877      $ 4,898   

NinePoint Medical, Inc.

 

Medical Devices &

Equipment

    Senior Secured   January 2016   Interest rate PRIME + 5.85% or Floor rate of 9.10%   $ 6,585        6,499        6,367   

Oraya Therapeutics, Inc.(11)

  Medical Devices & Equipment     Senior Secured   September 2015   Interest rate PRIME + 5.50% or Floor rate of 10.25%   $ 7,971        7,862        8,001   

SonaCare Medical

  Medical Devices & Equipment     Senior Secured   April 2016   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 4,000        3,930        3,785   

SonaCare Medical(11)

  Medical Devices & Equipment     Senior Secured   April 2016   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 6,000        6,031        5,805   
             

 

 

   

 

 

 

Total SonaCare Medical

                9,961        9,590   

United Orthopedic Group, Inc.

  Medical Devices & Equipment     Senior Secured   July 2016   Interest rate PRIME + 8.60% or Floor rate of 11.85%   $ 25,000        24,401        25,151   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          81,375        81,898   
             

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (14.32%)*

          91,613        92,136   
             

 

 

   

 

 

 

Semiconductors

               

1-5 Years Maturity

               

Achronix Semiconductor Corporation

  Semiconductors     Senior Secured   January 2015   Interest rate PRIME + 10.60% or Floor rate of 13.85%   $ 1,247        1,232        1,207   

SiTime Corporation

  Semiconductors     Senior Secured   September 2016   Interest rate PRIME + 6.50% or Floor rate of 9.75%   $ 3,500        3,442        3,442   
             

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          4,674        4,649   
             

 

 

   

 

 

 

Subtotal: Semiconductors (0.72%)*

              4,674        4,649   
             

 

 

   

 

 

 

Software

               

Under 1 Year Maturity

               

Clickfox, Inc.

  Software     Senior Secured   September 2014   Interest rate PRIME + 6.75% or Floor rate of 10.00%   $ 2,000        1,972        1,972   

Tada Innovations, Inc.(8)

  Software     Senior Secured   October 2013  

Interest rate FIXED +

8.00%

  $ 100        100        —     
             

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          2,072        1,972   
             

 

 

   

 

 

 

1-5 Years Maturity

               

Clickfox, Inc.

  Software     Senior Secured   November 2015   Interest rate PRIME + 8.25% or Floor rate of 11.50%   $ 6,511        6,120        6,120   

EndPlay, Inc.

  Software     Senior Secured   August 2015   Interest rate PRIME + 7.35% or Floor rate of 10.60%   $ 1,802        1,720        1,623   

Hillcrest Laboratories, Inc.

  Software     Senior Secured   July 2015   Interest rate PRIME + 7.50% or Floor rate of 10.75%   $ 3,039        3,000        3,006   

KXEN, Inc.(4)

  Software     Senior Secured   January 2015   Interest rate PRIME + 5.08% or Floor rate of 8.33%   $ 1,545        1,622        1,622   

Mobile Posse, Inc.

  Software     Senior Secured   December 2016   Interest rate PRIME + 7.50% or Floor rate of 10.75%   $ 4,000        3,845        3,845   

Neos Geosolutions, Inc.

  Software     Senior Secured   May 2016   Interest rate PRIME + 5.75% or Floor rate of 10.50%   $  4,000        4,010        3,895   

StartApp

  Software     Senior Secured   March 2017   Interest rate PRIME + 7.75% or Floor rate of 11.00%   $ 2,500        2,488        2,488   

 

See notes to consolidated financial statements.

 

15


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Maturity Date

 

Interest Rate and Floor

  Principal
Amount
    Cost     Value  

Touchcommerce, Inc.

  Software   Senior Secured   June 2017   Interest rate PRIME + 6.00% or Floor rate of 10.25%   $ 5,000      $ 4,686      $ 4,686   

Touchcommerce, Inc.

  Software   Senior Secured   December 2014   Interest rate PRIME + 2.25% or Floor rate of 6.50%   $ 3,111        3,060        3,060   
           

 

 

   

 

 

 

Total Touchcommerce, Inc.

              7,746        7,746   
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          30,551        30,345   
           

 

 

   

 

 

 

Subtotal: Software (5.02%)*

              32,623        32,317   
           

 

 

   

 

 

 

Specialty Pharmaceuticals

             

Under 1 Year Maturity

             

QuatRx Pharmaceuticals Company(9)

  Specialty Pharmaceuticals   Senior Secured   March 2014   Interest rate FIXED + 8.00%   $ 82        82        267   

QuatRx Pharmaceuticals Company(9)

  Specialty Pharmaceuticals   Senior Secured   March 2014   Interest rate FIXED + 8.00%   $ 556        556        920   

QuatRx Pharmaceuticals Company(9)

  Specialty Pharmaceuticals   Senior Secured   March 2014   Interest rate FIXED + 8.00%   $ 1,250        1,250        2,071   
           

 

 

   

 

 

 

Total QuatRx Pharmaceuticals Company

              1,888        3,258   
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

          1,888        3,258   
           

 

 

   

 

 

 

1-5 Years Maturity

             

Rockwell Medical, Inc.

  Specialty Pharmaceuticals   Senior Secured   December 2016   Interest rate PRIME + 9.25% or Floor rate of 12.50%   $ 20,000        19,919        19,919   
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          19,919        19,919   
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (3.60%)*

          21,807        23,177   
           

 

 

   

 

 

 

Surgical Devices

             

1-5 Years Maturity

             

Transmedics, Inc.(11)

  Surgical Devices   Senior Secured   November 2015   Interest rate FIXED + 12.95%   $ 7,250        7,174        7,174   
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

          7,174        7,174   
           

 

 

   

 

 

 

Subtotal: Surgical Devices (1.12%)*

  

    7,174        7,174   
           

 

 

   

 

 

 

Total Debt (139.03%)*

              910,412        894,493   
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

16


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

   Shares      Cost      Value  

Equity

              

Biotechnology Tools

              

NuGEN Technologies, Inc.

  Biotechnology Tools   Equity   Preferred Series C      189,394       $ 500       $ 691   
           

 

 

    

 

 

 

Subtotal: Biotechnology Tools (0.11%)*

          500         691   
           

 

 

    

 

 

 

Communications & Networking

              

GlowPoint, Inc.(3)

  Communications & Networking   Equity   Common Stock      114,192         102         153   

Peerless Network, Inc.

  Communications & Networking   Equity   Preferred Series A      1,000,000         1,000         3,046   

Stoke, Inc.

  Communications & Networking   Equity   Preferred Series E      152,905         500         685   
           

 

 

    

 

 

 

Subtotal: Communications & Networking (0.60%)*

          1,602         3,884   
           

 

 

    

 

 

 

Consumer & Business Products

              

Caivis Acquistion Corporation

  Consumer & Business Products   Equity   Common Stock      295,861         819         598   

IPA Holdings, LLC

  Consumer & Business Products   Equity   LLC Interest      500,000         500         564   

Market Force Information, Inc.

  Consumer & Business Products   Equity   Preferred Series B      187,970         500         403   
           

 

 

    

 

 

 

Subtotal: Consumer & Business Products (0.24%)*

          1,819         1,565   
           

 

 

    

 

 

 

Drug Delivery

              

AcelRx Pharmaceuticals, Inc.(3)

  Drug Delivery   Equity   Common Stock      89,243         178         858   

Merrion Pharm(3)(5)(10)

  Drug Delivery   Equity   Common Stock      20,000         9         —     

NuPathe, Inc.(3)

  Drug Delivery   Equity   Common Stock      50,000         146         120   

Transcept Pharmaceuticals, Inc.(3)

  Drug Delivery   Equity   Common Stock      41,570         500         132   
           

 

 

    

 

 

 

Subtotal: Drug Delivery (0.17%)*

          833         1,110   
           

 

 

    

 

 

 

Drug Discovery & Development

              

Acceleron Pharma, Inc.(3)

  Drug Discovery & Development   Equity   Common Stock      235,872         1471         4260   

Aveo Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Equity   Common Stock      167,864         842         346   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Equity   Preferred Series B      20,107         503         202   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Equity   Preferred Series C      142,858         1,000         991   
        

 

 

    

 

 

    

 

 

 

Total Dicerna Pharmaceuticals, Inc.

           162,965         1,503         1,193   

Inotek Pharmaceuticals Corporation

  Drug Discovery & Development   Equity   Common Stock      15,334         1,500         —     

Merrimack Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Equity   Common Stock      546,448         2,000         2,071   

Paratek Pharmaceuticals, Inc.

  Drug Discovery & Development   Equity   Common Stock      85,450         5         —     

Paratek Pharmaceuticals, Inc.

  Drug Discovery & Development   Equity   Preferred Series H      244,158         1000         —     
        

 

 

    

 

 

    

 

 

 

Total Paratek Pharmaceuticals, Inc.

           329,608         1,005         —     
           

 

 

    

 

 

 

Subtotal: Drug Discovery & Development (1.22%)*

          8,321         7,870   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

17


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

  Shares      Cost     Value  

Electronics & Computer Hardware

            

Virident Systems, Inc.

  Electronics & Computer Hardware   Equity   Preferred Series D     6,546,217       $ 5,000      $ 12,235   
          

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (1.90%)*

         5,000        12,235   
          

 

 

   

 

 

 

Information Services

            

Buzznet, Inc.

  Information Services   Equity   Preferred Series C     263,158         250        —     

Good Technologies, Inc. (pka Visto Corporation)

  Information Services   Equity   Common Stock     500,000         603        —     
          

 

 

   

 

 

 

Subtotal: Information Services (0.00%)*

         853        —     
          

 

 

   

 

 

 

Internet Consumer & Business Services

            

Philotic, Inc.

  Internet Consumer & Business Services   Equity   Common Stock     8,121         93        —     

Progress Financial

  Internet Consumer & Business Services   Equity   Preferred Series G     218,351         250        250   

Trulia, Inc.(3)

  Internet Consumer & Business Services   Equity   Common Stock     29,340         141        1,697   
          

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.30%)*

         484        1,947   
          

 

 

   

 

 

 

Media/Content/Info

            

Everyday Health, Inc. (pka Waterfront Media, Inc.)

  Media/Content/Info   Equity   Preferred Series D     145,590         1,000        544   
          

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.08%)*

         1,000        544   
          

 

 

   

 

 

 

Medical Devices & Equipment

            

Gelesis, Inc.(6)

  Medical Devices & Equipment   Equity   LLC Interest     2,024,092         925        513   

Lanx, Inc.

  Medical Devices & Equipment   Equity   Preferred Series C     1,203,369         1,000        2,000   

Medrobotics Corporation

  Medical Devices & Equipment   Equity   Preferred Series E     136,798         250        270   

Novasys Medical, Inc.

  Medical Devices & Equipment   Equity   Preferred Series D-1     4,118,444         1,000        —     

Optiscan Biomedical, Corp.(6)

  Medical Devices & Equipment   Equity   Preferred Series B     6,185,567         3,000        390   

Optiscan Biomedical, Corp.(6)

  Medical Devices & Equipment   Equity   Preferred Series C     1,927,309         655        132   

Optiscan Biomedical, Corp.(6)

  Medical Devices & Equipment   Equity   Preferred Series D     20,251,220         1932        1859   
       

 

 

    

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

          28,364,096         5,587        2,381   
          

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.80%)*

         8,762        5,164   
          

 

 

   

 

 

 

Software

            

Atrenta, Inc.

  Software   Equity   Preferred Series C     1,196,845         986        1,780   

Atrenta, Inc.

  Software   Equity   Preferred Series D     635,513         508        1126   
       

 

 

    

 

 

   

 

 

 

Total Atrenta, Inc.

          1,832,358         1,494        2,906   

Box, Inc.

  Software   Equity   Preferred Series C     390,625         500        5,352   

Box, Inc.

  Software   Equity   Preferred Series D     158,133         500        2,166   

Box, Inc.

  Software   Equity   Preferred Series D-1     124,511         1,000        1,706   

Box, Inc.

  Software   Equity   Preferred Series D-2     220,751         2,001        3,024   

Box, Inc.

  Software   Equity   Preferred Series E     38,183         500        523   
       

 

 

    

 

 

   

 

 

 

Total Box, Inc.

          932,203         4,501        12,771   

CapLinked, Inc.

  Software   Equity   Preferred Series A-3     53,614         50        71   

ForeScout Technologies, Inc.

  Software   Equity   Preferred Series D     319,099         398        1,401   

HighRoads, Inc.

  Software   Equity   Preferred Series B     190,170         307        302   
          

 

 

   

 

 

 

Subtotal: Software (2.71%)*

         6,750        17,451   
          

 

 

   

 

 

 

Specialty Pharmaceuticals

            

QuatRx Pharmaceuticals Company

  Specialty Pharmaceuticals   Equity   Preferred Series E     166,419         750        —     
          

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.00%)*

         750        —     
          

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

18


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

   Shares     Cost     Value  

Surgical Devices

            

Gynesonics, Inc.

  Surgical Devices   Equity   Preferred Series B      219,298      $ 250      $ 60   

Gynesonics, Inc.

  Surgical Devices   Equity   Preferred Series C      656,538        282        109   

Gynesonics, Inc.

  Surgical Devices   Equity   Preferred Series D      1,621,553        580        675   
        

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

           2,497,389        1,112        844   

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B      88,961        1,100        300   

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series C      119,999        300        219   

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series D      260,000        650        875   
        

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

           468,960        2,050        1,394   
          

 

 

   

 

 

 

Subtotal: Surgical Devices (0.35%)*

         3,162        2,238   
          

 

 

   

 

 

 
          

 

 

   

 

 

 

Subtotal: Equity (8.50%)*

         39,836        54,699   
          

 

 

   

 

 

 

Warrant

            

Biotechnology Tools

            

Cleveland BioLabs, Inc (3)

  Biotechnology Tools   Warrant   Common Stock      156,250        105        105   

Labcyte, Inc.

  Biotechnology Tools   Warrant   Preferred Series C      1,127,624        323        75   

NuGEN Technologies, Inc.

  Biotechnology Tools   Warrant   Preferred Series B      204,545        45        249   

NuGEN Technologies, Inc.

  Biotechnology Tools   Warrant   Preferred Series C      30,114        33        25   
          

 

 

   

 

 

 

Total NuGEN Technologies, Inc.

             78        274   
          

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.07%)*

         506        454   
          

 

 

   

 

 

 

Clean Tech

            

Agrivida, Inc.

  Clean Tech   Warrant   Preferred Series C      77,447        120        243   

Alphabet Energy, Inc.

  Clean Tech   Warrant   Preferred Series A      86,329        82        205   

American Superconductor Corporation(3)

  Clean Tech   Warrant   Preferred Common Stock      139,275        244        55   

Brightsource Energy, Inc.

  Clean Tech   Warrant   Preferred Series 1      175,000        780        175   

Calera, Inc.

  Clean Tech   Warrant   Preferred Series C      44,529        513        —     

EcoMotors, Inc.

  Clean Tech   Warrant   Preferred Series B      437,500        308        434   

Fluidic, Inc.

  Clean Tech   Warrant   Preferred Series C      59,665        102        102   

Fulcrum Bioenergy, Inc.

  Clean Tech   Warrant   Preferred Series C-1      280,897        275        198   

Glori Energy, Inc.

  Clean Tech   Warrant   Preferred Series C      145,932        165        46   

GreatPoint Energy, Inc.

  Clean Tech   Warrant   Preferred Series D-1      393,212        548        —     

Polyera Corporation

  Clean Tech   Warrant   Preferred Series C      161,575        69        90   

Propel Fuels

  Clean Tech   Warrant   Preferred Series C      3,200,000        211        169   

SCIEnergy, Inc.

  Clean Tech   Warrant   Preferred Series D      1,061,623        360        25   

Scifiniti (pka Integrated Photovoltaics, Inc.)

  Clean Tech   Warrant   Preferred Series B      390,000        82        114   

Solexel, Inc.

  Clean Tech   Warrant   Preferred Series B      1,171,625        1162        236   

Stion Corporation

  Clean Tech   Warrant   Preferred Series E      110,226        317        171   

TAS Energy, Inc.

  Clean Tech   Warrant   Preferred Series E      37,406        299        172   

TPI Composites, Inc.

  Clean Tech   Warrant   Preferred Series B      120        172        241   

Trilliant, Inc.

  Clean Tech   Warrant   Preferred Series A      320,000        162        36   
          

 

 

   

 

 

 

Subtotal: Clean Tech (0.42%)*

         5,971        2,712   
          

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

19


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

   Shares      Cost      Value  

Communications & Networking

              

Bridgewave Communications

  Communications & Networking   Warrant   Preferred Series 5      29,426       $ 753       $ —     

Intelepeer, Inc.

  Communications & Networking   Warrant   Preferred Series C      117,958         102         124   

OpenPeak, Inc.

  Communications & Networking   Warrant   Preferred Series E      25,646         149         —     

PeerApp, Inc.

  Communications & Networking   Warrant   Preferred Series B      298,779         61         52   

Peerless Network, Inc.

  Communications & Networking   Warrant   Preferred Series A      135,000         95         304   

Ping Identity Corporation

  Communications & Networking   Warrant   Preferred Series B      1,136,277         52         80   

Purcell Systems, Inc.

  Communications & Networking   Warrant   Preferred Series B      110,000         123         730   

Spring Mobile Solutions

  Communications & Networking   Warrant   Preferred Series D      2,834,375         418         776   

Stoke, Inc.

  Communications & Networking   Warrant   Preferred Series C      158,536         53         195   

Stoke, Inc.

  Communications & Networking   Warrant   Preferred Series D      72,727         65         84   
        

 

 

    

 

 

    

 

 

 

Total Stoke, Inc.

           231,263         118         279   
           

 

 

    

 

 

 

Subtotal: Communications & Networking (0.36%)*

          1,871         2,345   
           

 

 

    

 

 

 

Consumer & Business Products

              

IPA Holdings, LLC

  Consumer & Business Products   Warrant   Common Stock      650,000         275         322   

Market Force Information, Inc.

  Consumer & Business Products   Warrant   Preferred Series A      99,286         24         9   

Seven Networks, Inc.

  Consumer & Business Products   Warrant   Preferred Series C      1,821,429         174         3   
           

 

 

    

 

 

 

Subtotal: Consumer & Business Products (0.05%)*

          473         334   
           

 

 

    

 

 

 

Diagnostic

          

Navidea Biopharmaceuticals, Inc. (pka Neoprobe) (3)

  Diagnostic   Warrant   Common Stock      333,333         244         255   

Tethys Bioscience, Inc.

  Diagnostic   Warrant   Preferred Series E      2,689,945         147         —     
           

 

 

    

 

 

 

Subtotal: Diagnostic (0.04%)*

              391         255   
           

 

 

    

 

 

 

Drug Delivery

              

Alexza Pharmaceuticals, Inc.(3)

  Drug Delivery   Warrant   Common Stock      37,639         645         3   

BIND Therapeutics, Inc.(3)

  Drug Delivery   Warrant   Common Stock      71,359         367         267   

Intelliject, Inc.

  Drug Delivery   Warrant   Preferred Series B      82,500         594         780   

NuPathe, Inc.(3)

  Drug Delivery   Warrant   Common Stock      106,631         139         83   

Revance Therapeutics, Inc.

  Drug Delivery   Warrant   Preferred Series D      802,675         557         317   

Transcept Pharmaceuticals, Inc.(3)

  Drug Delivery   Warrant   Common Stock      61,452         87         4   
           

 

 

    

 

 

 

Subtotal: Drug Delivery (0.23%)*

              2,389         1,454   
           

 

 

    

 

 

 

Drug Discovery & Development

              

Acceleron Pharma, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      39,178         74         451   

ADMA Biologics, Inc.

  Drug Discovery & Development   Warrant   Common Stock      31,750         129         129   

Anacor Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      528,375         1155         2919   

Anthera Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      40,178         984         24   

Cell Therapeutics, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      679,040         300         483   

Cempra, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      138,797         458         655   

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series D      325,261         490         500   

Concert Pharmaceuticals, Inc.

  Drug Discovery & Development   Warrant   Preferred Series C      400,000         367         524   

Coronado Biosciences, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      73,009         142         161   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Warrant   Common Stock      200         28         —     

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Warrant   Preferred Series A      21,000         237         43   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Warrant   Preferred Series B      26,400         310         55   
        

 

 

    

 

 

    

 

 

 

Total Dicerna Pharmaceuticals, Inc.

           47,600         575         98   

Horizon Pharma, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      22,408         231         —     

Merrimack Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      302,143         155         217   

Neuralstem, Inc.(3)

  Drug Discovery & Development   Warrant   Common Stock      648,798         295         972   

Portola Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Warrant   Preferred Series B      68,702         152         729   

uniQure B.V.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series A      185,873         218         218   
           

 

 

    

 

 

 

Subtotal: Drug Discovery & Development (1.26%)*

          5,725         8,080   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

20


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

   Shares      Cost      Value  

Electronics & Computer Hardware

              

Clustrix, Inc.

  Electronics & Computer Hardware   Warrant   Preferred Series B      50,000       $ 12       $ 17   

Identive(3)

  Electronics & Computer Hardware   Warrant   Common Stock      992,084         247         226   

Plures Technologies, Inc.(3)

  Electronics & Computer Hardware   Warrant   Preferred Series A      552,467         124         58   
           

 

 

    

 

 

 

Subtotal: Electronics & Computer Hardware (0.05%)*

          383         301   
           

 

 

    

 

 

 

Healthcare Services, Other

              

MDEverywhere, Inc.

  Healthcare Services, Other   Warrant   Common Stock      129         94         58   
           

 

 

    

 

 

 

Subtotal: Healthcare Services, Other (0.01%)*

          94         58   
           

 

 

    

 

 

 

Information Services

              

Buzznet, Inc.

  Information Services   Warrant   Preferred Series B      19,962         9         —     

Cha Cha Search, Inc.

  Information Services   Warrant   Preferred Series G      48,232         58         15   

Eccentex Corporation

  Information Services   Warrant   Preferred Series A      408,719         31         —     

Intelligent Beauty, Inc.

  Information Services   Warrant   Preferred Series B      190,234         230         797   

InXpo, Inc.

  Information Services   Warrant   Preferred Series C      915,449         123         54   

InXpo, Inc.

  Information Services   Warrant   Preferred Series C-1      314,966         24         19   
        

 

 

    

 

 

    

 

 

 

Total InXpo, Inc.

           1,230,415         147         73   

Jab Wireless, Inc.

  Information Services   Warrant   Preferred Series A      266,567         265         334   

RichRelevance, Inc.

  Information Services   Warrant   Preferred Series D      112,749         98         40   
           

 

 

    

 

 

 

Subtotal: Information Services (0.20%)*

          838         1,259   
           

 

 

    

 

 

 

Internet Consumer & Business Services

              

Blurb, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B      439,336         323         506   

Blurb, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series C      234,280         636         364   
        

 

 

    

 

 

    

 

 

 

Total Blurb, Inc.

           673,616         959         870   

CashStar, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series C-2      454,545         102         39   

Gazelle

  Internet Consumer & Business Services   Warrant   Preferred Series D      151,827         165         384   

Invoke Solutions, Inc.

  Internet Consumer & Business Services   Warrant   Common Stock      53,084         39         —     

Just Fabulous, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B      137,456         589         1199   

Just.Me, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A      102,299         20         —     

Prism Education Group, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B      200,000         43         —     

Progress Financial

  Internet Consumer & Business Services   Warrant   Preferred Series G      174,562         78         62   

Reply! Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B      137,225         320         144   

ShareThis, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series C      493,502         547         473   

Tectura Corporation

  Internet Consumer & Business Services   Warrant   Preferred Series B-1      253,378         51         —     

WaveMarket, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series E      1,083,333         106         47   
           

 

 

    

 

 

 

Subtotal: Internet Consumer & Business Services (0.50%)*

          3,019         3,218   
           

 

 

    

 

 

 

Media/Content/Info

              

Everyday Health, Inc. (pka Waterfront Media, Inc.)

  Media/Content/Info   Warrant   Preferred Series C      110,018         60         72   

Glam Media, Inc.

  Media/Content/Info   Warrant   Preferred Series D      407,457         482         —     

Zoom Media and Marketing

  Media/Content/Info   Warrant   Preferred      1,204         348         379   
           

 

 

    

 

 

 

Subtotal: Media/Content/Info (0.07%)*

          890         451   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

21


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

   Shares      Cost      Value  

Medical Devices & Equipment

              

Gelesis, Inc.(6)

  Medical Devices & Equipment   Warrant   LLC Interest      263,688       $ 78       $ 9   

Home Dialysis Plus

  Medical Devices & Equipment   Warrant   Preferred Series A      300,000         245         245   

Lanx, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series C      1,203,369         441         1,156   

Medrobotics Corporation

  Medical Devices & Equipment   Warrant   Preferred Series D      424,008         343         207   

Medrobotics Corporation

  Medical Devices & Equipment   Warrant   Preferred Series E      34,199         27         25   
        

 

 

    

 

 

    

 

 

 

Total Medrobotics Corporation

           458,207         370         232   

MELA Sciences, Inc.(3)

  Medical Devices & Equipment   Warrant   Common Stock      693,202         401         137   

NinePoint Medical, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series A-1      587,840         170         260   

Novasys Medical, Inc.

  Medical Devices & Equipment   Warrant   Common Stock      109,449         2         —     

Novasys Medical, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series D      526,840         125         —     

Novasys Medical, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series D-1      53,607         6         —     
        

 

 

    

 

 

    

 

 

 

Total Novasys Medical, Inc.

           689,896         133         —     

Optiscan Biomedical, Corp.(6)

  Medical Devices & Equipment   Warrant   Preferred Series D      10,535,275         1252         290   

Oraya Therapeutics, Inc.

  Medical Devices & Equipment   Warrant   Common Stock      95,498         66         39   

Oraya Therapeutics, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series C      716,948         676         232   
        

 

 

    

 

 

    

 

 

 

Total Oraya Therapeutics, Inc.

           812,446         742         271   

SonaCare Medical

  Medical Devices & Equipment   Warrant   Preferred Series G      1,413,880         188         62   

United Orthopedic Group, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series A      423,076         608         673   
           

 

 

    

 

 

 

Subtotal: Medical Devices & Equipment (0.52%)*

          4,628         3,335   
           

 

 

    

 

 

 

Semiconductors

              

Achronix Semiconductor Corporation

  Semiconductors   Warrant   Preferred Series C      360,000         160         173   

Kovio, Inc.

  Semiconductors   Warrant   Preferred Series B      319,352         92         —     

SiTime Corporation

  Semiconductors   Warrant   Preferred Series G      195,683         23         23   
           

 

 

    

 

 

 

Subtotal: Semiconductors (0.03%)*

          275         196   
           

 

 

    

 

 

 

Software

              

Atrenta, Inc.

  Software   Warrant   Preferred Series D      392,670         121         345   

Box, Inc.

  Software   Warrant   Preferred Series B      271,070         73         3,535   

Box, Inc.

  Software   Warrant   Preferred Series C      199,219         117         2,475   

Box, Inc.

  Software   Warrant   Preferred Series D-1      62,255         193         378   
        

 

 

    

 

 

    

 

 

 

Total Box, Inc.

           532,544         383         6,388   

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A      168,750         188         —     

Central Desktop, Inc.

  Software   Warrant   Preferred Series B      522,823         108         206   

Clickfox, Inc.

  Software   Warrant   Preferred Series B      1,038,563         329         460   

Clickfox, Inc.

  Software   Warrant   Preferred Series C      592,019         730         289   
        

 

 

    

 

 

    

 

 

 

Total Clickfox, Inc.

           1,630,582         1,059         749   

Daegis Inc. (pka Unify Corporation)(3)

  Software   Warrant   Common Stock      718,860         1,434         38   

EndPlay, Inc.

  Software   Warrant   Preferred Series B      180,000         67         —     

ForeScout Technologies, Inc.

  Software   Warrant   Preferred Series E      80,587         41         223   

Hillcrest Laboratories, Inc.

  Software   Warrant   Preferred Series E      1,865,650         55         226   

KXEN, Inc.

  Software   Warrant   Preferred Series D      184,614         47         120   

Mobile Posse, Inc.

  Software   Warrant   Preferred Series C      396,430         130         141   

Neos Geosolutions, Inc.

  Software   Warrant   Preferred Series 3      221,150         22         —     

SugarSync, Inc.

  Software   Warrant   Preferred Series CC      332,726         78         85   

SugarSync, Inc.

  Software   Warrant   Preferred Series DD      107,526         34         29   
        

 

 

    

 

 

    

 

 

 

Total SugarSync, Inc.

           440,252         112         114   

Touchcommerce, Inc.

  Software   Warrant   Preferred Series E      992,595         251         426   

White Sky, Inc.

  Software   Warrant   Preferred Series B-2      124,295         54         5   

WildTangent, Inc.

  Software   Warrant   Preferred Series 3A      100,000         238         64   
           

 

 

    

 

 

 

Subtotal: Software (1.41%)*

          4,310         9,045   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

22


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2013

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment

 

Series

  Shares     Cost     Value  

Specialty Pharmaceuticals

           

QuatRx Pharmaceuticals Company

  Specialty Pharmaceuticals   Warrant   Preferred Series E     155,324      $ 306      $ —     
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.00%)*

        306        —     
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.

  Surgical Devices   Warrant   Preferred Series C     180,480        74        26   

Gynesonics, Inc.

  Surgical Devices   Warrant   Preferred Series D     1,575,965        320        362   
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

          1,756,445        394        388   

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436        225        10   

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series D     175,000        100        340   
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

          215,436        325        350   
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.11%)*

        719        738   
         

 

 

   

 

 

 
         

 

 

   

 

 

 

Total Warrants (5.32%)*

            32,788        34,235   
         

 

 

   

 

 

 
         

 

 

   

 

 

 

Total Investments (152.85%)*

          $ 983,036      $ 983,427   
         

 

 

   

 

 

 

 

* Value as a percent of net assets
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $46.1 million, $46.3 million and $157,787 respectively. The tax cost of investments is $982.2 million.
(3) Except for warrants in twenty-one publicly traded companies and common stock in nine publicly traded companies, all investments are restricted at September 30, 2013 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities of the Company.
(7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners as least 25% but not more than 50% of the voting securities of the Company.
(8) Debt is on non-accrual status at September 30, 2013, and is therefore considered non-income producing.
(9) Convertible Senior Debt
(10) Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets.
(11) Denotes that all or a portion of the loan secures the notes offered in the Debt Securitization (as defined in Note 4).

See notes to consolidated financial statements.

 

23


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Anthera Pharmaceuticals Inc.(3)

  Drug Discovery & Development  

Senior Debt(11)

Matures December 2014

Interest rate Prime + 7.30% or

Floor rate of 10.55%

  $ 20,532      $ 20,745      $ 21,007   

Aveo Pharmaceuticals, Inc.(3)

  Drug Discovery & Development  

Senior Debt(11)

Matures September 2015

Interest rate Prime + 7.15% or

Floor rate of 11.90%

  $ 26,500        26,500        27,030   

Cempra, Inc.(3)

  Drug Discovery & Development  

Senior Debt(11)

Matures December 2015

Interest rate Prime + 6.30% or

Floor rate of 9.55%

  $ 10,000        9,862        9,902   

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development  

Senior Debt

Matures November 2013

Interest rate Prime + 7.75% or

Floor rate of 12.00%

  $ 4,111        4,718        4,759   

Concert Pharmaceuticals, Inc.(4)

  Drug Discovery & Development  

Senior Debt

Matures October 2015

Interest rate Prime + 3.25% or

Floor rate of 8.50%

  $ 20,000        19,633        18,983   

Coronado BioSciences, Inc.(3)

  Drug Discovery & Development  

Senior Debt(11)

Matures March 2016

Interest rate Prime + 6.00% or

Floor rate of 9.25%

  $ 15,000        14,761        14,761   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development  

Senior Debt

Matures January 2015

Interest rate Prime + 4.40% or

Floor rate of 10.15%

  $ 9,166        8,996        8,929   

Insmed, Inc.

  Drug Discovery & Development  

Senior Debt(11)

Matures January 2016

Interest rate Prime + 4.75% or

Floor rate of 9.25%

  $ 20,000        19,305        19,674   

Merrimack Pharmaceuticals, Inc.

  Drug Discovery & Development  

Senior Debt

Matures May 2016

Interest rate Prime + 5.30% or

Floor rate of 10.55%

  $ 40,000        39,670        39,670   

NeurogesX, Inc.(3)

  Drug Discovery & Development  

Senior Debt

Matures February 2015

Interest rate Prime + 7.50% or

Floor rate of 10.75%

  $ 13,662        13,645        13,884   

Paratek Pharmaceuticals, Inc.

  Drug Discovery & Development  

Senior Debt(9)

Matures upon liquidation

Interest rate Fixed 10.00%

  $ 45        45        45   
   

Senior Debt(9)

Matures upon liquidation

Interest rate Fixed 10.00%

  $ 36        31        31   
       

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc.

          76        76   
       

 

 

   

 

 

 

Total Debt Drug Discovery & Development (34.63%)*

      177,911        178,675   
       

 

 

   

 

 

 

See notes to consolidated financial statements.

 

24


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Bridgewave Communications

  Communications & Networking  

Senior Debt

Matures March 2016

Interest rate Prime + 8.75% or

Floor rate of 12.00%

  $ 7,500      $ 7,003      $ 4,896   

OpenPeak, Inc.

  Communications & Networking  

Senior Debt(11)

Matures July 2015

Interest rate Prime + 8.75% or

Floor rate of 12.00%

  $ 15,000        15,008        15,158   

PeerApp, Inc.(4)

  Communications & Networking  

Senior Debt

Matures April 2013

Interest rate Prime + 7.50% or

Floor rate of 11.50%

  $ 501        588        588   

UPH Holdings, Inc.

  Communications & Networking  

Senior Debt

Matures April 2015

Interest rate Libor + 11.00% or

Floor rate of 13.50%

  $ 7,000        6,880        6,772   
   

Senior Debt

Matures September 2015

Interest rate Libor + 11.00% or

Floor rate of 13.50%

  $ 347        343        333   
   

Senior Debt

Matures December 2016

Interest rate Libor + 11.00% or

Floor rate of 13.50%

  $ 3,594        3,594        3,400   
       

 

 

   

 

 

 

Total UPH Holdings, Inc.

          10,817        10,505   
       

 

 

   

 

 

 

Total Debt Communications & Networking (6.04%)*

      33,416        31,147   
       

 

 

   

 

 

 

Clustrix, Inc.

  Electronics & Computer Hardware  

Senior Debt

Matures December 2015

Interest rate Prime + 6.50% or

Floor rate of 9.75%

  $ 235        227        227   

Identive Group, Inc.

  Electronics & Computer Hardware  

Senior Debt

Matures November 2015

Interest rate Prime + 7.75% or

Floor rate 11.00%

  $ 7,500        7,447        7,447   
       

 

 

   

 

 

 

Total Debt Electronics & Computer Hardware (1.49%)

      7,674        7,674   
       

 

 

   

 

 

 

Box, Inc.(4)

  Software  

Senior Debt

Matures March 2016

Interest rate Prime + 3.75% or

Floor rate of 7.50%

  $ 10,000        9,910        9,353   
   

Senior Debt

Matures July 2014

Interest rate Prime + 5.25% or

Floor rate of 8.50%

  $ 1,018        1,075        1,060   
   

Senior Debt(11)

Matures July 2016

Interest rate Prime + 5.13% or

Floor rate of 8.88%

  $ 20,000        20,138        19,274   
       

 

 

   

 

 

 

Total Box, Inc.

          31,123        29,687   

 

See notes to consolidated financial statements.

 

25


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Clickfox, Inc.

  Software  

Senior Debt

Matures November 2015

Interest rate Prime + 8.25% or

Floor rate of 11.50%

  $ 8,000      $ 7,318      $ 7,558   

EndPlay,Inc.

  Software  

Senior Debt

Matures August 2015

Interest rate Prime + 7.35% or

Floor rate 10.6%

  $ 2,000        1,930        1,930   

Hillcrest Laboratories, Inc

  Software  

Senior Debt

Matures July 2015

Interest rate Prime + 7.50% or

Floor rate of 10.75%

  $ 4,000        3,923        3,860   

JackBe Corporation

  Software  

Senior Debt

Matures January 2016

Interest rate Prime + 7.25%

or Floor rate of 10.50%

  $ 3,000        2,900        2,900   

Kxen, Inc.(4)

  Software  

Senior Debt

Matures January 2015

Interest rate Prime + 5.08% or

Floor rate of 8.33%

  $ 2,337        2,371        2,192   

Tada Innovations, Inc.

  Software  

Senior Debt(9)

Matures November 2012

Interest rate Fixed 8.00%

  $ 100        100        —     
       

 

 

   

 

 

 

Total Debt Software (9.33%)*

      49,665        48,127   
       

 

 

   

 

 

 

Althea Technologies, Inc.

  Specialty Pharmaceuticals  

Senior Debt

Matures October 2013

Interest rate Prime + 7.70% or

Floor rate of 10.95%

  $ 7,659        7,927        7,927   

Quatrx Pharmaceuticals Company

  Specialty Pharmaceuticals  

Senior Debt(9)

Matures March 2014

Interest rate Fixed 8.00%

  $ 1,888        1,888        2,394   
       

 

 

   

 

 

 

Total Debt Specialty Pharmaceuticals (2.00%)*

      9,815        10,321   
       

 

 

   

 

 

 

Achronix Semiconductor Corporation

  Semiconductors  

Senior Debt

Matures January 2015

Interest rate Prime + 10.60% or

Floor rate of 13.85%

  $ 1,847        1,803        1,783   
       

 

 

   

 

 

 

Total Debt Semiconductors (0.34%)*

      1,803        1,783   
       

 

 

   

 

 

 

AcelRX Pharmaceuticals, Inc.(3)

  Drug Delivery  

Senior Debt(11)

Matures December 2014

Interest rate Prime + 3.25% or

Floor rate of 8.50%

  $ 16,345        16,222        15,983   

ADMA Biologics, Inc.

  Drug Delivery  

Senior Debt

Matures February 2016

Interest rate Prime + 2.75% or

Floor rate of 8.50%

  $ 4,000        3,857        3,857   

Alexza Pharmaceuticals, Inc.(3)

  Drug Delivery  

Senior Debt(11)

Matures October 2013

Interest rate Prime + 6.50% or

Floor rate of 10.75%

  $ 5,052        5,410        5,410   

BIND Biosciences, Inc.

  Drug Delivery  

Senior Debt

Matures July 2014

Interest rate Prime + 7.45% or

Floor rate of 10.70%

  $ 3,326        3,320        3,387   

 

See notes to consolidated financial statements.

 

26


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Intelliject, Inc.

  Drug Delivery  

Senior Debt(11)

Matures June 2016

Interest rate Prime + 5.75% or

Floor rate of 11.00%

  $ 15,000      $ 14,615      $ 15,065   

Nupathe, Inc.(3)

  Drug Delivery  

Senior Debt

Matures May 2016

Interest rate Prime - 3.25% or

Floor rate of 9.85%

  $ 8,500        8,166        8,166   

Revance Therapeutics, Inc.

  Drug Delivery  

Senior Debt

Matures March 2015

Interest rate Prime + 6.60% or

Floor rate of 9.85%

  $ 18,446      $ 18,330      $ 18,263   
       

 

 

   

 

 

 

Total Debt Drug Delivery (13.59%)*

      69,920        70,131   
       

 

 

   

 

 

 

Ahhha, Inc.(8)

  Internet Consumer & Business Services  

Senior Debt

Matures January 2015

Interest rate Fixed 12.00%

  $ 350        347        —     

Blurb, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures December 2015

Interest rate Prime + 5.25% or

Floor rate 8.50%

  $ 8,000        7,708        7,429   

Education Dynamics, LLC

  Internet Consumer & Business Services  

Senior Debt

Matures March 2016

Interest rate Fixed 12.50%, PIK Interest

1.50%

  $ 27,500        26,976        26,976   

Just.Me, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures June 2015

Interest rate Prime + 2.50% or

Floor rate 5.75%

  $ 750        732        680   
   

Senior Debt

Matures June 2015

Interest rate Prime + 5.00% or

Floor rate 8.25%

  $ 750        727        704   
     

 

 

   

 

 

   

 

 

 

Total Just.Me, Inc.

          1,459        1,384   

Loku, Inc.

  Internet Consumer & Business Services  

Senior Debt(9)

Matures June 2013

Interest rate Fixed 6.00%

  $ 100        100        100   

NetPlenish, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures April 2015

Interest rate Fixed 10.00%

  $ 500        490        452   

Reply! Inc.

  Internet Consumer & Business Services  

Senior Debt(11)

Matures September 2015

Interest rate Prime + 6.875% or

Floor rate of 10.125%

  $ 11,749        11,624        11,337   
   

Senior Debt(11)

Matures September 2015

Interest rate Prime + 7.25% or

Floor rate of 11.00%

  $ 2,000        1,946        1,971   
     

 

 

   

 

 

   

 

 

 

Total Reply! Inc.

          13,570        13,308   

Second Rotation, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures August 2015

Interest rate Prime + 6.50% or

Floor rate of 10.25% , PIK Interest 2.50%

  $ 5,843        5,860        5,880   

 

See notes to consolidated financial statements.

 

27


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  
   

Senior Debt

Matures August 2015

Interest rate Prime + 6.50% or

Floor rate of 10.25% , PIK Interest 1.50%

  $ 1,947      $ 1,888      $ 1,909   
   

Revolving Line of Credit

Matures January 2013

Interest rate Fixed 10.50%, PIK Interest

0.25%

  $ 327        313        313   
       

 

 

   

 

 

 

Total Second Rotation, Inc.

          8,061        8,102   

ShareThis, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures June 2016

Interest rate Prime + 7.50% or

Floor rate of 10.75%

  $ 15,000        14,268        14,268   

Tectura Corporation

  Internet Consumer & Business Services  

Revolving Line of Credit

Matures July 2013

Interest rate Libor + 8.00% or

Floor rate of 11.00%

  $ 16,340        17,850        17,797   
   

Senior Debt

Matures December 2014

Interest rate Libor + 10.00% or

Floor rate of 13.00%

  $ 6,978        6,908        6,827   
   

Senior Debt

Matures April 2013

Interest rate Libor + 10.00% or

Floor rate of 13.00%

  $ 1,390        1,325        1,325   
     

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

          26,083        25,949   

Trulia, Inc.(3)

  Internet Consumer & Business Services  

Senior Debt(11)

Matures September 2015

Interest rate Prime + 2.75% or

Floor rate of 6.00%

  $ 5,000        4,921        4,729   
   

Senior Debt(11)

Matures September 2015

Interest rate Prime + 5.50% or

Floor rate of 8.75%

  $ 5,000        4,920        4,547   
     

 

 

   

 

 

   

 

 

 

Total Trulia, Inc.

          9,841        9,276   

Vaultlogix, Inc.

  Internet Consumer & Business Services  

Senior Debt

Matures September 2016

Interest rate LIBOR + 8.50% or

Floor rate of 10.00%, PIK interest 2.50%

  $ 7,500        7,681        7,721   
   

Senior Debt

Matures September 2015

Interest rate LIBOR + 7.00% or

Floor rate of 8.50%

  $ 10,253        10,190        9,854   
       

 

 

   

 

 

 

Total Vaultlogix, Inc.

          17,871        17,575   

Votizen, Inc.

  Internet Consumer & Business Services  

Senior Debt(9)

Matures February 2013

Interest rate Fixed 5.00%

  $ 100        100        6   

Wavemarket, Inc.

  Internet Consumer & Business Services  

Senior Debt(11)

Matures September 2015

Interest rate Prime + 5.75% or

Floor rate of 9.50%

  $ 10,000        9,840        9,444   
       

 

 

   

 

 

 

Total Debt Internet Consumer & Business Services (26.02%)*

      136,714        134,269   
       

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

28


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Cha Cha Search, Inc.

  Information Services  

Senior Debt

Matures February 2015

Interest rate Prime + 6.25% or

Floor rate of 9.50%

  $ 2,641      $ 2,604      $ 2,522   

Eccentex Corporation

  Information Services  

Senior Debt(11)

Matures May 2015

Interest rate Prime + 7.00% or

Floor rate of 10.25%

  $ 1,000        977        965   

InXpo, Inc.

  Information Services  

Senior Debt

Matures March 2014

Interest rate Prime + 7.50% or

Floor rate of 10.75%

  $ 2,550        2,466        2,434   

Jab Wireless, Inc.

  Information Services  

Senior Debt

Matures November 2017

Interest rate Prime + 6.75% or

Floor rate of 8.00%

  $ 30,000        29,852        29,850   

RichRelevance, Inc.

  Information Services  

Senior Debt

Matures January 2015

Interest rate Prime + 3.25% or

Floor rate of 7.50%

  $ 4,245        4,210        4,068   

Womensforum.com, Inc.

  Information Services  

Senior Debt(11)

Matures October 2016

Interest rate LIBOR + 6.50% or

Floor rate of 9.25%

  $ 8,000        7,838        7,838   
   

Senior Debt(11)

Matures October 2016

Interest rate LIBOR + 7.50% or

Floor rate of 10.25%

  $ 4,500        4,422        4,422   
       

 

 

   

 

 

 

Total Womensforum.com, Inc.

      12,260        12,260   
       

 

 

   

 

 

 

Total Debt Information Services (10.10%)*

      52,369        52,099   
       

 

 

   

 

 

 

Gynesonics, Inc.

  Medical Device & Equipment  

Senior Debt

Matures October 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

  $ 3,912        3,975        4,014   
   

Senior Debt

Matures February 2013

Interest rate Fixed 8.00%

  $ 253        247        247   
   

Senior Debt

Matures September 2013

Interest rate Fixed 8.00%

  $ 36        30        30   
       

 

 

   

 

 

 

Total Gynesonics, Inc.

          4,252        4,291   

Lanx, Inc.

  Medical Device & Equipment  

Senior Debt

Matures October 2016

Interest rate Prime + 6.50% or

Floor rate of 10.25%

  $ 15,000        14,428        14,428   
   

Revolving Line of Credit

Matures October 2015

Interest rate Prime + 5.25% or

Floor rate of 9.00%

  $ 5,500        5,300        5,300   
       

 

 

   

 

 

 

Total Lanx, Inc.

          19,728        19,728   

Novasys Medical, Inc.

  Medical Device & Equipment  

Senior Debt (9)

Matures January 2013

Interest rate Fixed 8.00%

  $ 65        65        65   
   

Senior Debt(9)

Matures August 2013

Interest rate Fixed 8.00%

  $ 22        20        20   
       

 

 

   

 

 

 

Total Novasys Medical, Inc.

          85        85   

 

See notes to consolidated financial statements.

 

29


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Optiscan Biomedical, Corp.(6)

  Medical Device & Equipment  

Senior Debt

Matures December 2013

Interest rate Prime + 8.20% or

Floor rate of 11.45%

  $ 8,260      $ 8,915      $ 9,080   
   

Senior Debt(9)

Matures April 2013

Interest rate Fixed 8.00%

  $ 288        288        288   
   

Senior Debt(9)

Matures September 2013

Interest rate Fixed 8.00%

  $ 123        123        123   
       

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

          9,326        9,491   

Oraya Therapeutics, Inc.

  Medical Device & Equipment  

Senior Debt (9)

Matures December 2013

Interest rate Fixed 7.00%

  $ 500        500        500   
   

Senior Debt(11)

Matures September 2015

Interest rate Prime + 5.50% or

Floor rate of 10.25%

  $ 10,000        9,798        10,079   
       

 

 

   

 

 

 

Total Oraya Therapeutics, Inc.

          10,298        10,579   

USHIFU, LLC

  Medical Device & Equipment  

Senior Debt (11)

Matures April 2016

Interest rate Prime + 7.75% or

Floor rate of 11.00%

  $ 6,000        5,856        5,856   
       

 

 

   

 

 

 

Total Debt Medical Device & Equipment (9.69%)*

      49,545        50,030   
       

 

 

   

 

 

 

Navidea Biopharmaceuticals, Inc. (pka Neoprobe)(3)

  Diagnostic  

Senior Debt

Matures December 2014

Interest rate Prime + 6.75% or

Floor rate of 10.00%

  $ 5,741        5,691        5,752   

Tethys Bioscience Inc.

  Diagnostic  

Senior Debt(11)

Matures December 2015

Interest rate Prime + 8.40% or

Floor rate of 11.65%

  $ 10,000        9,940        10,026   
       

 

 

   

 

 

 

Total Debt Diagnostic (3.06%)*

      15,631        15,778   
       

 

 

   

 

 

 

Labcyte, Inc.

  Biotechnology Tools  

Senior Debt

Matures May 2013

Interest rate Prime + 8.60% or

Floor rate of 11.85%

  $ 761        834        834   
   

Senior Debt(11)

Matures June 2016

Interest rate Prime + 6.70% or

Floor rate of 9.95%

  $ 5,000        4,890        4,995   
       

 

 

   

 

 

 

Total Labcyte, Inc.

          5,724        5,829   
       

 

 

   

 

 

 

Total Debt Biotechnology Tools (1.13%)*

      5,724        5,829   
       

 

 

   

 

 

 

MedCall, LLC

  Healthcare Services, Other  

Senior Debt

Matures January 2016

Interest rate 7.79% or

Floor rate of 9.50%

  $ 4,908        4,844        4,695   
   

Senior Debt

Matures January 2016

Interest rate LIBOR +8.00% or

Floor rate of 10.00%

  $ 4,037        3,972        3,871   
       

 

 

   

 

 

 

Total MedCall, LLC

          8,816        8,566   

 

See notes to consolidated financial statements.

 

30


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Pacific Child & Family Associates, LLC

  Healthcare Services, Other  

Senior Debt

Matures January 2015

Interest rate LIBOR + 9.00% or

Floor rate of 11.50%

  $ 3,661      $ 3,713      $ 3,713   
   

Revolving Line of Credit

Matures January 2015

Interest rate LIBOR + 7.50% or

Floor rate of 10.00%

  $ 1,500        1,490        1,490   
   

Senior Debt

Matures January 2015

Interest rate LIBOR + 11.50% or

Floor rate of 14.00%, PIK interest 3.75%

  $ 5,900        6,562        6,562   
       

 

 

   

 

 

 

Total Pacific Child & Family Associates, LLC

      11,765        11,765   

ScriptSave (Medical Security Card Company, LLC)

  Healthcare Services, Other  

Senior Debt

Matures February 2016

Interest rate LIBOR + 8.75% or

Floor rate of 11.25%

  $ 16,375        16,168        16,150   
       

 

 

   

 

 

 

Total Debt Health Services, Other (7.07%)*

      36,749        36,481   
       

 

 

   

 

 

 

Entrigue Surgical, Inc.

  Surgical Devices  

Senior Debt

Matures December 2014

Interest rate Prime + 5.90% or

Floor rate of 9.65%

  $ 2,463        2,431        2,427   

Transmedics, Inc.

  Surgical Devices  

Senior Debt (11)

Matures November 2015

Interest rate Fixed 12.95%

  $ 7,250        7,464        7,464   
       

 

 

   

 

 

 

Total Debt Surgical Devices (1.92%)*

      9,895        9,891   
       

 

 

   

 

 

 

Westwood One Communications

  Media/Content/ Info  

Senior Debt

Matures October 2016

Interest rate LIBOR + 6.50% or

Floor rate of 8.00%

  $ 20,475        18,994        17,575   

Women’s Marketing, Inc.

  Media/Content/ Info  

Senior Debt

Matures May 2016

Interest rate Libor + 9.50% or

Floor rate of 12.00%, PIK interest 3.00%

  $ 9,681        10,002        10,002   
   

Senior Debt(11)

Matures November 2015

Interest rate Libor + 7.50% or

Floor rate of 10.00%

  $ 16,362        16,105        15,787   
       

 

 

   

 

 

 

Total Women’s Marketing, Inc.

      26,107        25,789   

Zoom Media Corporation

  Media/Content/ Info  

Senior Debt

Matures December 2015

Interest rate Prime + 7.25% or

Floor rate of 10.50%, PIK 3.75%

  $ 5,000        4,657        4,657   
  Media/Content/ Info  

Revolving Line of Credit

Matures December 2014

Interest rate Prime + 5.25% or

Floor rate of 8.50%

  $ 3,000        2,700        2,700   
       

 

 

   

 

 

 

Total Zoom Media Corporation

      7,357        7,357   
       

 

 

   

 

 

 

Total Debt Media/Content/Info (9.83%)*

      52,458        50,721   
       

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

31


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

  Principal
Amount
    Cost(2)     Value(3)  

Alphabet Energy, Inc.

  Clean Tech  

Senior Debt

Matures February 2015

Interest rate Prime + 5.75% or

Floor rate of 9.00%

  $ 1,614      $ 1,531      $ 1,531   

American Supercondutor Corporation(3)

  Clean Tech  

Senior Debt(11)

Matures December 2014

Interest rate Prime + 7.25% or

Floor rate of 11.00%

  $ 9,231        9,161        9,438   

BrightSource Energy, Inc.

  Clean Tech  

Revolving Line of Credit

Matures January 2013

Interest rate Prime + 7.25% or

Floor rate of 10.50%

  $ 35,000        34,870        34,870   

Comverge, Inc.

  Clean Tech  

Senior Debt

Matures November 2017

Interest rate LIBOR + 8.00% or

Floor rate of 9.50%

  $ 20,000        19,577        19,577   
  Clean Tech  

Senior Debt

Matures November 2017

Interest rate LIBOR + 9.50% or

Floor rate of 11.00%

  $ 14,000        13,704        13,704   
       

 

 

   

 

 

 

Total Comverge, Inc.

      33,281        33,281   

Enphase Energy, Inc.(3)

  Clean Tech  

Senior Debt(11)

Matures June 2014

Interest rate Prime + 5.75% or

Floor rate of 9.00%

  $ 3,758        3,739        3,716   
  Clean Tech  

Senior Debt

Matures August 2016

Interest rate Prime + 8.25% or

Floor rate of 11.50%

  $ 7,400        7,321        7,321   
       

 

 

   

 

 

 

Total Enphase Energy, Inc.

      11,060        11,037   

Glori Energy, Inc.

  Clean Tech  

Senior Debt(11)

Matures June 2015

Interest rate Prime + 6.75% or

Floor rate of 10.00%

  $ 8,000        7,832        7,988   

Integrated Photovoltaics, Inc.

  Clean Tech  

Senior Debt

Matures February 2015

Interest rate Prime + 7.38% or

Floor rate of 10.63%

  $ 2,572        2,494        2,508   

Polyera Corporation

  Clean Tech  

Senior Debt

Matures June 2016

Interest rate Prime + 6.75% or

Floor rate of 10.00%

  $ 3,000        2,952        2,952   

Redwood Systems, Inc.

  Clean Tech  

Senior Debt

Matures February 2016

Interest rate Prime + 6.50% or

Floor rate of 9.75%

  $ 5,000        4,965        4,965   

SCIenergy, Inc.(4)

  Clean Tech  

Senior Debt

Matures September 2015

Interest rate Prime + 8.75% or

Floor rate 12.00%

  $ 5,296        5,103        5,262   

Solexel, Inc.

  Clean Tech  

Senior Debt

Matures June 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

  $ 2,884        2,877        2,877   
   

Senior Debt

Matures June 2013

Interest rate Prime + 7.25% or

Floor rate of 10.50%

  $ 331        330        330   
       

 

 

   

 

 

 

Total Solexel, Inc.

      3,207        3,207   

Stion Corporation(4)

  Clean Tech  

Senior Debt

Matures February 2015

Interest rate Prime + 6.75% or

Floor rate of 10.00%

  $ 7,519        7,483        7,545   
       

 

 

   

 

 

 

Total Debt Clean Tech (24.14%)*

      123,938        124,584   
       

 

 

   

 

 

 

Total Debt (160.38%)

    $ 833,228      $ 827,540   
       

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

32


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

Acceleron Pharmaceuticals, Inc.

  Drug Discovery & Development   Common Stock Warrants       46,446      $ 39      $ 53   
    Preferred Stock Warrants   Series A     426,000        69        345   
    Preferred Stock Warrants   Series B     110,270        35        64   
       

 

 

   

 

 

   

 

 

 

Total Warrants Acceleron Pharmaceuticals, Inc.

          582,716        143        462   

Anthera Pharmaceuticals Inc. (3)

  Drug Discovery & Development   Common Stock Warrants       321,429        984        66   

Cempra, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       39,038        187        46   

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Preferred Stock Warrants   Series D     325,261        490        500   

Concert Pharmaceuticals, Inc.(4)

  Drug Discovery & Development   Preferred Stock Warrants   Series C     400,000        367        126   

Coronado Biosciences, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       73,009        142        81   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Common Stock Warrants       50,000        28        16   
    Preferred Stock Warrants   Series A     525,000        236        173   
    Preferred Stock Warrants   Series B     660,000        311        217   
       

 

 

   

 

 

   

 

 

 

Total Warrants Dicerna Pharmaceuticals, Inc.

          1,235,000        575        406   

EpiCept Corporation(3)

  Drug Discovery & Development   Common Stock Warrants       325,204        4        —     

Horizon Pharma, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       22,408        231        —     

Insmed, Incorporated(3)

  Drug Discovery & Development   Common Stock Warrants       329,931        570        1,316   

Merrimack Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       302,143        155        641   

NeurogesX, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       3,421,500        503        400   

PolyMedix, Inc.(3)

  Drug Discovery & Development   Common Stock Warrants       627,586        480        9   

Portola Pharmaceuticals, Inc.

  Drug Discovery & Development   Preferred Stock Warrants   Series B     687,023        152        298   
         

 

 

   

 

 

 

Total Warrants Drug Discovery & Development (0.84%)*

        4,983        4,351   
         

 

 

   

 

 

 

Bridgewave Communications

  Communications & Networking   Preferred Stock Warrants   Series 5     2,942,618        753        —     

Intelepeer, Inc.

  Communications & Networking   Preferred Stock Warrants   Series C     117,958        101        190   

Neonova Holding Company

  Communications & Networking   Preferred Stock Warrants   Series A     450,000        94        23   

OpenPeak, Inc.

  Communications & Networking   Preferred Stock Warrants   Series E     25,646        149        9   

PeerApp, Inc.(4)

  Communications & Networking   Preferred Stock Warrants   Series B     298,779        61        47   

Peerless Network, Inc.

  Communications & Networking   Preferred Stock Warrants   Series A     135,000        95        352   

Ping Identity Corporation

  Communications & Networking   Preferred Stock Warrants   Series B     1,136,277        52        112   

UPH Holdings, Inc.

  Communications & Networking   Common Stock Warrants       145,877        131        52   

Purcell Systems, Inc.

  Communications & Networking   Preferred Stock Warrants   Series B     110,000        123        62   

Stoke, Inc.

  Communications & Networking   Preferred Stock Warrants   Series C     158,536        53        135   
    Preferred Stock Warrants   Series D     72,727        65        57   
       

 

 

   

 

 

   

 

 

 

Total Stoke, Inc.

      231,263        118        192   
         

 

 

   

 

 

 

Total Warrants Communications & Networking (0.20%)*

        1,677        1,039   
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

33


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

Atrenta, Inc.

  Software   Preferred Stock Warrants   Series D     392,670      $ 121      $ 322   

Box, Inc.(4)

  Software   Preferred Stock Warrants   Series C     271,070        117        2,235   
    Preferred Stock Warrants   Series B     199,219        73        3,242   
    Preferred Stock Warrants   Series D-1     62,255        194        566   
       

 

 

   

 

 

   

 

 

 

Total Box, Inc.

          532,544        384        6,043   

Braxton Technologies, LLC.

  Software   Preferred Stock Warrants   Series A     168,750        188        —     

Central Desktop, Inc.

  Software   Preferred Stock Warrants   Series B     522,823        108        166   

Clickfox, Inc.

  Software   Preferred Stock Warrants   Series B     1,038,563        329        332   
    Preferred Stock Warrants   Series C     592,019        730        213   
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

      1,630,582        1,059        545   

Daegis Inc. (pka Unify Corporation)(3)

  Software   Common Stock Warrants       718,860        1,434        75   

Endplay, Inc.

  Software   Preferred Stock Warrants   Series B     180,000        67        39   

Forescout Technologies, Inc.

  Software   Preferred Stock Warrants   Series D     399,687        99        202   

HighRoads, Inc.

  Software   Preferred Stock Warrants   Series B     190,176        44        9   

Hillcrest Laboratories, Inc.

  Software   Preferred Stock Warrants   Series E     1,865,650        55        70   

JackBe Corporation

  Software   Preferred Stock Warrants   Series C     180,000        73        54   

Kxen, Inc.(4)

  Software   Preferred Stock Warrants   Series D     184,614        47        13   

Rockyou, Inc.

  Software   Preferred Stock Warrants   Series B     41,266        117     

SugarSync Inc.

  Software   Preferred Stock Warrants   Series CC     332,726        78        123   
    Preferred Stock Warrants   Series DD     107,526        34        30   
       

 

 

   

 

 

   

 

 

 

Total SugarSync Inc.

      440,252        112        153   

Tada Innovations, Inc.

  Software   Preferred Stock Warrants   Series A     20,833        25     

White Sky, Inc.

  Software   Preferred Stock Warrants   Series B-2     124,295        54        3   

WildTangent, Inc.

  Software   Preferred Stock Warrants   Series 3A     100,000        238        82   
         

 

 

   

 

 

 

Total Warrants Software (1.51%)*

        4,225        7,776   
         

 

 

   

 

 

 

Clustrix, Inc.

  Electronics & Computer Hardware   Preferred Stock Warrants   Series B     49,732        12        13   

Luminus Devices, Inc.

  Electronics & Computer Hardware   Common Stock Warrants       26,386        600     

Shocking Technologies, Inc.

  Electronics & Computer Hardware   Preferred Stock Warrants   Series A-1     181,818        63        106   
         

 

 

   

 

 

 

Total Warrant Electronics & Computer Hardware (0.02%)*

        675        119   
         

 

 

   

 

 

 

Althea Technologies, Inc.

  Specialty Pharmaceuticals   Preferred Stock Warrants   Series D     502,273        309        889   

Pacira Pharmaceuticals, Inc.(3)

  Specialty Pharmaceuticals   Common Stock Warrants       178,987        1,086        1,263   

Quatrx Pharmaceuticals Company

  Specialty Pharmaceuticals   Preferred Stock Warrants   Series E     340,534        528        —     
         

 

 

   

 

 

 

Total Warrants Specialty Pharmaceuticals (0.42%)*

        1,923        2,152   
         

 

 

   

 

 

 

IPA Holdings, LLC

  Consumer & Business Products   Common Stock Warrants       650,000        275        485   

Market Force Information, Inc.

  Consumer & Business Products   Preferred Stock Warrants   Series A     99,286        24        84   

Seven Networks, Inc.

  Consumer & Business Products   Preferred Stock Warrants   Series C     1,821,429        174        130   

ShareThis, Inc.

  Consumer & Business Products   Preferred Stock Warrants   Series B     535,905        547        543   

Wageworks, Inc.(3)

  Consumer & Business Products   Common Stock Warrants       211,765        252        2,023   

Wavemarket, Inc.

  Consumer & Business Products   Preferred Stock Warrants   Series E     1,083,333        106        61   
         

 

 

   

 

 

 

Total Warrant Consumer & Business Products (0.64%)*

        1,378        3,326   
         

 

 

   

 

 

 

Achronix Semiconductor Corporation

  Semiconductors   Preferred Stock Warrants   Series D     360,000        160        84   

Enpirion, Inc.

  Semiconductors   Preferred Stock Warrants   Series D     239,872        157     

iWatt, Inc.

  Semiconductors   Preferred Stock Warrants   Series C     558,748        45        14   
    Preferred Stock Warrants   Series D     1,954,762        583        289   
       

 

 

   

 

 

   

 

 

 

Total iWatt, Inc.

      2,513,510        628        303   

Kovio Inc.

  Semiconductors   Preferred Stock Warrants   Series B     319,352        92     

Quartics, Inc.

  Semiconductors   Preferred Stock Warrants   Series C     69,139        53     
         

 

 

   

 

 

 

Total Warrants Semiconductors (0.08%)*

        1,090        387   
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

34


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

AcelRX Pharmaceuticals, Inc.(3)

  Drug Delivery   Common Stock Warrants       274,508      $ 356      $ 406   

ADMA Biologics, Inc.

  Drug Delivery   Common Stock Warrants       25,000        129        128   

Alexza Pharmaceuticals, Inc.(3)

  Drug Delivery   Common Stock Warrants       37,639        645        8   

BIND Biosciences, Inc.

  Drug Delivery   Preferred Stock Warrants   Series C-1     150,000        291        446   

Intelliject, Inc.

  Drug Delivery   Preferred Stock Warrants   Series B     82,500        594        574   

NuPathe, Inc.(3)

  Drug Delivery   Common Stock Warrants       106,631        139        165   

Revance Therapeutics, Inc.

  Drug Delivery   Preferred Stock Warrants   Series D     269,663        557        618   

Transcept Pharmaceuticals, Inc.(3)

  Drug Delivery   Common Stock Warrants       61,452        87        44   
         

 

 

   

 

 

 

Total Warrant Drug Delivery (0.46%)*

        2,798        2,389   
         

 

 

   

 

 

 

Blurb, Inc.

  Internet Consumer & Business Services   Preferred Stock Warrants   Series B     439,336        323        347   
    Preferred Stock Warrants   Series C     234,280        636        218   
       

 

 

   

 

 

   

 

 

 

Total Blurb, Inc.

          673,616        959        565   

Invoke Solutions, Inc.

  Internet Consumer & Business Services   Common Stock Warrants       53,084        38        —     

Just.Me

  Internet Consumer & Business Services   Preferred Stock Warrants   Series A     102,299        20        20   

Prism Education Group, Inc.

  Internet Consumer & Business Services   Preferred Stock Warrants   Series B     200,000        43     

Reply! Inc.

  Internet Consumer & Business Services   Preferred Stock Warrants   Series B     137,225        320        802   

Second Rotation

  Internet Consumer & Business Services   Preferred Stock Warrants   Series D     105,819        105        113   

Tectura Corporation

  Internet Consumer & Business Services   Preferred Stock Warrants   Series B-1     253,378        51        12   

Trulia, Inc.(3)

  Internet Consumer & Business Services   Common Stock Warrants       56,053        188        368   
         

 

 

   

 

 

 

Total Warrants Internet Consumer & Business Services (0.37%)*

        1,724        1,880   
         

 

 

   

 

 

 

Buzznet, Inc.

  Information Services   Preferred Stock Warrants   Series B     19,962        9     

Cha Cha Search, Inc.

  Information Services   Preferred Stock Warrants   Series F     48,232        58        5   

Eccentex Corporation

  Information Services   Preferred Stock Warrants   Series A     408,719        31        3   

Intelligent Beauty, Inc.

  Information Services   Preferred Stock Warrants   Series B     190,234        230        579   

InXpo, Inc.

  Information Services   Preferred Stock Warrants   Series C     648,400        98        43   
  Information Services   Preferred Stock Warrants   Series C-1     267,049        25        24   
       

 

 

   

 

 

   

 

 

 

Total InXpo, Inc.

  Information Services         915,449        123        67   

Jab Wireless, Inc.

  Information Services   Preferred Stock Warrants   Series A     266,567        265        420   

RichRelevance, Inc.

  Information Services   Preferred Stock Warrants   Series D     112,749        98        28   

Solutionary, Inc.

  Information Services   Preferred Stock Warrants   Series A-2     111,311        96        5   
         

 

 

   

 

 

 

Total Warrants Information Services (0.22%)*

        910        1,107   
         

 

 

   

 

 

 

EKOS Corporation

  Medical Device & Equipment   Preferred Stock Warrants   Series C     4,448,135        327     

Gelesis, Inc.(6)

  Medical Device & Equipment     LLC Interest     263,688        78        95   

Lanx, Inc.

  Medical Device & Equipment   Preferred Stock Warrants   Series C     1,203,369        441        445   

Novasys Medical, Inc.

  Medical Device & Equipment   Preferred Stock Warrants   Series D     580,447        131     
    Common Stock Warrants       109,449        2     
       

 

 

   

 

 

   

Total Novasys Medical, Inc.

          689,896        133     

Optiscan Biomedical, Corp.(6)

  Medical Device & Equipment   Preferred Stock Warrants   Series D     6,206,187        1,069        151   

Oraya Therapeutics, Inc.

  Medical Device & Equipment   Preferred Stock Warrants   Series C     716,948        676        314   
    Common Stock Warrants       95,498        66        62   
       

 

 

   

 

 

   

 

 

 

Total Oraya Therapeutics, Inc.

          812,446        742        376   

USHIFU, LLC

  Medical Device & Equipment   Preferred Stock Warrants   Series G     141,388        188        188   
         

 

 

   

 

 

 

Total Warrants Medical Device & Equipment (0.24%)*

        2,978        1,255   
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

35


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

Navidea Biopharmaceuticals, Inc. (pka Neoprobe)(3)

  Diagnostic   Common Stock Warrants       333,333      $ 244      $ 360   

Tethys Bioscience, Inc.

  Diagnostic   Preferred Stock Warrants   Series E     617,683        148        169   
         

 

 

   

 

 

 

Total Warrants Diagnostic (0.10%)*

        392        529   
         

 

 

   

 

 

 

Labcyte, Inc.

  Biotechnology Tools   Preferred Stock Warrants   Series C     1,127,624        323        247   

NuGEN Technologies, Inc.

  Biotechnology Tools   Preferred Stock Warrants   Series B     204,545        45        161   
    Preferred Stock Warrants   Series C     30,114        33        8   
       

 

 

   

 

 

   

 

 

 

Total NuGEN Technologies, Inc.

          234,659        78        169   
         

 

 

   

 

 

 

Total Warrants Biotechnology Tools (0.08%)*

        401        416   
         

 

 

   

 

 

 

Entrigue Surgical, Inc.

  Surgical Devices   Preferred Stock Warrants   Series B     62,500        87        2   

Transmedics, Inc.

  Surgical Devices   Preferred Stock Warrants   Series B     40,436        225        —     
    Preferred Stock Warrants   Series D     175,000        100        100   
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

            325        100   

Gynesonics, Inc.

  Surgical Devices   Preferred Stock Warrants   Series A     123,457        18        7   
    Preferred Stock Warrants   Series C     1,474,261        387        298   
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

          1,597,718        405        305   
         

 

 

   

 

 

 

Total Warrants Surgical Devices (0.08%)*

        817        407   
         

 

 

   

 

 

 

Everyday Health, Inc. (pka Waterfront Media, Inc.)

  Media/Content/ Info   Preferred Stock Warrants   Series C     110,018        60        55   

Glam Media, Inc.

  Media/Content/ Info   Preferred Stock Warrants   Series D     407,457        482     

Zoom Media Group, Inc.

  Media/Content/ Info   Preferred Stock Warrants   n/a     1,204        348        346   
         

 

 

   

 

 

 

Total Warrants Media/Content/Info (0.08%)*

        890        401   
         

 

 

   

 

 

 

Alphabet Energy, Inc.

  Clean Tech   Preferred Stock Warrants   Series A     79,083        68        148   

American Supercondutor Corporation(3)

  Clean Tech   Common Stock Warrants       139,275        244        122   

BrightSource Energy, Inc.

  Clean Tech   Preferred Stock Warrants   Series D     58,333        675        248   

Calera, Inc.

  Clean Tech   Preferred Stock Warrants   Series C     44,529        513     

EcoMotors, Inc.

  Clean Tech   Preferred Stock Warrants   Series B     437,500        308        435   

Enphase Energy, Inc.(3)

  Clean Tech   Common Stock Warrants       37,500        102        17   

Fulcrum Bioenergy, Inc.

  Clean Tech   Preferred Stock Warrants   Series C-1     187,265        211        104   

Glori Energy, Inc.

  Clean Tech   Preferred Stock Warrants   Series C     145,932        165        62   

GreatPoint Energy, Inc.

  Clean Tech   Preferred Stock Warrants   Series D-1     393,212        548        1   

Integrated Photovoltaics, Inc.

  Clean Tech   Preferred Stock Warrants   Series A-1     390,000        82        119   

Polyera Corporation

  Clean Tech   Preferred Stock Warrants   Series C     161,575        69        68   

Propel Biofuels, Inc.

  Clean Tech   Preferred Stock Warrants   Series C     3,200,000        211        317   

Redwood Systems, Inc.

  Clean Tech   Preferred Stock Warrants   Series C     331,250        3        2   

SCIenergy, Inc.(4)

  Clean Tech   Preferred Stock Warrants   Series D     1,061,168        361        145   

Solexel, Inc.

  Clean Tech   Preferred Stock Warrants   Series B     245,682        1,161        7   

Stion Corporation(4)

  Clean Tech   Preferred Stock Warrants   Series E     110,226        317        167   

Trilliant, Inc.

  Clean Tech   Preferred Stock Warrants   Series A     320,000        161        54   
         

 

 

   

 

 

 

Total Warrants Clean Tech (0.39%)*

        5,199        2,016   
         

 

 

   

 

 

 

Total Warrants (5.73%)

      $ 32,060      $ 29,550   
         

 

 

   

 

 

 

Aveo Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Common Stock       167,864        842        1,351   

Dicerna Pharmaceuticals, Inc.

  Drug Discovery & Development   Preferred Stock   Series B     502,684        502        488   

Inotek Pharmaceuticals Corp.

  Drug Discovery & Development   Preferred Stock   Series C     15,334        1,500        —     

Merrimack Pharmaceuticals, Inc.(3)

  Drug Discovery & Development   Common Stock       546,448        2,000        3,328   

Paratek Pharmaceuticals, Inc.

  Drug Discovery & Development   Preferred Stock   Series H     244,158        1,000        283   
    Common Stock       47,471        5        3   
       

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc.

          291,629        1,005        286   
         

 

 

   

 

 

 

Total Equity Drug Discovery & Development (1.06%)*

        5,849        5,453   
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

36


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

Acceleron Pharmaceuticals, Inc.

  Drug Delivery   Preferred Stock   Series B     600,601      $ 1,000      $ 915   
    Preferred Stock   Series C     93,456        242        205   
    Preferred Stock   Series E     43,488        98        174   
    Preferred Stock   Series F     19,268        61        77   
       

 

 

   

 

 

   

 

 

 

Total Acceleron Pharmaceuticals, Inc.

          756,813        1,401        1,371   

Merrion Pharma, Plc.(3)(5)(10)

  Drug Delivery   Common Stock       20,000        9        —     

Nupathe, Inc.

  Drug Delivery   Common Stock       50,000        146        142   

Transcept Pharmaceuticals, Inc.(3)

  Drug Delivery   Common Stock       41,570        500        185   
         

 

 

   

 

 

 

Total Equity Drug Delivery (0.33%)*

        2,056        1,698   
         

 

 

   

 

 

 

E-band Communications, Corp.(6)

  Communications & Networking   Preferred Stock   Series B     564,972        2,000        —     
    Preferred Stock   Series C     649,998        372        —     
    Preferred Stock   Series D     847,544        508        —     
    Preferred Stock   Series E     1,987,605        374        —     
       

 

 

   

 

 

   

 

 

 

Total E-band Communications, Corp.

          4,050,119        3,254        —     

Glowpoint, Inc.(3)

  Communications & Networking   Common Stock       114,192        101        227   

Neonova Holding Company

  Communications & Networking   Preferred Stock   Series A     500,000        250        200   

Peerless Network, Inc.

  Communications & Networking   Preferred Stock   Series A     1,000,000        1,000        3,692   

Stoke, Inc.

  Communications & Networking   Preferred Stock   Series E     152,905        500        631   

UPH Holdings, Inc.

  Communications & Networking   Common Stock       742,887        —          624   
         

 

 

   

 

 

 

Total Equity Communications & Networking (1.04%)*

        5,105        5,374   
         

 

 

   

 

 

 

Atrenta, Inc.

  Software   Preferred Stock   Series C     1,196,845        508        1,042   
    Preferred Stock   Series D     635,513        986        1,604   
       

 

 

   

 

 

   

 

 

 

Total Atrenta, Inc.

          1,832,358        1,494        2,646   

Box, Inc.(4)

  Software   Preferred Stock   Series C     390,625        500        5,117   
    Preferred Stock   Series D     158,127        500        2,071   
    Preferred Stock   Series D-1     124,511        1,000        1,632   
    Preferred Stock   Series D-2     220,751        2,001        2,892   
    Preferred Stock   Series E     38,183        500        500   
       

 

 

   

 

 

   

 

 

 

Total Box, Inc.

          932,197        4,501        12,212   

Caplinked, Inc.

  Software   Preferred Stock   Series A-3     53,614        52        77   
         

 

 

   

 

 

 

Total Equity Software (2.89%)*

        6,047        14,935   
         

 

 

   

 

 

 

Spatial Photonics, Inc.

  Electronics & Computer Hardware   Preferred Stock   Series D     4,717,813        268        —     

Virident Systems

  Electronics & Computer Hardware   Preferred Stock   Series D     6,546,217        5,000        4,922   
         

 

 

   

 

 

 

Total Equity Electronics & Computer Hardware (0.95%)*

        5,268        4,922   
         

 

 

   

 

 

 

Quatrx Pharmaceuticals
Company

  Specialty
Pharmaceuticals
  Preferred Stock   Series E     166,419        750        —     
         

 

 

   

 

 

 

Total Equity Specialty Pharmaceuticals (0.00%)*

        750        —     
         

 

 

   

 

 

 

Caivis Acquisition Corporation

  Consumer & Business Products   Common Stock   Series A     295,861        819        597   

Facebook, Inc.(3)

  Consumer & Business Products   Common Stock   Series B     307,500        9,558        8,089   

IPA Holdings, LLC

  Consumer & Business Products   Preferred Stock   LLC interest     500,000        500        711   

Market Force Information, Inc.

  Consumer & Business Products   Preferred Stock   Series B     187,970        500        657   

Wageworks, Inc.(3)

  Consumer & Business Products   Common Stock   Series D     19,260        250        343   
         

 

 

   

 

 

 

Total Equity Consumer & Business Products (2.02%)*

        11,627        10,397   
         

 

 

   

 

 

 

iWatt, Inc.

  Semiconductors   Preferred Stock   Series E     2,412,864        490        752   
         

 

 

   

 

 

 

Total Equity Semiconductors (0.15%)*

        490        752   
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2012

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(2)     Value(3)  

Buzznet, Inc.

  Information Services   Preferred Stock   Series C     263,158      $ 250      $ —     

Good Technologies, Inc.
(pka Visto Corporation)

  Information Services   Common Stock       500,000        603        —     

Solutionary, Inc.

  Information Services   Preferred Stock   Series A-1     189,495        18        235   
    Preferred Stock   Series A-2     65,834        325        82   
       

 

 

   

 

 

   

 

 

 

Total Solutionary, Inc.

          255,329        343        317   
         

 

 

   

 

 

 

Total Equity Information Services (0.06%)*

        1,196        317   
         

 

 

   

 

 

 

Gelesis, Inc.(6)

  Medical Device & Equipment     LLC Interest     674,208        —          435   
      LLC Interest     674,208        425        610   
      LLC Interest     675,676        500        525   

Total Gelesis, Inc.

          2,024,092        925        1,570   

Lanx, Inc.

  Medical Device & Equipment   Preferred Stock   Series C     1,203,369        1,000        1,155   

Novasys Medical, Inc.

  Medical Device & Equipment   Preferred Stock   Series D-1     4,118,444        1,000        —     

Optiscan Biomedical, Corp.(6)

  Medical Device & Equipment   Preferred Stock   Series B     6,185,567        3,000        314   
    Preferred Stock   Series C-2     1,927,309        655        251   
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

          8,112,876        3,655        565   
         

 

 

   

 

 

 

Total Equity Medical Device & Equipment (0.64%)*

          6,580        3,290   
         

 

 

   

 

 

 

NuGEN Technologies, Inc.

  Biotechnology Tools   Preferred Stock   Series C     189,394        500        600   
         

 

 

   

 

 

 

Total Equity Biotechnology Tools (0.12%)*

          500        600   
         

 

 

   

 

 

 

Transmedics, Inc.

  Surgical Devices   Preferred Stock   Series B     88,961        1,100        —     
    Preferred Stock   Series C     119,999        300        —     
    Preferred Stock   Series D     260,000        650        650   
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

          468,960        2,050        650   

Gynesonics, Inc.

  Surgical Devices   Preferred Stock   Series B     219,298        250        159   
    Preferred Stock   Series C     656,512        282        251   
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

          875,810        532        410   
         

 

 

   

 

 

 

Total Equity Surgical Devices (0.20%)*

          2,582        1,060   
         

 

 

   

 

 

 

Everyday Health, Inc. (pka Waterfront Media, Inc.)

  Media/Content/ Info   Preferred Stock   Series D     145,590        1,000        412   
         

 

 

   

 

 

 

Total Equity Media/Content/Info (0.08%)*

          1,000        412   
         

 

 

   

 

 

 
           
       

 

 

   

 

 

   

 

 

 

Total Equity (9.54%)

          45,081,540      $ 49,050      $ 49,210   
       

 

 

   

 

 

   

 

 

 
          49,050        49,210   
         

 

 

   

 

 

 
           

Total Investments (175.65%)

        $ 914,338      $ 906,300   
         

 

 

   

 

 

 

 

* Value as a percent of net assets
(1)

Preferred and common stock, warrants, and equity interests are generally non-income producing.

(2)

Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $19.9 million, $27.6 million and $7.8 million respectively. The tax cost of investments is $916.9 million

(3)

Except for warrants in twenty publicly traded companies and common stock in eight publicly traded companies, all investments are restricted at December 31, 2012 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.

(4)

Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.

(5)

Non-U.S. company or the company’s principal place of business is outside the United States.

(6)

Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities of the Company.

(7)

Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners as least 25% but not more than 50% of the voting securities of the Company.

(8)

Debt is on non-accrual status at December 31, 2012, and is therefore considered non-income producing.

(9)

Convertible Senior Debt

(10)

Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets.

(11)

Denotes that all or a portion of the loan secures the notes offered in the Debt Securitization (as defined in Note 4).

 

See notes to consolidated financial statements.

 

38


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business and Basis of Presentation

Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related markets, including technology, biotechnology, life science, and energy and renewables technology industries at all stages of development. The Company sources its investments through its principal office located in Palo Alto, CA, as well as through its additional offices in Boston, MA, New York, NY, Boulder, CO and McLean, VA. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003.

The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 5).

Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“HT IV”), are Delaware limited partnerships that were formed in January 2005, September 2009 and December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies (“SBICs”) under the authority of the Small Business Administration (“SBA”) on September 27, 2006 and May 26, 2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license; however, the Company has not yet applied for such license, and HT IV currently has no material assets or liabilities. The Company also formed Hercules Technology SBIC Management, LLC, or (“HTM”), a limited liability company in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the Company’s consolidated financial statements.)

HT II and HT III hold approximately $163.9 million and $274.7 million in assets, respectively, and they accounted for approximately 10.4% and 17.5% of our total assets, respectively, prior to consolidation at September 30, 2013.

The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). By investing through these wholly owned subsidiaries, the Company is able to benefit from the tax treatment of these entities and create a tax structure that is more advantageous with respect to the Company’s RIC status.

The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIE. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and the Securities and Exchange Act of 1934, the Company does not consolidate portfolio company investments. The accompanying consolidated interim financial statements are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933 and the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2012. The year-end consolidated statement of assets and liabilities data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

 

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Table of Contents

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all VIEs of which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE.

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has a potentially significant interest in the VIE, then it consolidates the VIE.

The Company performs ongoing reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework.

As of the date of this report, the only VIE consolidated by the Company is its securitization VIE formed in conjunction with the issuance of the Asset-Backed Notes (See Note 4).

Valuation of Investments

The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). At September 30, 2013, 80.1% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in

 Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.

Our Board of Directors may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below:

 

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Table of Contents

(1) the Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee;

(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment committee which incorporates the results of the independent valuation firm as appropriate;

(4) the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the valuation committee.

ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company.

In accordance with ASU 2011-04, the following table provides quantitative information about the Company’s Level 3 fair value measurements of the Company’s investments as of September 30, 2013 (unaudited). In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.

 

Investment Type - Level Three Debt Investments

   Fair Value at
September 30, 2013
   

Valuation Techniques/
Methodologies

 

Unobservable Input (a)

  Range
     (in thousands)              

Pharmaceuticals - Debt

   $ 271,642      Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   12.84% - 17.62%
(1.0%) - 0.00%
     3,258      Option Pricing Model (b)   Average Industry Volatility (c) Risk Free Interest Rate Estimated Time to Exit (in months)   55.86%
0.04%
6.07
     1,033      Liquidation   Investment Collateral   $1.0 - $3.2 million

Medical Devices - Debt

     60,557      Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   13.54% - 18.41%
(1.0%) - 1.0%

Technology - Debt

     148,459      Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   7.84% - 21.22%
(1.0%) - 2.0%
     2,377      Liquidation   Investment Collateral   $0.4 - $5.4 million

Clean Tech - Debt

     174,487      Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   13.29% - 17.86%
(0.5%) - 1.5%

Lower Middle Market - Debt

     232,580      Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   12.67% - 17.17%
(0.5%) - 0.75%
     100        Investment Collateral   $0.00 - $2.1 million
  

 

 

       

Total Level Three Debt Investments

   $ 894,493         
  

 

 

       

 

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(a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows:

Pharmaceuticals, above, is comprised of debt investments in the Therapeutic, Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments.

Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments.

Technology, above, is comprised of debt investments in the Software, Semiconductors, Internet Consumer and Business Services, Information Services, and Communications and Networking industries in the Schedule of Investments.

Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Electronics and Computer Hardware, Healthcare Services - Other, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments.

Clean Tech, above, aligns with the Clean Tech Industry in the Schedule of Investments.

 

(b) An option pricing model valuation technique was used to derive the fair value of the conversion feature of convertible notes.
(c) Represents the range of industry volatility used by market participants when pricing the investment.

 

Investment Type -

   Fair Value at
September 30, 2013
   

Valuation Techniques/
Methodologies

 

Unobservable Input (a)

  Range
     (in thousands)              

Level Three Equity Investments

   $ 45,063      Market Comparable Companies  

EBITDA Multiple (b)

Revenue Multiple (b)

Discount for Lack of Marketability (c)

  5.7x - 47.0x

1.2x - 5.7x

10.8% - 27.4%

Level Three Warrant Investments

     26,393      Market Comparable Companies  

EBITDA Multiple (b)

Revenue Multiple (b)

Discount for Lack of Marketability (c)

  5.7x - 47.0x

1.2x - 5.7x

10.8% - 27.4%

Warrant positions additionally subject to:

     Option Pricing Model  

Average Industry Volatility (d)

Risk-Free Interest Rate

Estimated Time to Exit (in months)

  34.9% - 103.5%

0.1% - 1.3%

12 - 48

  

 

 

       

Total Level Three Warrant and Equity Investments

   $ 71,456         
  

 

 

       

 

(a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date.
(b) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.
(c) Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.
(d) Represents the range of industry volatility used by market participants when pricing the investment.

Debt Investments

The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged.

In making a good faith determination of the value of our investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest which has been accrued to principal as earned. The Company then applies the valuation methods as set forth below.

The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company uses pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date.

 

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        The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.

The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis.

The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost.

When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan.

Equity-Related Securities and Warrants

Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Company has a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date.

The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date.

Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of September 30, 2013 (unaudited) and as of December 31, 2012. The Company transfers investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the nine months ended September 30, 2013, there were no transfers between Levels 1 or 2.

 

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Table of Contents
            Investments at Fair Value as of September 30, 2013  

(in thousands)

Description

   9/30/2013      Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Senior secured debt

   $ 894,493       $ —         $ —           894,493   

Preferred stock

     44,370         —           —           44,370   

Common stock

     10,329         9,636         —           693   

Warrants

     34,235         —           7,842         26,393   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 983,427       $ 9,636       $ 7,842       $ 965,949   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Investments at Fair Value as of December 31, 2012  

(in thousands)

Description

   12/31/2012      Quoted Prices In
Active Markets For
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Senior secured debt

   $ 827,540       $ —         $ —         $ 827,540   

Preferred stock

     33,889         —           —           33,889   

Common stock

     15,321         13,665         —           1,656   

Warrants

     29,550         —           7,410         22,140   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 906,300       $ 13,665       $ 7,410       $ 885,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents reconciliation for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the nine-months ended September 30, 2013 (unaudited) and year ended December 31, 2012.

 

(in thousands)

  Balance,
January 1, 2013
    Net Realized
Gains (losses) (1)
    Net change in
unrealized
appreciation
or
depreciation (2)
    Purchases     Sales     Repayments     Gross
Transfers
into
Level 3 (3)
    Gross
Transfers
out of
Level 3 (3)
    Balances,
September 30, 2013
 

Senior Debt

  $ 827,540      $ (92   $ (10,233   $ 409,139      $ (8   $ (331,786   $ 769      $ (836   $ 894,493   

Preferred Stock

    33,889        (609     11,975        4,010        (3,995     —          776        (1,676     44,370   

Common Stock

    1,656        —          (1,056     —          —          —          93        —          693   

Warrants

    22,140        5,075        3,792        4,542        (8,247     —          —          (909     26,393   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 885,225      $ 4,374      $ 4,478      $ 417,691      $ (12,250   $ (331,786   $ 1,638      $ (3,421   $ 965,949   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands)

  Balance,
January 1, 2012
    Net Realized
Gains (losses) (1)
    Net change in
unrealized
appreciation
or
depreciation (2)
    Purchases     Sales     Repayments     Gross
Transfers
into
Level 3
    Gross
Transfers
out of
Level 3
    Balances,
December 31, 2012
 

Senior Debt

  $ 585,767      $ (5,178   $ (2,262   $ 545,913      $ (2,000   $ (294,294   $ —        $ (406   $ 827,540   

Preferred Stock

    30,289        (733     4,112        10,562        (6,553     —          356        (4,144     33,889   

Common Stock

    90        (16     5,523        9,558        (45     —          —          (13,453     1,656   

Warrants

    26,284        4,413        (2,453     7,362        (9,211     —          —          (4,256     22,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 642,430      $ (1,514   $ 4,920      $ 573,395      $ (17,809   $ (294,294   $ 356      $ (22,259   $ 885,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations.
(2) Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations.
(3) Transfers in/out of Level 3 relate to the conversion of Optiscan Biomedical, Inc., Gynesonics, Inc. and Philotic, Inc. debt to equity, the conversion of OCZ Technology warrants to principal and the initial public offerings of Portola Pharmaceuticals, Inc., Acceleron Pharma, Inc. and Bind, Inc.

 

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For the nine months ended September 30, 2013, approximately $7.6 million and $2.5 million in unrealized appreciation was recorded for equity and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $10.2 million in unrealized depreciation was recorded for Level 3 debt investments relating to assets still held at the reporting date.

For the year ended December 31, 2012, approximately $3.8 million in unrealized appreciation and $2.2 million in unrealized depreciation was recorded for equity and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $2.3 million in unrealized depreciation was recorded for Level 3 debt investments relating to assets still held at the reporting date.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Generally, under the 1940 Act, the Company is deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments.

 

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The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the three and nine-months ended September 30, 2013 and 2012 (unaudited). At September 30, 2013, the Company did not hold any Control Investments.

 

(in thousands)   Three months ended September 30, 2013     Nine months ended September 30, 2013  
Portfolio Company   Type   Fair
Value at
September
30, 2013
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
 

Gelesis, Inc.

  Affiliate   $ 523      $ —        $ (487   $ —        $ —        $ —        $ (1,143   $ —        $ —     

Optiscan BioMedical, Corp.

  Affiliate     12,374        566        (505     —          —          1,693        (325     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 12,897      $ 566      $ (992   $ —        $ —        $ 1,693      $ (1,468   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)   Three months ended September 30, 2012     Nine months ended September 30, 2012  
Portfolio Company   Type   Fair
Value at
September
30, 2012
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
 

E-Band Communication, Corp.

  Affiliate   $ 1,483      $ —        $ 21      $ —        $ —        $ 4      $ (1,466   $ —        $ —     

Gelesis

  Affiliate     1,792        239        92        —          —          683        (799     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 3,275      $ 239      $ 113      $ —        $ —        $ 687      $ (2,265   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s investment in E-Band Communications, Corp., a company that was a non-controlled affiliate investment as of September 30, 2012, was liquidated during the period ended June 30, 2013. Approximately $3.3 million of realized losses and $3.3 million of net change in unrealized appreciation was recognized on this non-controlled affiliate equity investment during the nine-months ended September 30, 2013.

During the year ended December 31, 2012, Optiscan BioMedical, Corp. became classified as a non-controlled affiliate.

A summary of the composition of the Company’s investment portfolio as of September 30, 2013 (unaudited) and December 31, 2012 at fair value is shown as follows:

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 687,932         70.0   $ 652,041         72.0

Senior secured debt

     240,796         24.5     205,049         22.6

Preferred stock

     44,370         4.5     33,885         3.7

Common Stock

     10,329         1.0     15,325         1.7
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

A summary of the Company’s investment portfolio, at value, by geographic location as of September 30, 2013 (unaudited) and December 31, 2012:

 

   

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 948,214         96.4   $ 901,041         99.4

Netherlands

     9,878         1.0     —           0.0

Canada

     24,835         2.5     —           0.0

England

     500         0.1     5,259         0.6
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The following table shows the fair value the Company’s portfolio by industry sector at September 30, 2013 (unaudited) and December 31, 2012:

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments
at Fair Value
     Percentage of
Total Portfolio
    Investments
at Fair Value
     Percentage of
Total Portfolio
 

Drug Discovery & Development

   $ 209,624         21.3   $ 188,479         20.8

Clean Tech

     173,305         17.6     126,600         14.0

Internet Consumer & Business Services

     157,884         16.1     136,149        15.0

Medical Devices & Equipment

     100,635         10.2     54,575         6.0

Software

     58,813         6.0     70,838         7.8

Drug Delivery

     54,748         5.6     74,218         8.2

Information Services

     46,696         4.7     53,523         5.9

Communications & Networking

     40,155         4.1     37,560         4.1

Electronics & Computer Hardware

     33,272         3.4     12,715         1.4

Healthcare Services, Other

     29,378         3.0     36,481         4.0

Media/Content/Info

     25,920         2.6     51,534         5.7

Specialty Pharmaceuticals

     23,177         2.4     12,473         1.4

Biotechnology Tools

     11,638         1.2     6,845         0.8

Surgical Devices

     10,150         1.0     11,358         1.3

Semiconductors

     4,845         0.5     2,922         0.3

Consumer & Business Products

     1,899         0.2     13,723         1.5

Diagnostic

     1,288         0.1     16,307         1.8
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

During the three and nine-months ended September 30, 2013, the Company funded investments in debt securities totaling approximately $67.5 million and $405.4 million, respectively. During the three and nine-months ended September 30, 2013, the Company funded equity investments totaling approximately $1.5 million and $3.5 million, respectively. The Company did not convert any debt to equity in the three-months ended September 30, 2013 and converted approximately $836,000 of debt to equity in three portfolio companies in the nine month period ended September 30, 2013. The Company converted approximately $803,000 of warrants to debt in the three and nine-month periods ended September 30, 2013.

During the three and nine-month periods ended September 30, 2012, the Company funded investments in debt securities, totaling approximately $90.8 million and $260.6 million, respectively. During the three and nine-month periods ended September 30, 2012, the Company funded equity investments of approximately $589,000 and $7.7 million respectively. During the nine-month period ended September 30, 2012, the Company converted approximately $356,000 of debt to equity in one portfolio company.

No single portfolio investment represents more than 10% of the fair value of the investments as of September 30, 2013 and September 30, 2012.

 

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During the three and nine-months ended September 30, 2013, the Company recognized net realized gains of approximately $7.1 million and $11.3 million on the portfolio, respectively. During the three-months ended September 30, 2013, the Company recorded gross realized gains of approximately $7.8 million primarily from the sale of investments in 3 portfolio companies, including iWatt, Inc. (approximately $4.7 million), AcelRx, Inc. (approximately $1.1 million) and Facebook, Inc. (approximately $728,0000). These gains were partially offset by the liquidation of the Company’s investments in 6 portfolio companies of approximately $460,000 in gross realized losses.

During three month period ended September 30, 2012, the Company recognized net realized losses of approximately $9.1 million on the portfolio. During the quarter ended September 30, 2012, we recorded realized losses of approximately $8.7 million, $672,000 and $463,000, respectively, from the liquidation of MaxVision Holding, L.L.C, Zeta Interactive Corporation and Magi.com (pka Hi5 Networks, Inc.). These losses were partially offset by realized gains of approximately $825,000 related to the sale of Barrx Medical, Inc. During the nine-month period ended September 30, 2012, the Company recognized net realized gains of approximately $2.0 million on the portfolio.

Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. The Company had approximately $3.4 million and $2.0 million of unamortized fees at September 30, 2013 and December 31, 2012, respectively, and approximately $13.6 million and $6.8 million in exit fees receivable at September 30, 2013 and December 31, 2012, respectively.

The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $889,000 and $297,000 in PIK income during the three-months ended September 30, 2013 and 2012, respectively. The Company recorded approximately $2.7 million and $866,000 in PIK income in the nine-month periods ended September 30, 2013 and 2012, respectively.

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction closes. The Company had no income from advisory services in the three and nine-month periods ended September 30, 2013.

In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At September 30, 2013, approximately 66.9% of the Company’s portfolio company loans were secured by a first priority security in all of the assets of the portfolio company (including their intellectual property), 31.9% of portfolio company loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property and 1.2% of portfolio company loans had an equipment only lien.

3. Fair Value of Financial Instruments

Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities, approximate the fair values of such items due to the short maturity of such instruments. The Convertible Senior Notes, 2019 Notes payable (the “April 2019 Notes” and the “September 2019 Notes”, together the “2019 Notes”), the Asset-Backed Notes and the SBA debentures as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. At September 30, 2013, the April 2019 Notes were trading on the New York Stock Exchange for $1.026 per dollar at par value, and the September 2019 Notes were trading on the New York Stock Exchange for $1.023 per dollar at par value. Based on market quotations on or around September 30, 2013, the Convertible Senior Notes were trading for $1.305 per dollar at par value and the Asset-Backed Notes were trading for $1.005 per dollar at par value. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of the SBA debentures would be approximately $239.1 million, compared to the carrying amount of $225.0 million as of September 30, 2013.

 

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See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in Note 2.

The liabilities of the Company below are recorded at amortized cost and not at fair value on the Consolidated Statement of Assets and Liabilities. The following table provides additional information about the level in the fair value hierarchy of the Company’s liabilities:

 

(in thousands)

Description

   September 30,
2013
     Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Convertible Senior Notes

   $ 97,875       $ —         $ 97,875       $ —     

April 2019 Notes

     86,687         —           86,687         —     

September 2019 Notes

     87,833         —           87,833         —     

Class A Notes

     102,987         —           —           102,987   

SBA Debentures

     239,097         —           —           239,097   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 614,479       $ —         $ 272,395       $ 342,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

4. Borrowings Long Term

Long-Term SBA Debentures

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $38.0 million in HT II as of September 30, 2013, HT II has the capacity to issue a total of $76.0 million of SBA guaranteed debentures, subject to SBA approval, of which $76.0 million was outstanding as of September 30, 2013. As of September 30, 2013, HT II has paid commitment fees of approximately $1.5 million. As of September 30, 2013, the Company held investments in HT II in 46 companies with a fair value of approximately $103.1 million, accounting for approximately 10.5% of the Company’s total portfolio.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $74.5 million in HT III as of September 30, 2013, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of September 30, 2013. As of September 30, 2013, HT III has paid commitment fees of approximately $1.5 million. As of September 30, 2013, the Company held investments in HT III in 38 companies with a fair value of approximately $202.0 million, accounting for approximately 20.5% of the Company’s total portfolio.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA.

A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of September 30, 2013 as a result of having sufficient capital as defined under the SBA regulations.

 

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The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.25% to 5.73%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013, were 0.804%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the three-month period ended September 30, 2013 for HT II was approximately $76.0 million with an average interest rate of approximately 5.41%. The average amount of debentures outstanding for the three-month period ended September 30, 2013 for HT III was approximately $149.0 million with an average interest rate of approximately 3.46%.

HT II and HT III hold approximately $163.9 million and $274.7 million in assets, respectively, and accounted for approximately 10.4% and 17.5% of our total assets prior to consolidation at September 30, 2013.

In January 2011, the Company repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. In April 2011, the SBA approved a $25.0 million dollar commitment for HT III.

In February 2012, the Company repaid $24.25 million of SBA debentures under HT II, priced at 6.63%, including annual fees. In June 2012, the SBA approved a $24.25 million dollar commitment for HT III.

In August 2012, the Company repaid $24.75 million of SBA debentures under HT II, $12.0 million priced at 6.43%, including annual fees and $12.75 million priced at 6.38%, including annual fees.

As of September 30, 2013, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA, and a maximum amount of $225.0 million for funds under common control, subject to periodic adjustments by the SBA. In the aggregate, at September 30, 2013 there was $225.0 million principal amount of indebtedness outstanding incurred by our SBIC subsidiaries, the maximum statutory limit on the dollar amount of SBA guaranteed debentures under the SBIC program.

The Company reported the following SBA debentures outstanding on its Consolidated Statement of Assets and Liabilities as of September 30, 2013 (unaudited) and December 31, 2012:

 

(in thousands)

Issuance/Pooling Date

   Maturity Date    Interest Rate (1)     September 30,
2013
     December 31,
2012
 

SBA Debentures:

          

March 26, 2008

   March 1, 2018      6.38   $ 34,800       $ 34,800   

March 25, 2009

   March 1, 2019      5.53     18,400         18,400   

September 23, 2009

   September 1, 2019      4.64     3,400         3,400   

September 22, 2010

   September 1, 2020      3.62     6,500         6,500   

September 22, 2010

   September 1, 2020      3.50     22,900         22,900   

March 29, 2011

   March 1, 2021      4.37     28,750         28,750   

September 21, 2011

   September 1, 2021      3.16     25,000         25,000   

March 21, 2012

   March 1, 2022      3.28     25,000         25,000   

March 21, 2012

   March 1, 2022      3.05     11,250         11,250   

September 19, 2012

   September 1, 2022      3.05     24,250         24,250   

March 27, 2013

   March 27, 2023      3.16     24,750         24,750   
       

 

 

    

 

 

 

Total SBA Debentures

        $ 225,000       $ 225,000   
       

 

 

    

 

 

 

 

 

(1) Interest rate includes annual charge

 

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Wells Facility

In August 2008, the Company entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, the Company renewed the Wells Facility. Under this three-year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility.

On August 1, 2012, the Company entered into an amendment to the Wells Facility. The amendment reduces the interest rate floor by 75 basis points to 4.25% and extends the maturity date by one year to August 2015. Additionally, an amortization period of 12 months was added to pay down the principal balance as of the maturity date, and the unused line fee was reduced.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.25% and an advance rate of 50% against eligible loans. The Wells Facility is secured by loans in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the three-month period ended September 30, 2013, this non-use fee was approximately $96,000. On June 20, 2011 the Company paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through the end of the term.

The Wells Facility includes various financial and operating covenants applicable to the Company and its subsidiaries, in addition to those applicable to Hercules Funding II, LLC. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $362.0 million plus 90% of the cumulative amount of equity raised after June 30, 2012. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital that the Company subsequently raises. As of September 30, 2013, the minimum tangible net worth covenant has increased to $478.5 million as a result of the Company’s follow-on public offerings. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at September 30, 2013.

At September 30, 2013, there were no borrowings outstanding on this facility.

Union Bank Facility

On February 10, 2010, the Company entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). On November 2, 2011, the Company renewed and amended the Union Bank Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets (“RBC”) have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Union Bank Facility.

On March 30, 2012, the Company entered into an amendment to the Union Bank Facility which permitted the Company to issue additional senior notes relating to the offer and sale of our 2019 Notes. On September 17, 2012, the Company entered into an amendment to the Union Bank Facility. Pursuant to the terms of the amendment, the Company is permitted to increase its unsecured indebtedness by an aggregate original principal amount not to exceed $200.0 million incurred after March 30, 2012 in one or more issuances, provided certain conditions are satisfied for each issuance.

On December 17, 2012, the Company further amended the Union Bank Facility to remove RBC from the Union Bank Facility. Following the removal of RBC, the Union Bank Facility consists solely of Union Bank’s commitment of $30.0 million. In connection with the amendment, the maximum availability under the Union Bank Facility, subject to a borrowing base, was reduced from $55.0 million to $30.0 million. The Union Bank Facility contains an accordion feature, in which the Company could increase the credit line by up to $95.0 million in the aggregate, funded by commitments from additional lenders and with the agreement of Union Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility.

Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the three-month period ended September 30, 2013, this non-use fee was approximately $38,000. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity.

 

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The Union Bank Facility requires various financial and operating covenants. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. As of September 30, 2013, the minimum tangible net worth covenant has increased to $472.8 million as a result of the Company’s follow-on public offerings. The Union Bank Facility will mature on November 1, 2014, approximately three years from the date of issuance, revolving through the first 24 months with a term out provision for the remaining 12 months. Union Bank Facility also provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at September 30, 2013.

At September 30, 2013, there were no borrowings outstanding on this facility.

Citibank Credit Facility

The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. which expired under normal terms. During the first quarter of 2009, the Company paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached.

During the nine-months ended September 30, 2013, the Company reduced its realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. The Company recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $54,000 as a result of appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $268,000 as of September 30, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $1.6 million under the warrant participation agreement thereby reducing realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and January 2017.

Convertible Senior Notes

In April 2011, the Company issued $75.0 million in aggregate principal amount of its 6.00% convertible senior notes (the “Convertible Senior Notes”) due in 2016. As of September 30, 2013, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $72.2 million.

The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities.

Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of its common stock or a combination of cash and shares of its common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of September 30, 2013, the conversion rate is 85.5334 shares of common stock per $1,000 principal amount of Convertible Senior Notes.

 

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The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, the Company estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the accompanying consolidated statement of assets and liabilities. As a result, the Company records interest expense comprised of both stated interest expense as well as accretion of the original issue discount. Additionally, the issuance costs associated with the Convertible Senior Notes were allocated to the debt and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. At the time of issuance, the debt issuance costs and equity issuance costs were approximately $2.9 million and $224,000, respectively. At the time of issuance and as of September 30, 2013, the equity component, net of issuance costs, as recorded in the “capital in excess of par value” in the balance sheet was approximately $5.2 million.

As of September 30, 2013 (unaudited) and December 31, 2012, the components of the carrying value of the Convertible Senior Notes were as follows:

 

(in thousands)    September 30, 2013     December 31, 2012  

Principal amount of debt

   $ 75,000      $ 75,000   

Original issue discount, net of accretion

     (2,752     (3,564
  

 

 

   

 

 

 

Carrying value of debt

   $ 72,248      $ 71,436   
  

 

 

   

 

 

 

For the three and nine-months ended September 30, 2013 and 2012, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows (unaudited):

 

     Three Months Ended
September,
     Nine Months Ended
September,
 
(in thousands)    2013      2012      2013      2012  

Stated interest expense

   $ 1,125       $ 1,125       $ 3,375       $ 3,375   

Accretion of original issue discount

     271         271         812         812   

Amortization of debt issuance cost

     144         144         433         433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 1,540       $ 1,540       $ 4,620       $ 4,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —         $ —         $ 2,250       $ 2,250   

The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.0% and 8.1% for the three and nine-months ended September 30, 2013 and approximately 8.1% and 8.2% for the three and nine-months ended September 30, 2012, respectively. As of September 30, 2013, the Company is in compliance with the terms of the indentures governing the Convertible Senior Notes.

 

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2019 Notes

On March 6, 2012, the Company and the Trustee entered into an indenture (the “Base Indenture”). On April 17, 2012, the Company and the Trustee entered into the First Supplemental Indenture to the Base Indenture, dated April 17, 2012, relating to the Company’s issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million.

On September 24, 2012, the Company and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture, dated as of September 24, 2012, relating to the Company’s issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million.

2019 Notes payable is compromised of:

 

(in thousands)    September 30, 2013      December 31, 2012  

April 2019 Notes

   $ 84,490       $ 84,490   

September 2019 Notes

     85,874         85,874   
  

 

 

    

 

 

 

Carrying Value of Debt

   $ 170,364       $ 170,364   
  

 

 

    

 

 

 

April 2019 Notes

The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGZ.”

The April 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under the Company’s credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under the Company’s revolving senior secured credit facility with Wells Fargo Capital Finance.

The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the First Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period.

The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement.

In July 2012, the Company re-opened our April 2019 Notes and issued an additional amount of approximately $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount.

 

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September 2019 Notes

The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGY.”

The September 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under the Company’s credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under the Company’s revolving senior secured credit facility with Wells Fargo Capital Finance.

The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period.

The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement.

In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount.

For the three and nine-months ended September 30, 2013 and 2012, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 and September 2019 Notes are as follows (unaudited):

 

     Three Months Ended
September 30,
    

Nine Months Ended

September 30,

 
(in thousands)    2013      2012      2013      2012  

Stated interest expense

   $ 2,981       $ 1,509       $ 8,944       $ 2,128   

Amortization of debt issuance cost

     243         130         725         179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 3,224       $ 1,639       $ 9,669       $ 2,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense and fees

   $ 2,981       $ —         $ 8,944       $ —     

 

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As of September 30, 2013, the Company is in compliance with the terms of the indenture, and respective supplemental indenture, governing the April 2019 Notes and September 2019 Notes.

Asset-Backed Notes

On December 19, 2012, the Company completed a $230.7 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “Asset-Backed Notes”), which Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes were issued by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among the Company, Hercules Capital Funding 2012-1 LLC, as Trust Depositor (the “Trust Depositor”), Hercules Capital Funding Trust 2012- 1, as Issuer (the “Issuer”), and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The Asset-Backed Notes have a stated maturity of December 16, 2017.

As part of this transaction, the Company entered into a sale and contribution agreement with the Trust Depositor under which the Company has agreed to sell or have contributed to the Trust Depositor certain senior loans made to certain of our portfolio companies (the “Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the Loans as of the date of their transfer to the Trust Depositor.

In connection with the issuance and sale of the Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The Asset-Backed Notes are secured obligations of the Issuer and are non-recourse to the Company. The Issuer also entered into an indenture governing the Asset-Backed Notes, which indenture includes customary representations, warranties and covenants. The Asset-Backed Notes were sold without being registered under the Securities Act of 1933, as amended (the “Securities Act”), to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act. In addition, the Trust Depositor entered into an amended and restated trust agreement, which includes customary representation, warranties and covenants.

The Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the Loans. The Company is entitled to receive a monthly fee from the Issuer for servicing the Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the Loans, excluding all defaulted Loans and all purchased Loans, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013).

The Company also serves as administrator to the Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At September 30, 2013 and December 31, 2012, the Asset Backed Notes had an outstanding balance of $102.5 million and $129.3 million, respectively.

Under the terms of the Asset Backed Notes, the Company is required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as Restricted Cash. There was approximately $3.6 million of Restricted Cash as of September 30, 2013 funded through interest collections. There was no cash segregated at December 31, 2012 due to immaterial monthly interest collections for the period ended December 31, 2012.

Outstanding Borrowings

At September 30, 2013 (unaudited) and December 31, 2012, the Company had the following borrowing capacity and outstanding borrowings:

 

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     September 30, 2013      December 31, 2012  
     Total
Available
     Carrying
Value (1)
     Total
Available
     Carrying
Value (1)
 

(in thousands)

           

Union Bank Facility

   $ 30,000       $ —         $ 30,000       $ —     

Wells Facility

     75,000         —           75,000         —     

Convertible Senior Notes (2)

     75,000         72,248         75,000         71,436   

2019 Notes

     170,364         170,364         170,364         170,364   

Asset-Backed Notes

     102,474         102,474         129,300         129,300   

SBA Debentures (3)

     225,000         225,000         225,000         225,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 677,838       $ 570,086       $ 704,664       $ 596,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.
(2) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.8 million at September 30, 2013 and $3.6 million at December 31, 2012.
(3) At September 30, 2013 and at December 31, 2012, the total available borrowings under the SBA was $225.0 million, of which 76.0 million was available in HT II and $149.0 million was available in HT III.

5. Income taxes

The Company has elected to be taxed as a RIC under Subchapter M of the Code and intends to continue to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.

To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as defined by the Code. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Company’s earnings fall below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.

Taxable income includes the Company’s taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized.

Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

During the three-months ended September 30, 2013, the Company declared a distribution of $0.28 per share. 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. As a result, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. If the Company had determined the tax attributes of our distributions year-to-date as of September 30, 2013, approximately 100% would be from ordinary income and spillover earnings from 2012. However there can be no certainty to shareholders that this determination is representative of what the tax attributes of its 2013 distributions to shareholders will actually be.

As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). The Company will not be subject to excise taxes on amounts on which the Company is required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, the Company may choose to carry over taxable income in excess of current year

 

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distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent the Company chooses to carry over taxable income into the next tax year, dividends declared and paid by the Company in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital.

Taxable income for the nine-month period ended September 30, 2013 was approximately $51.3 million or $0.87 per share. Taxable net realized gains for the same period were $16.7 million or approximately $0.28 per share. Taxable income for the nine-month period ended September 30, 2012 was approximately $33.8 million or $0.70 per share. Taxable net realized gains for the same period were $10.8 million or approximately $0.22 per share.

The Company intends to distribute approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013.

6. Shareholders’ Equity

On July 25, 2012, our Board of Directors approved an extension of the stock repurchase plan under the same terms and conditions that allowed the Company to repurchase up to $35.0 million of our common stock. The stock repurchase plan expired on February 26, 2013 and no shares were repurchased in 2013.

On March 13, 2013, the Company raised approximately $95.8 million, before deducting offering expenses, in a public offering of 8,050,000 shares of its common stock.

The Company has issued stock options for common stock subject to future issuance, of which 1,397,470 and 2,574,749 were outstanding at September 30, 2013 and December 31, 2012, respectively.

On August 16, 2013, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with JMP Securities LLC (“JMP”). The equity distribution agreement provides that the Company may offer and sell up to 8,000,000 shares of its common stock from time to time through JMP, as its sales agent. Sales of the Company’s common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. There were no sales under the ATM Program for the three-months ended September 30, 2013.

7. Equity Incentive Plan

The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7,000,000 shares of common stock. On June 1, 2011, stockholders approved an amended and restated plan and provided an increase of 1,000,000 shares, authorizing the Company to issue 8,000,000 shares of common stock under the 2004 Plan.

The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1,000,000 shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007.

On June 21, 2007, the stockholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock issued or delivered by the Company during the terms of the Plans. The amendments further specify that no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants, options and rights issued to the Company’s directors, officers and employees, together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities.

 

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The following table summarizes the common stock options activities for the nine-months ended September 30, 2013 and 2012 (unaudited):

 

     For the Nine Months Ended September 30,  
     2013      2012  
     Common
Stock
Options
    Weighted
Average
Exercise
Price
     Common
Stock
Options
    Weighted
Average
Exercise
Price
 

Outstanding at December 31,

     2,574,749      $ 12.00         4,213,604      $ 11.40   

Granted

     325,000      $ 14.16         54,000      $ 10.97   

Exercised

     (1,321,941   $ 12.17         (560,696   $ 5.53   

Forfeited

     (115,338   $ 10.38         (57,174   $ 9.69   

Expired

     (65,000   $ 13.30         (1,126,932   $ 12.85   
  

 

 

      

 

 

   

Outstanding at September 30,

     1,397,470      $ 12.41         2,522,802      $ 12.09   
  

 

 

      

 

 

   

Shares Expected to Vest at September 30,

     499,959      $ 12.41         360,922      $ 12.09   

The following table summarizes stock options outstanding and exercisable at September 30, 2013 (unaudited):

 

(Dollars in thousands, except exercise price)

  Options outstanding     Options exercisable  

Range of exercise prices

  Number of
shares
    Weighted
average
remaining
contractual
life
    Aggregate
intrinsic
value
    Weighted
average
exercise
price
    Number
of shares
    Weighted
average
remaining
contractual
life
    Aggregate
intrinsic
value
    Weighted
average
exercise
price
 

$4.21 - $8.67

    31,415        2.47      $ 346,077      $ 4.23        31,415        2.47      $ 346,077      $ 4.23   

$9.25 - $14.02

    1,194,055        2.91        3,552,088      $ 12.28        866,096        1.68        2,438,629      $ 12.44   

$14.86 - $14.86

    172,000        6.96        67,080      $ 14.86        —          —          —        $ —     
 

 

 

     

 

 

     

 

 

     

 

 

   

$4.21 - $14.86

    1,397,470        3.39      $ 3,965,245      $ 12.41        897,511        1.70      $ 2,784,706      $ 12.15   
 

 

 

     

 

 

     

 

 

     

 

 

   

Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be exercised for a period ending seven years after the date of grant. At September 30, 2013, options for approximately 898,000 shares were exercisable at a weighted average exercise price of approximately $12.15 per share with weighted average of remaining contractual term of 1.70 years.

The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table for each of the nine-month periods ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30,
     2013   2012

Expected Volatility

   46.90%   46.39%

Expected Dividends

   10%   10%

Expected term (in years)

   4.5   4.5

Risk-free rate

   0.56% - 1.63%   0.49% - 1.07%

During the nine months ended September 30, 2013 and 2012, the Company granted approximately 607,000 shares and 692,000 shares, respectively, of restricted stock pursuant to the Plans. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 will continue to vest on a monthly basis following their one year anniversary over the succeeding 36 months. During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short and long-term awards. Under the 2004 Plan, restricted stock awarded subsequent to March 3, 2013 will vest subject to continued employment based on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months.

The Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the nine-month periods ended September 30, 2013 and 2012 was approximately $7.7 million and $7.5 million, respectively. During the three-month periods ended September 30, 2013 and 2012, the Company expensed approximately $1.5 million and $1.0 million of compensation expense related to restricted stock, respectively. During the nine-month periods ended September 30, 2013 and 2012, the Company expensed approximately $4.1 million and $2.9 million of compensation expense related to restricted stock, respectively. As of September 30, 2013, there was approximately $11.7 million of total unrecognized compensation costs related to restricted stock. These costs are expected to be recognized over a weighted average period of 2.42 years.

 

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The following table summarizes the activities for our unvested restricted stock for the nine-months ended September 30, 2013 and 2012 (unaudited):

 

     For the Nine-Month Period Ended September 30,  
     2013      2012  
     Restricted
Stock Units
    Weighted
Average
Issuance
Price
     Restricted
Stock Units
    Weighted
Average
Issuance
Price
 

Unvested at December 31

     899,789      $ 10.73         621,509      $ 10.06   

Granted

     607,001      $ 12.72         691,859      $ 10.83   

Vested

     (364,844   $ 10.56         (289,019   $ 9.98   

Forfeited

     (10,739   $ 11.37         (59,019   $ 9.95   

Unvested at September 30

     1,131,207      $ 11.85         965,330      $ 10.64   

The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make, and does not preclude the participant from electing to make, a cash payment at the time of option exercise or to pay taxes on restricted stock.

8. Earnings Per Share

Shares used in the computation of the Company’s basic and diluted earnings per share are as follows (unaudited):

 

     Three months Ended September 30,     Nine months Ended September 30,  

(in thousands, except per share data)

       2013             2012             2013             2012      

Numerator

        

Net increase in net assets resulting from operations

   $ 36,981      $ 4,745      $ 74,549      $ 21,898   

Less: Dividends declared-common and restricted shares

     (17,277     (11,952     (47,292     (35,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

     19,704        (7,207     27,257        (13,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings-common shares

     19,704        (7,207     27,257        (13,394

Add: Dividend declared-common shares

     16,949        11,703        46,292        34,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic and diluted change in net assets per common share

     36,653        4,496        73,549        21,109   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Basic weighted average common shares outstanding

     60,522        48,750        58,206        48,130   

Common shares issuable

     228        58        190        107   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding assuming dilution

     60,750        48,808        58,396        48,237   

Change in net assets per common share

        

Basic

   $ 0.61      $ 0.09      $ 1.26      $ 0.44   

Diluted

   $ 0.59      $ 0.09      $ 1.23      $ 0.44   

The Convertible Senior Notes may be surrendered for conversion during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day. For the purpose of calculating diluted earnings per share for the three and nine-month period ended September 30 2013, the underlying shares for the intrinsic value of the embedded options in the Convertible Senior Notes were included in this calculation because the trading price was greater than the conversion price in effect ($11.69) for such period for the Convertible Senior Notes.

 

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The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti-dilutive shares. For the three and nine-months ended September 30, 2013 and 2012, the number of anti-dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, was approximately 2,081,780 and 2,574,749 shares, respectively.

At September 30, 2013, the Company was authorized to issue 100,000,000 shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote.

9. Financial Highlights

Following is a schedule of financial highlights for the nine-months ended September 30, 2013 and 2012:

 

     Nine Months Ended
September 30,
 
     2013     2012  

Per share data:

    

Net asset value at beginning of period

   $ 9.75      $ 9.83   

Net investment income (1)

     0.93        0.73   

Net realized gain (loss) on investments

     0.19        0.04   

Net unrealized appreciation (depreciation) on investments

     0.15        (0.33
  

 

 

   

 

 

 

Total from investment operations

     1.27        0.44   

Net increase/(decrease) in net assets from capital share transactions

     0.15        (0.20

Distributions

     (0.82     (0.71

Stock-based compensation expense included in investment income (2)

     0.07        0.06   
  

 

 

   

 

 

 

Net asset value at end of period

   $ 10.42      $ 9.42   
  

 

 

   

 

 

 

Ratios and supplemental data:

    

Per share market value at end of period

   $ 15.25      $ 11.01   

Total return (3)

     47.94     24.25 % 

Shares outstanding at end of period

     61,756        49,785   

Weighted average number of common shares outstanding

     58,206        48,130   

Net assets at end of period

   $   643,376      $   469,117   

Ratio of operating expense to average net assets

     11.84     9.79

Ratio of net investment income and investment gains and losses to average net assets

     12.27     9.77

Average debt outstanding

   $ 585,070      $ 322,193   

Weighted average debt per common share

   $ 10.05      $ 6.69   

 

(1) Net investment income per share is calculated as net investment income divided by the weighted average shares outstanding.
(2) Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment loss includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.
(3) The total return for the nine-month periods ended September 30, 2013 and 2012 equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning price.

10. Commitments and Contingencies

The Company’s commitments and contingencies consist primarily of unused commitments to extend credit in the form of loans to the Company’s portfolio companies. The balance of unfunded commitments to extend credit at September 30, 2013 totaled approximately $169.6 million. Approximately $93.1 million of these unfunded origination activity commitments as of September 30, 2013 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Since a portion of these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In addition, the Company had approximately $57.3 million of non-binding term sheets outstanding at September 30, 2013. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent the Company’s future cash requirements.

 

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Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $296,000 and $900,000 during the three and nine-month periods ended September 30, 2013. There was approximately $294,000 and $868,000 recorded in the same periods ended September 30, 2012, respectively. Future commitments under the credit facility and operating leases were as follows at September 30, 2013:

 

     Payments due by period  
     (in thousands)  

Contractual Obligations(1)(2)

   Total      Less than
1 year
     1 - 3
years
     3 - 5
years
     After
5 years
 

Borrowings (3) (4)

   $ 570,086       $ —         $ 102,474       $ 72,248       $ 395,364   

Operating Lease Obligations (5)

     7,964         1,447         2,944         3,107         466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 578,050       $ 1,447       $ 105,418       $ 75,355       $ 395,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes commitments to extend credit to our portfolio companies.
(2) The Company also has a warrant participation agreement with Citigroup. See Note 4 to the Company’s consolidated financial statements.
(3) Includes $225.0 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $102.5 million in aggregate principal amount of the Asset-Backed Notes and $72.2 million of the Convertible Senior Notes.
(4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes was $2.8 million at September 30, 2013.
(5) Long-term facility leases.

The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition or results of operations in any future reporting period.

11. Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so the Company anticipates no impact from adopting this standard on the Company’s statement of assets and liabilities or results of operations. The Company is currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

12. Subsequent Events

Dividend Declaration

On November 4, 2013 the Board of Directors increased the quarterly dividend by $0.03, or approximately 10.7%, and declared a cash dividend of $0.31 per share to be paid on November 25, 2013 to shareholders of record as of November 18, 2013. This dividend will represent the Company’s thirty-third consecutive dividend declaration since its initial public offering, bringing the total cumulative dividend declared to date to $8.75 per share.

 

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Portfolio Company Developments

In October 2013, ADMA Biologics, Inc. (OTCBB: ADMA) completed its initial public offering of 3,352,941 shares of its common stock at $8.50 per share.

In October 2013, Western Digital Corp (NASDAQ: WDC) completed its acquisition of Hercules portfolio company Virident Systems, Inc. This liquidity event represents a net realized gain of approximately $7.5 million, an internal rate of return of 76.5% (excluding proceeds in escrow) and a gross multiple of 2.5x on Hercules total investment in Virident Systems, Inc.

In October 2013, EnerSys (NYSE: ENS) completed its acquisition of Hercules portfolio company Purcell Systems, Inc. This liquidity event represents a net realized gain of approximately $617,000, an internal rate of return of 15.6% (excluding proceeds in escrow), and a gross multiple of 6.0x on Hercules total investment in Purcell Systems, Inc.

In November 2013, Biomet, Inc. completed its acquisition of Hercules portfolio company Lanx, Inc. This liquidity event represents an expected net realized gain of approximately $1.9 million, an expected internal rate of return of 38.6% (excluding proceeds in escrow), and an expected gross multiple of 2.3x on Hercules total investment in Lanx, Inc.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The matters discussed in this report, as well as in future oral and written statements by management of Hercules Technology Growth Capital, Inc., that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our prospective portfolio companies;

 

   

the impact of investments that we expect to make;

 

   

the impact of a protracted decline in the liquidity of credit markets on our business;

 

   

our informal relationships with third parties including in the venture capital industry;

 

   

the expected market for venture capital investments and our addressable market;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

   

our ability to access debt markets and equity markets;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

our regulatory structure and tax status;

 

   

our ability to operate as a BDC, a SBIC and a RIC;

 

   

the adequacy of our cash resources and working capital;

 

   

the timing of cash flows, if any, from the operations of our portfolio companies;

 

   

the timing, form and amount of any dividend distributions;

 

   

the impact of fluctuations in interest rates on our business;

 

   

the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and

 

   

our ability to recover unrealized losses.

 

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The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A—“Risk Factors” of Part II of this quarterly report on Form 10-Q, Item 1A—“Risk Factors” of our annual report on Form 10-K filed with the SEC on February 28, 2013 and under “Forward-Looking Statements” of this Item 2.

Overview

We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related markets, including technology, biotechnology, life science, and energy and renewables technology industries at all stages of development. We source our investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York, NY, Boulder, CO and McLean, VA.

Our goal is to be the leading structured debt financing provider of choice for venture capital-backed companies in technology-related markets requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related markets including technology, biotechnology, life science, and energy and renewables technology industries and to offer a full suite of growth capital products. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We invest primarily in private companies but also have investments in public companies.

We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company.

Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related markets with attractive current yields and the potential for equity appreciation and realized gains. Our structured debt investments typically include warrants or other equity interests, giving us the potential to realize equity-like returns on a portion of our investments. Our equity ownership in our portfolio companies may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide directly to venture capital-backed companies in technology-related markets is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations.

We also make investments in qualifying small businesses through our two wholly-owned SBICs. Our SBICs, HT II and HT III, hold approximately $163.9 million and $274.7 million in assets, respectively, and accounted for approximately 10.4% and 17.5% of our total assets, respectively, prior to consolidation at September 30, 2013. We have issued $225.0 million in SBA-guaranteed debentures in our SBIC subsidiaries, which is the maximum amount allowed for a group of SBICs under common control.

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities of private U.S. companies, cash, cash equivalents and high-quality debt investments that mature in one year or less.

We have qualified as and have elected to be treated for tax purposes as a RIC under the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements.

Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology-related companies at various stages of their development. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies.

We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion of our portfolio on an opportunistic basis. We, our subsidiaries or our affiliates may also agree to manage certain other funds that invest in debt, equity or provide other financing or

 

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services to companies in a variety of industries for which we may earn management or other fees for our services. We may also invest in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future incentive allocations. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, the approval of our stockholders. Accordingly, there can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require significant management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction.

Portfolio and Investment Activity

The total value of our investment portfolio was $983.4 million at September 30, 2013, as compared to $906.3 million at December 31, 2012.

The fair value of our loan portfolio at September 30, 2013 was approximately $894.5 million, compared to a fair value of approximately $827.5 million at December 31, 2012. The fair value of the equity portfolio at September 30, 2013 was approximately $54.7 million, compared to a fair value of approximately $49.2 million at December 31, 2012. The fair value of the warrant portfolio at September 30, 2013 was approximately $34.2 million, compared to a fair value of approximately $29.5 million at December 31, 2012.

Portfolio Activity

Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. From time to time, unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the two succeeding quarters from close. Not all debt commitments represent our future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and do not represent our future cash requirements.

Prior to entering into a contractual commitment, we generally issue a non-binding term sheet to a prospective portfolio company. Non-binding term sheets are subject to completion of our due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies and generally convert to contractual commitments within approximately 45 to 60 days of signing. Not all non-binding term sheets are expected to close and do not necessarily represent our future cash requirements.

Our portfolio activity for the nine-month period ended September 30, 2013 (unaudited) and the year ended December 31, 2012 was comprised of the following:

 

(in millions)

   September 30, 2013      December 31, 2012  

Debt Commitments (1)

     

New portfolio company

   $ 453.0       $ 362.3   

Existing portfolio company

     121.9         274.3   
  

 

 

    

 

 

 

Total

   $ 574.9       $ 636.6   

Funded Debt Investments

     

New portfolio company

   $ 324.1       $ 267.9   

Existing portfolio company

     81.3         191.4   
  

 

 

    

 

 

 

Total

   $ 405.4       $ 459.3   

Funded Equity Investments

     

New portfolio company

   $ —         $ 6.0   

Existing portfolio company

     3.5         3.7   
  

 

 

    

 

 

 

Total

   $ 3.5       $ 9.7   

Unfunded Contractual Commitments (2)

     

Total

   $ 169.6       $ 61.9   

Non-Binding Term Sheets

     

New portfolio company

   $ 46.5       $ 70.0   

Existing portfolio company

     10.8         —     
  

 

 

    

 

 

 

Total

   $ 57.3       $ 70.0   

 

(1) Includes restructured loans and renewals in addition to new commitments.
(2) The amount for September 30, 2013 includes unfunded contractual commitments in 27 new and existing portfolio companies. Approximately $93.1 million of these unfunded commitments as of September 30, 2013 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available.

 

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We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period. During the nine-month period ended September 30, 2013, we received approximately $132.2 million in aggregate principal repayments. Of the approximately $132.2 million of aggregate principal repayments, approximately $67.6 million were early principal repayments related to nine portfolio companies, approximately $34.5 million were early repayments due to current quarter M&A transactions related to six portfolio companies and approximately $30.1 million were scheduled principal payments.

Total portfolio investment activity (inclusive of unearned income) for the nine-month period ended September 30, 2013 (unaudited) and for the year ended December 31, 2012 was as follows:

 

(in millions)    September 30, 2013     December 31, 2012  

Beginning Portfolio

   $ 906.3      $ 652.9   

New Fundings

     401.5        469.9   

Warrants not related to current period fundings

     2.5        (0.2

Principal payments received on investments

     (140.0     (120.7

Early payoffs

     (196.4     (125.1

Restructure payoffs

     (9.7     (48.5

Restructure fundings

     17.1        85.0   

Accretion of loan discounts and paid-in-kind principal

     27.6        21.3   

New loan fees

     (13.3     (12.8

Conversion of “Other Assets”

     —          9.6   

Debt Converted to Equity

     —          0.6   

Warrants converted to Equity

     0.1        —     

Proceeds from sale of investments

     (14.7     (7.2

Net realized (loss) gain on investments

     (6.0     (14.1

Net change in unrealized appreciation (depreciation)

     8.4        (4.4
  

 

 

   

 

 

 

Ending Portfolio

   $ 983.4      $ 906.3   
  

 

 

   

 

 

 

The following table shows the fair value of our portfolio of investments by asset class as of September 30, 2013 (unaudited) and December 31, 2012.

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 687,932         70.0   $ 652,041         72.0

Senior secured debt

     240,796         24.5     205,049         22.6

Preferred stock

     44,370         4.5     33,885         3.7

Common Stock

     10,329         1.0     15,325         1.7
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

A summary of our investment portfolio at value by geographic location is as follows:

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 948,214         96.4   $ 901,041         99.4

Netherlands

     9,878         1.0     —           0.0

Canada

     24,835         2.5     —           0.0

England

     500         0.1     5,259         0.6
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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As of September 30, 2013, we held warrants or equity positions in three companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, specifically, ADMA Biologics, Inc. (“ADMA”) and two companies that filed confidentially under the JOBS Act. Subsequent to quarter end, in October 2013, ADMA completed its initial public offering of 3,352,941 shares of its common stock at $8.50 per share. There can be no assurance that the other two companies will complete their initial public offerings in a timely manner or at all.

Changes in Portfolio

We generate revenue in the form of interest income, primarily from our investments in debt securities, and commitment and facility fees. Fees generated in connection with our debt investments are recognized over the life of the loan or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity-related securities that we acquire from our portfolio companies. Our investments generally range from $1.0 million to $25.0 million. As of September 30, 2013, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from the prevailing U.S. prime rate, or Prime or the LIBOR rate to approximately 15%. In addition to the cash yields received on our loans, in some instances, our loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt. Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. We had approximately $3.4 million and $2.0 million of unamortized fees at September 30, 2013 and December 31, 2012, respectively, and approximately $13.6 million and $6.8 million in exit fees receivable at September 30, 2013 and December 31, 2012, respectively. The increase of both unamortized fees and exit fees receivable is attributable to overall growth of the loan portfolio.

We have loans in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $889,000 and $297,000 in PIK income during the three-months ended September 30, 2013 and 2012, respectively. We recorded approximately $2.7 million and $866,000 in PIK income in the nine-month periods ended September 30, 2013 and 2012, respectively.

In the majority of cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, we obtain a negative pledge covering a company’s intellectual property. At September 30, 2013, approximately 66.9% of our portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 31.9% of the loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property and 1.2% of portfolio company loans had an equipment-only lien.

Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the security. In addition, certain of our loans may include an interest-only period ranging from three to eighteen months or longer. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities and any accrued but unpaid interest become due at the maturity date.

The effective yield on our debt investments during the three-month periods ended September 30, 2013 and 2012 was 17.7% and 14.4%, respectively. Excluding the effect of fee accelerations that occurred from early payoffs and one-time events, the adjusted effective yield for the three-month period ended September 30, 2013 was 14.3%. The adjusted effective yield for the three-month period ended December 31, 2012 was 13.6%. The effective yield is derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the quarter which exclude non-interest earning assets such as warrants and equity investments. The overall weighted average yield to maturity of our loan investments was approximately 13.3% at September 30, 2013, compared to 12.91% at December 31, 2012. The weighted average yield to maturity is computed using the interest rates in effect at the inception of each of the loans, and includes amortization of the loan facility fees, commitment fees and market premiums or discounts over the expected life of the debt investments, weighted by their respective costs when averaged and based on the assumption that all contractual loan commitments have been fully funded and held to maturity.

Portfolio Composition

Our portfolio companies are primarily privately held companies and, to a lesser extent, public companies which are active in the drug discovery and development, internet consumer and business services, clean technology, software, drug delivery, medical device

 

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and equipment, media/content/info, communications and networking, information services, healthcare services, diagnostic, specialty pharmaceuticals, biotechnology tools, surgical devices, consumer and business products, semiconductors, electronics and computer hardware and therapeutic industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property.

As of September 30, 2013, approximately 65.2% of the fair value of our portfolio was composed of investments in four industries: 21.3% was composed of investments in the drug discovery and development industry, 17.6% was composed of investments in the clean technology industry, 16.1% was composed of investments in the internet consumer and business services industry and 10.2% was composed of investments in the medical device and equipment industry.

The following table shows the fair value of our portfolio by industry sector at September 30, 2013 (unaudited) and December 31, 2012:

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Investments at
Fair Value
     Percentage of Total
Portfolio
    Investments at
Fair Value
     Percentage of Total
Portfolio
 

Drug Discovery & Development

   $ 209,624         21.3   $ 188,479         20.8

Clean Tech

     173,305         17.6     126,600         14.0

Internet Consumer & Business Services

     157,884         16.1     136,149         15.0

Medical Devices & Equipment

     100,635         10.2     54,575         6.0

Software

     58,813         6.0     70,838         7.8

Drug Delivery

     54,748         5.6     74,218         8.2

Information Services

     46,696         4.7     53,523         5.9

Communications & Networking

     40,155         4.1     37,560         4.1

Electronics & Computer Hardware

     33,272         3.4     12,715         1.4

Healthcare Services, Other

     29,378         3.0     36,481         4.0

Media/Content/Info

     25,920         2.6     51,534         5.7

Specialty Pharmaceuticals

     23,177         2.4     12,473         1.4

Biotechnology Tools

     11,639         1.2     6,845         0.8

Surgical Devices

     10,150         1.0     11,358         1.3

Semiconductors

     4,845         0.5     2,922         0.3

Consumer & Business Products

     1,899         0.2     13,723         1.5

Diagnostic

     1,288         0.1     16,307         1.8
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 983,427         100.0   $ 906,300         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies.

For the nine-months ended September 30, 2013 and the year ended December 31, 2012, our ten largest portfolio companies represented approximately 29.7% and 35.2% of the total fair value of our investments in portfolio companies, respectively. At September 30, 2013 and December 31, 2012, we had three and eight investments, respectively, that represented 5% or more of our net assets. At September 30, 2013, we had five equity investments representing approximately 64.4% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. At December 31, 2012, we had six equity investments which represented approximately 70.9% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of such investments.

As of September 30, 2013, over 98.8% of our debt investments were in a senior secured first lien position, and more than 98.0% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime-or LIBOR-based interest rate floor. As a result, we believe we are well positioned to benefit should market interest rates increase.

Our investments in senior secured debt with warrants have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round. As of September 30, 2013, we held warrants in 116 portfolio companies, with a fair value of approximately $34.2 million. The fair value of our warrant portfolio increased by approximately 15.9%, as compared to a fair value of $29.5 million at December 31, 2012.

 

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Our existing warrant holdings currently would require us to invest approximately $73.2 million to exercise such warrants. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. Of the warrants which we have monetized since inception, we have realized warrant gain multiples in the range of approximately 1.01x to 14.91x based on the historical rate of return on our investments. However, our warrants may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrant portfolio.

As required by the 1940 Act, we classify our investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that we are deemed to “control”, which, in general, includes a company in which we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of ours, as defined in the 1940 Act, which are not control investments. We are deemed to be an “affiliate” of a company in which we have invested if we own 5% or more, but less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments.

The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the three and nine-month periods ended September 30, 2013 and 2012 (unaudited):

 

(in thousands)   Three months ended September 30, 2013     Nine months ended September 30, 2013  
Portfolio Company   Type   Fair Value at
September  30,
2013
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
 

Gelesis, Inc.

  Affiliate   $ 523      $ —        $ (487   $ —        $ —        $ —        $ (1,143   $ —        $ —     

Optiscan BioMedical, Corp.

  Affiliate     12,374        566        (505     —          —          1,693        (325     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 12,897      $ 566      $ (992   $ —        $ —        $ 1,693      $ (1,468   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands)

  Three months ended September 30, 2012     Nine months ended September 30, 2012  
Portfolio Company   Type   Fair Value at
September 30,
2012
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
    Investment
Income
    Unrealized
(Depreciation)/
Appreciation
    Reversal of
Unrealized

(Depreciation)/
Appreciation
    Realized
Gain/
(loss)
 

E-Band Communication, Corp.

  Affiliate   $ 1,483      $ —        $ 21      $ —        $ —        $ 4      $ (1,466   $ —        $ —     

Gelesis

  Affiliate     1,792        239        92        —          —          683        (799     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 3,275      $ 239      $ 113      $ —        $ —        $ 687      $ (2,265   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our investment in E-Band Communications Corp., a company that was a non-controlled affiliate investment as of September 30, 2012, was liquidated during the period ended June 30, 2013. Approximately $3.3 million of realized losses and $3.3 million of net change in unrealized appreciation was recognized on this non-controlled affiliate investment during the nine-months ended September 30, 2013.

During the year ended December 31, 2012, Optiscan BioMedical, Corp. became classified as a non-controlled affiliate of ours.

Portfolio Grading

We grade each of our debt investments on a scale of 1 to 5 to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of September 30, 2013 and December 31, 2012, respectively:

 

     September 30, 2013     December 31, 2012  

(in thousands)

   Number of
Companies
     Investments at Fair
Value
     Percentage of Total
Portfolio
    Number of
Companies
     Investments at Fair
Value
     Percentage of Total
Portfolio
 

Investment Grading

                

1

     17       $ 186,084         20.8     9       $ 134,166         16.2

2

     46         483,412         54.0     52         542,885         65.6

3

     17         188,442         21.1     16         127,560         15.4

4

     5         33,046         3.7     5         22,929         2.8

5

     9         3,509         0.4     1         —           —     
     

 

 

    

 

 

      

 

 

    

 

 

 
      $ 894,493         100.0      $ 827,540         100.0
     

 

 

    

 

 

      

 

 

    

 

 

 

 

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As of September 30, 2013, our investments had a weighted average investment grading of 2.13, as compared to 2.06 at December 31, 2012. Our policy is to lower the grading on our portfolio companies as they approach the point in time when they will require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our financing criteria or are underperforming relative to their respective business plans. Various companies in our portfolio will require additional funding in the near term or have not met their business plans and have therefore been downgraded until their funding is complete or their operations improve.

At September 30, 2013, we had seven loans on non-accrual with a cumulative fair value of approximately $3.1 million compared to one loan on non-accrual at December 31, 2012 with no fair market value.

Results of Operations

Comparison of the three and nine-month periods ended September 30, 2013 and 2012

Investment Income

Total investment income for the three-month period ended September 30, 2013 was approximately $41.0 million as compared to approximately $23.9 million for the three-month period ended September 30, 2012. Total investment income for the nine-month period ended September 30, 2013 was approximately $106.5 million as compared to approximately $70.1 million for the nine-month period ended September 30, 2012.

Interest income for the three-month period ended September 30, 2013 totaled approximately $36.2 million as compared to approximately $21.7 million for the three-month period ended September 30, 2012. Interest income for the nine-month period ended September 30, 2013 totaled approximately $95.4 million as compared to approximately $63.2 million for the nine-month period ended September 30, 2012. In general, the increase in interest income is attributable to overall growth in the loan portfolio. Specifically, the increase in interest income is attributable to an increase of loan interest income of approximately $6.9 million and $21.2 million for the three and nine-month periods ended September 30, 2013, respectively, and an increase of PIK interest income of approximately $592,000 and $1.8 million for the three and nine-month periods ended September 30, 2013, respectively. In addition, backend interest income for the three and nine-month periods ended September 30, 2013 increased by $5.4 million and $7.4 million, respectively, primarily due to one-time forbearance fee of approximately $1.9 million and back end interest income for new fundings.

Income from commitment, facility and loan related fees for the three-month period ended September 30, 2013 totaled approximately $4.8 million as compared to approximately $2.2 million for the three-month period ended September 30, 2012. Income from commitment, facility and loan related fees for the nine-month period ended September 30, 2013 totaled approximately $11.1 million as compared to approximately $6.9 million for the nine-month period ended September 30, 2012. The increase in fee income is primarily attributable to additional fee accelerations and one time fees due to early pay-offs during the three and nine-month periods ended September 30, 2013 as compared to the same periods in 2012.

The following table shows the PIK-related activity for the nine-months ended September 30, 2013 and 2012, at cost (unaudited):

 

     Nine Months Ended September 30,  

(in thousands)

   2013     2012  

Beginning PIK loan balance

   $ 3,309      $ 2,041   

PIK interest capitalized during the period

     2,410        1,125   

Payments received from PIK loans

     (824     —     

Realized Loss

     —          (291
  

 

 

   

 

 

 

Ending PIK loan balance

   $ 4,895      $ 2,875   
  

 

 

   

 

 

 

The increase in payments received from PIK loans and PIK interest capitalized during the nine-months ended September 30, 2013 is due to the addition of fourteen PIK loans which have incurred PIK capitalizations during the period and the payoff of three PIK loans during the period ended September 30, 2013.

In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and nine-month periods ended September 30, 2013 and 2012, respectively.

 

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Operating Expenses

Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Our operating expenses totaled approximately $19.5 million and $12.6 million during the three month periods ended September 30, 2013 and 2012, respectively. Operating expenses totaled approximately $52.3 million and $35.1 million during the nine-month periods ended September 30, 2013 and 2012, respectively.

Interest and Fees on our Borrowings

Interest and fees on our borrowings totaled approximately $8.7 million for the three-month period ended September 30, 2013 as compared to approximately $6.1 million for the three-month period ended September 30, 2012. This increase was primarily attributable to an increase in interest and fee expenses of approximately $1.6 million for the three-month period ended September 30, 2013 related to the 2019 Notes and an increase of approximately $1.2 million related to the Asset-Backed Notes issued in December 2012.

Interest and fees on borrowings totaled approximately $26.1 million for the nine-month period ended September 30, 2013 as compared to approximately $16.3 million for the nine-month period ended September 30, 2012. This increase was primarily attributable to an increase in interest and fee expenses of approximately $7.4 million for the nine-month period ended September 30, 2013 related to the 2019 Notes and approximately $3.7 million related to the Asset-Backed Notes issued in December 2012. These expenses were partially offset by a decrease in interest and fees of approximately $1.1 million for the nine-month period ended September 30, 2013 associated with our SBA debentures due to the pay down in August 2012.

We had a weighted average cost of debt, comprised of interest and fees, of approximately 6.0% at September 30, 2013, as compared to 6.7% during September 30, 2012. The decrease was primarily driven by the Asset-Backed Notes issued in December 2012, which account for approximately 19.6% of our outstanding debt and accrue interest at 3.32%. As of September 30, 2013 the weighted average debt outstanding was approximately $585.1 million.

General and Administrative Expenses

General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses decreased to $2.2 million from $2.4 million for the three-month periods ended September 30, 2013 and 2012, respectively. These decreases were primarily due to decreases of approximately $279,000 and $136,000 related to outside accounting fees and Board of Directors compensation, respectively, partially offset by increases of approximately $149,000 and $90,000 for recruiting and consultant expenses, respectively, in the three-month period ended September 30, 2013. Expenses increased to $6.8 million from $6.1 million for the nine-month periods ended September 30, 2013 and 2012, respectively. These increases were primarily due to increases of approximately $514,000, $230,000 and $168,000 related to outside consulting services, office and transportation expenses as a result of increased headcount and recruiting fees, respectively, partially offset by a decrease of approximately $313,000 for outside accounting expenses in the nine-month period ended September 30, 2013.

Employee Compensation

Employee compensation and benefits totaled approximately $7.0 million for the three-month period ended September 30, 2013 as compared to approximately $2.9 million for the three-month period ended September 30, 2012 and approximately $15.0 million for the nine-month period ended September 30, 2013 as compared to approximately $9.6 million for the nine-month period ended September 30, 2012. This increase was due to increasing our staff to 63 active employees at September 30, 2013 from 52 active employees at September 30, 2012 and increasing our variable compensation (bonus) accrual based on performance improvements.

Stock-based compensation totaled approximately $1.6 million for the three-month period ended September 30, 2013 as compared to approximately $1.1 million for the three-month period ended September 30, 2012 and approximately $4.3 million for the nine-month period ended September 30, 2013 as compared to approximately $3.1 million for the nine-month period ended September 30, 2012. These increases were due primarily to the expense on restricted stock grants of approximately 606,000 shares granted in the first quarter of 2013.

 

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Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

A summary of realized gains and losses for the three and nine-month periods ended September 30, 2013 and 2012 is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in thousands)    2013     2012     2013     2012  

Realized gains

   $ 7,827      $ 948      $ 17,476      $ 13,122   

Realized losses

     (702     (10,039     (6,167     (11,073
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses)

   $ 7,125      $ (9,091   $ 11,309      $ 2,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three-month periods ended September 30, 2013 and September 30, 2012, we recognized net realized gains of approximately $7.1 million and net realized losses of approximately $9.1 million, respectively. During the three-months ended September 30, 2013, we recorded gross realized gains of approximately $7.8 million primarily from the sale of investments in three portfolio companies. These gains were partially offset by the liquidation of the Company’s investments in eight portfolio companies of approximately $700,000 in gross realized losses.

During the nine-month periods ended September 30, 2013 and September 30, 2012, we recognized net realized gains of approximately $11.3 million and $2.0 million, respectively. During the nine-month period ended September 30, 2013, we recorded gross realized gains of approximately $17.5 million primarily from the sale of investments in eight portfolio companies. These gains were partially offset by the liquidation of our investments in nineteen portfolio companies of approximately $6.2 million in gross realized losses.

The net unrealized appreciation and depreciation of our investments is based on fair value of each investment determined in good faith by our Board of Directors. The following table itemizes the change in net unrealized appreciation/depreciation of investments for the three and nine-month periods ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

(in thousands)

   Amount     Amount     Amount     Amount  

Gross unrealized appreciation on portfolio investments

   $ 28,760      $ 15,000      $ 58,168      $ 40,531   

Gross unrealized depreciation on portfolio investments

     (15,626     (23,845     (44,117     (56,190

Reversal of prior period net unrealized appreciation upon a realization event

     (6,196     (80     (13,599     (11,666

Reversal of prior period net unrealized depreciation upon a realization event

     2,335        11,503        7,977        12,122   

Net unrealized appreciation (depreciation) on escrow receivables

     (923     —          564        —     

Citigroup Warrant Participation

     (54     (93     45        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on portfolio investments

   $ 8,296      $ 2,485      $ 9,038      $ (15,187
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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During the three-months ended September 30, 2013, we recorded approximately $9.3 million of net unrealized appreciation from our debt, equity and warrant investments. Approximately $7.3 million is attributed to net unrealized appreciation on equity, which primarily resulted from appreciation of our investment in Virident Systems due to the announcement of the portfolio company’s acquisition by Western Digital, Inc. Approximately $2.1 million is attributed to net unrealized appreciation on our debt investments, which primarily resulted from fair value adjustments made as a result of a decrease in interest rates reflected in our current quarter effective yield. We recorded approximately $99,000 of net unrealized depreciation on our warrant investments.

During the three-month period ended September 30, 2013, net unrealized appreciation decreased by approximately $54,000 as a result of appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. Additionally during the three-month period ended September 30, 2013, net unrealized appreciation on escrow receivables decreased by approximately $923,000, primarily due to the reversal of prior period net unrealized appreciation upon being realized as a gain.

During the three month period ended September 30, 2012, we recorded approximately $2.6 million of net unrealized appreciation from our loans, warrant and equity investments. Approximately $3.9 million and $2.0 million is attributed to net unrealized appreciation on equity and warrants, respectively, of which approximately $4.1 million and $457,000 is due to the reversal of prior period net unrealized appreciation upon being realized as a loss.

During the three-month period ended September 30, 2012, we recorded approximately $3.3 million of net unrealized depreciation on our debt investments, partially offset by approximately $6.9 million due to the reversal of prior period net unrealized depreciation upon being realized as a loss.

The following table itemizes the change in net unrealized appreciation/(depreciation) in the investment portfolio by category for the three-month periods ended September 30, 2013 and 2012.

 

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     Three Months Ended September 30, 2013  

(in millions)

   Loans     Equity     Warrants     Total  

Collateral based impairments

   $ (3.4   $ —        $ (0.1   $ (3.5

Reversals due to Loan Payoffs & Warrant/Equity sales

     1.4        (0.7     (3.1     (2.4

Fair Value Market/Yield Adjustments*

        

Level 1 & 2 Assets

     —          2.0        1.9        3.9   

Level 3 Assets

     4.1        6.0        1.2        11.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     4.1        8.0        3.1        15.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation/(Depreciation)

   $ 2.1      $ 7.3      $ (0.1   $ 9.3   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended September 30, 2012  

(in millions)

   Loans     Equity     Warrants     Total  

Collateral based impairments

   $ (8.7   $ (2.1   $ (1.2   $ (12.0

Reversals due to Loan Payoffs & Warrant/Equity sales

     6.9        4.1        0.4        11.4   

Fair Value Market/Yield Adjustments*

        

Level 1 & 2 Assets

     —          (1.5     0.6        (0.9

Level 3 Assets

     (1.5     3.4        2.2        4.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     (1.5     1.9        2.8        3.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation/(Depreciation)

   $ (3.3   $ 3.9      $ 2.0      $ 2.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820.

During the nine-months ended September 30, 2013, we recorded approximately $8.4 million of net unrealized depreciation from our debt, equity and warrant investments. Approximately $14.7 million is attributed to net unrealized appreciation on equity which primarily resulted from appreciation of our investment in Virident Systems due to the announcement of the portfolio company’s acquisition by Western Digital, Inc. and $3.5 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. Approximately $3.9 million is attributed to net unrealized appreciation on our warrant investments, of which approximately $8.7 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $2.7 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. We recorded approximately $10.2 million of net unrealized depreciation on our debt investments, which primarily related to fair value adjustments made as a result of fluctuations in interest rates reflected in our effective yield.

For the nine-month period ended September 30, 2013, net unrealized appreciation increased by approximately $45,000 as a result of depreciation during the nine-month period ended September 30, 2013 of fair value on the pool of warrants collateralized under the warrant participation agreement.

 

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During the nine-month period ended September 30, 2012, we recorded approximately $15.2 million of net unrealized depreciation from our loans, equity and warrant investments. Approximately $1.6 million is attributed to net unrealized appreciation on equity investments and approximately $2.3 million is attributed to net unrealized depreciation on warrant investments. Approximately $497,000 and $6.0 million is due to the reversal of prior period net unrealized appreciation on equity and warrants respectively, upon being realized as a gain. Additionally, we recorded approximately $500,000 of unrealized depreciation attributed to reduced expectations of escrow proceeds previously anticipated to be collected.

We recorded approximately $12.6 million net unrealized depreciation on our debt investments related to fluctuations in current market interest rates during the nine-month period ended September 30, 2012.

The following table itemizes the change in net unrealized appreciation/(depreciation) in the investment portfolio by category for the nine-month periods ended September 30, 2013 and 2012.

 

     9 Months Ended September 30, 2013  

(in millions)

   Loans     Equity     Warrants     Total  

Collateral based impairments

   $ (10.3   $ —        $ (0.1   $ (10.4

Reversals due to Loan Payoffs & Warrant/Equity sales

     1.6        2.7        (8.2     (3.9

Fair Value Market/Yield Adjustments*

        

Level 1 & 2 Assets

     —          2.0        3.2        5.2   

Level 3 Assets

     (1.5     10.0        9.0        17.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     (1.5     12.0        12.2        22.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation/(Depreciation)

   $ (10.2   $ 14.7      $ 3.9      $ 8.4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9 Months Ended September 30, 2012  

(in millions)

   Loans     Equity     Warrants     Total  

Collateral based impairments

   $ (9.3   $ (2.1   $ (1.2   $ (12.6

Reversals due to Loan Payoffs & Warrant/Equity sales

     7.9        (0.5     (6.0     1.4   

Fair Value Market/Yield Adjustments*

        

Level 1 & 2 Assets

     —          (5.7     2.1        (3.6

Level 3 Assets

     (12.6     9.9        2.8        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     (12.6     4.2        4.9        (3.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation/(Depreciation)

   $ (14.0   $ 1.6      $ (2.3   $ (14.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820.

 

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Income and Excise Taxes

We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized. We intend to distribute approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013.

Net Increase in Net Assets Resulting from Operations and Change in Net Assets per Share

For the three-month periods ended September 30, 2013 and September 30, 2012, the net increase in net assets resulting from operations totaled approximately $37.0 million and approximately $4.7 million, respectively. For the nine-month periods ended September 30, 2013 and September 30, 2012, the net increase in net assets resulting from operations totaled approximately $74.5 million and $21.9 million, respectively. These changes are made up of the items previously described.

The basic and fully diluted net change in net assets per common share was $0.61 and $0.59 for the three-month period ended September 30, 2013, whereas both the basic and fully diluted net change in net assets per common share for the three-month period ended September 30, 2012 was $0.09. The basic and fully diluted net change in net assets per common share for the nine-month period ended September 30, 2013 was and $1.26 and $1.23, respectively, whereas both the basic and fully diluted net change in net assets per common share for the nine-month period ended September 30, 2012 was $0.44.

Financial Condition, Liquidity, and Capital Resources

Our liquidity and capital resources are derived from our Wells Facility, Union Bank Facility (together the “Credit Facilities”), SBA debentures, Convertible Senior Notes, 2019 Notes, Asset-Backed Notes and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our borrowings and the proceeds from the rotation of our portfolio and from public and private offerings of securities to finance our investment objectives. We may raise additional equity or debt capital through both registered offerings off a shelf registration, ATM and private offerings of securities, by securitizing a portion of our investments or borrowing, including from the SBA through our SBIC subsidiaries.

At September 30, 2013, we had $75.0 million of Convertible Senior Notes payable, $170.4 million of 2019 Notes, $102.5 million of Asset-Backed Notes and $225.0 million of SBA debentures payable. We had no borrowings outstanding under either the Wells Facility or the Union Bank Facility.

At September 30, 2013, we had $310.0 million in available liquidity, including $205.0 million in cash and cash equivalents. We had available borrowing capacity of approximately $75.0 million under the Wells Facility and $30.0 million under the Union Bank Facility, subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts.

At September 30, 2013, we had approximately $3.6 million of restricted cash. Our restricted cash consists of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized Asset-Backed Notes, based on current characteristics of the securitized loan portfolios, the restricted funds may be used to pay monthly interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the nine-months ended September 30, 2013, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of loan investments and the sale of loan and equity investments.

During the nine-months ended September 30, 2013, our operating activities provided $4.7 million of cash and cash equivalents, compared to $88.6 million used during the nine-months ended September 30, 2012. The $93.3 million increase in cash provided by operating activities resulted primarily from an increase in net assets resulting from operations of $52.7 and principal payments received on investments of approximately $171.3 million, partially offset by additional purchases of investments of approximately $108.9 million. During the nine-months ended September 30, 2013, our investing activities used $3.9 million of cash, compared to $85,000 during nine-months ended September 30, 2012. This $3.8 million increase in cash used by investing activities was primarily due to an increase of approximately $3.6 million in cash collections of interest and principal payments, classified as restricted cash, on assets that are securitized.

During the nine-months ended September 30, 2013, our financing activities provided $21.2 million of cash, compared to $131.3 million during the nine-months ended September 30, 2012. This $110.1 million decrease in cash provided by financing activities was primarily due to a decrease in borrowings of credit facilities of $39.3 million and the Issuance of our 2019 Notes of $159.5 million in 2012 partially offset by an increase in proceeds from issuance of common stock of $46.8 million and a decrease in repayments of credit facilities of $47.5 million.

 

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As of September 30, 2013, net assets totaled $643.4 million, with a net asset value per share of $10.42. We intend to generate additional cash primarily from cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in other high-quality debt investments that mature in one year or less as well as from future borrowings as required to meet our lending activities. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock.

Additionally, we expect to raise additional capital to support our future growth through future equity and debt offerings, and/or future borrowings, to the extent permitted by the 1940 Act. To the extent we determine to raise additional equity through an offering of our common stock at a price below net asset value, existing investors will experience dilution. During our 2013 Annual Shareholder Meeting held on May 30, 2013, our stockholders authorized us, with the approval of our Board of Directors, to offer and issue debt with warrants or debt convertible into shares of our common stock at an exercise or conversion price that will not be less than the fair market value per share. There can be no assurance that these capital resources will be available.

On July 25, 2012, our Board of Directors approved an extension of the stock repurchase plan under the same terms and conditions that allowed us to repurchase up to $35.0 million of our common stock. The stock repurchase plan expired on February 26, 2013 and no shares were repurchased in 2013.

As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of September 30, 2013 our asset coverage ratio under our regulatory requirements as a business development company was 286.4%, excluding our SBA debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio. As a result of the SEC exemptive order, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 200%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total leverage when including our SBA debentures was 212.8% at September 30, 2013.

Outstanding Borrowings

At September 30, 2013 (unaudited) and December 31, 2012, we had the following borrowing capacity and outstanding amounts:

 

     September 30, 2013      December 31, 2012  

(in thousands)

   Total
Available
     Carrying
Value (1)
     Total
Available
     Carrying
Value (1)
 

Union Bank Facility

   $ 30,000       $ —         $ 30,000       $ —     

Wells Facility

     75,000         —           75,000         —     

Convertible Senior Notes (2)

     75,000         72,248         75,000         71,436   

2019 Notes

     170,364         170,364         170,364         170,364   

Asset-Backed Notes

     102,474         102,474         129,300         129,300   

SBA Debentures (3)

     225,000         225,000         225,000         225,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 677,838       $ 570,086       $ 704,664       $ 596,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding.
(2) Represents the aggregate principal amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.8 million at September 30, 2013 and $3.6 million at December 31, 2012.
(3) At September 30, 2013 and at December 31, 2012, the total available borrowings under the SBA was $225.0 million, of which 76.0 million was available in HT II and $149.0 million was available in HT III.

Our net asset value may decline as a result of economic conditions in the United States. Our continued compliance with the covenants under our Credit Facilities, Convertible Senior Notes, 2019 Notes Payable, Asset-Backed Notes and SBA debentures depend on many factors, some of which are beyond our control. Material net asset devaluation could have a material adverse effect on our operations and could require us to reduce our borrowings in order to comply with certain covenants, including the ratio of total assets to total indebtedness. We believe that our current cash and cash equivalents, cash generated from operations, and funds available from our Credit Facilities will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months.

 

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Debt financing costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid expenses and amortized into the consolidated statement of operations as loan fees over the term of the related debt instrument. Prepaid financing costs, net of accumulated amortization, as of September 30, 2013 (unaudited) and December 31, 2012 were as follows:

 

(in thousands)

   September 30, 2013      December 31, 2012  

Wells Facility

   $ 516       $ 867   

SBA Debenture

     5,320         5,877   

Convertible Debt

     1,467         1,900   

Class A2 Notes

     3,260         4,074   

2019 Notes

     5,562         6,287   
  

 

 

    

 

 

 
   $ 16,125       $ 19,005   
  

 

 

    

 

 

 

Commitments

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded contractual commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded contractual commitments may be significant from time to time. As of September 30, 2013, we had unfunded contractual commitments of approximately $169.6 million. Approximately $93.1 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent our future cash requirements. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due.

In addition, we had approximately $57.3 million of non-binding term sheets outstanding to seven new companies, which generally convert to contractual commitments within approximately 45 to 60 days of signing. Non-binding outstanding term sheets are subject to completion of our due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.

Contractual Obligations

The following table shows our contractual obligations as of September 30, 2013 (unaudited):

 

     Payments due by period
(in thousands)
 

Contractual Obligations(1)(2)

   Total      Less than
1 year
     1 - 3 years      3 - 5
years
     After 5
years
 

Borrowings (3) (4)

   $ 570,086       $ —         $ 102,474       $ 72,248       $ 395,364   

Operating Lease Obligations (5)

     7,964         1,447         2,944         3,107         466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 578,050       $ 1,447       $ 105,418       $ 75,355       $ 395,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes commitments to extend credit to our portfolio companies.
(2) We also have a warrant participation agreement with Citigroup. See Note 4 to our consolidated financial statements.
(3) Includes $225.0 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $102.5 million in aggregate principal amount of the Asset-Backed Notes and $72.2 million of the Convertible Senior Notes.
(4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes was $2.8 million at September 30, 2013.
(5) Long-term facility leases.

Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $296,000 and $900,000 during the three and nine-month periods ended September 30, 2013, respectively. There was approximately $294,000 and $868,000 recorded in the same periods ended September 30, 2012, respectively

We and our executives and directors are covered by Directors and Officers Insurance, with the directors and officers being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.

 

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Borrowings

Long-term SBA Debentures

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. HT II has a total of $76.0 million of SBA guaranteed debentures outstanding as of September 30, 2013 and has paid the SBA commitment fees of approximately $1.5 million. As of September 30, 2013, we held investments in HT II in 46 companies with a fair value of approximately $103.1 million, accounting for approximately 10.5% of our total portfolio at September 30, 2013.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With our net investment of $74.5 million in HT III as of September 30, 2013, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of September 30, 2013. As of September 30, 2013, HT III has paid commitment fees of approximately $1.5 million. As of September 30 2013, we held investments in HT III in 38 companies with a fair value of approximately $202.0 million accounting for approximately 20.5% of our total portfolio at September 30, 2013.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of September 30, 2013 as a result of having sufficient capital as defined under the SBA regulations.

The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.25% to 5.73%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013 were 0.804%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the three-months ended September 30, 2013 for HT II was approximately $76.0 million with an average interest rate of approximately 5.41%. The average amount of debentures outstanding for the three-months ended September 30, 2013 for HT III was approximately $149.0 million with an average interest rate of approximately 3.46%.

In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. In April 2011, the SBA approved a $25.0 million dollar commitment for HT III. In February 2012, we repaid $24.25 million of SBA debentures under HT II, priced at 6.63%, including annual fees. In June 2012, the SBA approved a $24.25 million dollar commitment for HT III. In August 2012, we repaid $24.75 million of SBA debentures under HT II, $12.0 million priced at 6.43%, including annual fees and $12.75 million priced at 6.38%, including annual fees.

As of September 30, 2013, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA, and a maximum amount of $225.0 million for funds under common control, subject to periodic adjustments by the SBA. In the aggregate, at September 30, 2013 there was $225.0 million principal amount of indebtedness outstanding incurred by our SBIC subsidiaries, bringing us to the maximum statutory limit on the dollar amount of SBA guaranteed debentures under the SBIC program.

 

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We reported the following SBA debentures outstanding as of September 30, 2013 (unaudited) and December 31, 2012:

 

(in thousands)

Issuance/Pooling Date

   Maturity Date    Interest Rate  (1)     September 30,
2013
     December 31,
2012
 

SBA Debentures:

          

March 26, 2008

   March 1, 2018      6.38   $ 34,800       $ 34,800   

March 25, 2009

   March 1, 2019      5.53     18,400         18,400   

September 23, 2009

   September 1, 2019      4.64     3,400         3,400   

September 22, 2010

   September 1, 2020      3.62     6,500         6,500   

September 22, 2010

   September 1, 2020      3.50     22,900         22,900   

March 29, 2011

   March 1, 2021      4.37     28,750         28,750   

September 21, 2011

   September 1, 2021      3.16     25,000         25,000   

March 21, 2012

   March 1, 2022      3.28     25,000         25,000   

March 21, 2012

   March 1, 2022      3.05     11,250         11,250   

September 19, 2012

   September 1, 2022      3.05     24,250         24,250   

March 27, 2013

   March 27, 2023      3.16     24,750         24,750   
       

 

 

    

 

 

 

Total SBA Debentures

        $ 225,000       $ 225,000   
       

 

 

    

 

 

 

 

(1) Interest rate includes annual charge

Wells Facility

In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, we renewed the Wells Facility. Under this three-year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility.

On August 1, 2012, we entered into an amendment to the Wells Facility. The amendment reduces the interest rate floor by 75 basis points to 4.25% and extends the maturity date by one year to August 2015. Additionally, an amortization period of 12 months was added to pay down the principal balance as of the maturity date, and the unused line fee was reduced.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.25% and an advance rate of 50% against eligible loans. The Wells Facility is secured by loans in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the three-month period ended September 30, 2013, this non-use fee was approximately $96,000. On June 20, 2011 we paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through the end of the term. At September 30, 2013, there were no borrowings outstanding on this facility.

The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries, in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $362.0 million plus 90% of the cumulative amount of equity raised after June 30, 2012. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital that we subsequently raise. As of September 30, 2013, the minimum tangible net worth covenant has increased to $478.5 million as a result of the October 2012 follow-on public offering of 3.1 million shares of common stock for proceeds of approximately $33.6 million and the March 2013 follow-on public offering of 8.1 million shares of common stock for proceeds of approximately $95.8 million. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at September 30, 2013.

 

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Union Bank Facility

On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). On November 2, 2011, we renewed and amended the Union Bank Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets (“RBC”) have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Union Bank Facility.

On March 30, 2012 we entered into an amendment to the Union Bank Facility which permitted us to issue additional senior notes relating to the offer and sale of our 2019 Notes. On September 17, 2012, we entered into an amendment to the Union Bank Facility. Pursuant to the terms of the amendment, we are permitted to increase our unsecured indebtedness by an aggregate original principal amount not to exceed $200.0 million incurred after March 30, 2012 in one or more issuances, provided certain conditions are satisfied for each issuance.

On December 17, 2012, we further amended the Union Bank Facility to remove RBC from the Union Bank Facility. Following the removal of RBC, the Union Bank Facility consists solely of Union Bank’s commitment of $30.0 million. In connection with the amendment, the maximum availability under the Union Bank Facility, subject to a borrowing base, was reduced from $55.0 million to $30.0 million. The Union Bank Facility contains an accordion feature, in which we could increase the credit line by up to $95.0 million in the aggregate, funded by commitments from additional lenders and with the agreement of Union Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility.

Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the three-month period ended September 30, 2013, this nonuse fee was approximately $38,000. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. At September 30, 2013 there were no borrowings outstanding on this facility.

The Union Bank Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. As of September 30, 2013, the minimum tangible net worth covenant has increased to $472.8 million as a result of the January and October 2012 follow-on public offerings of 5.0 and 3.1 million shares of common stock, respectively, for total net proceeds of approximately $80.9 million and the March 2013 follow-on public offering of 8.1 million shares of common stock for total net proceeds of approximately $95.6 million. The Union Bank Facility will mature on November 1, 2014, approximately three years from the date of issuance, revolving through the first 24 months with a term out provision for the remaining 12 months. Union Bank Facility also provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at September 30, 2013.

Citibank Credit Facility

We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. which expired under normal terms. During the first quarter of 2009, we paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached.

During the nine-months ended September 30, 2013, we reduced our realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising a portfolio company warrant which was included in the collateral pool. We recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $54,000 as a result of current quarter appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $268,000 as of September 30, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid

 

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Citigroup approximately $1.6 million under the warrant participation agreement thereby reducing our realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and January 2017.

Convertible Senior Notes

In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes (the “Convertible Senior Notes”) due 2016. As of September 30, 2013, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $72.2 million.

The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.

Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders.

We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes has initially been recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, we record interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 7.9%.

As of September 30, 2013 (unaudited) and December 31, 2012, the components of the carrying value of the Convertible Senior Notes were as follows:

 

(in thousands)    As of September 30, 2013     As of December 31, 2012  

Principal amount of debt

   $ 75,000      $ 75,000   

Original issue discount, net of accretion

     (2,752     (3,564
  

 

 

   

 

 

 

Carrying value of debt

   $ 72,248      $ 71,436   
  

 

 

   

 

 

 

 

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For the three and nine-months ended September 30, 2013 and 2012 (unaudited), the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows:

 

     Three Months Ended September,      Nine Months Ended September,  
(in thousands)    2013      2012      2013      2012  

Stated interest expense

   $ 1,125       $ 1,125       $ 3,375       $ 3,375   

Accretion of original issue discount

     271         271         812         812   

Amortization of debt issuance cost

     144         144         433         433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 1,540       $ 1,540       $ 4,620       $ 4,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —         $ —         $ 2,250       $ 2,250   

The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.0% and 8.1% for the three and nine-months ended September 30, 2013 and approximately 8.1% and 8.2% for the three and nine-months ended September 30, 2012, respectively. As of September 30, 2013, we are in compliance with the terms of the indentures governing the Convertible Senior Notes.

2019 Notes

On March 6, 2012, we and U.S. Bank National Association (the “Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, we and the Trustee entered into the First Supplemental Indenture to the Base Indenture (the “First Supplemental Indenture”), dated April 17, 2012, relating to our issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million.

On September 24, 2012, we and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture (the “Second Supplemental Indenture”), dated as of September 24, 2012, relating to our issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes” and, together with the April 2019 Notes, the “2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million.

2019 Notes payable is compromised of:

 

     As of  
(in thousands)    September 30, 2013      December 31, 2012  

April 2019 Notes

   $ 84,490       $ 84,490   

September 2019 Notes

     85,874         85,874   
  

 

 

    

 

 

 

Carrying Value of Debt

   $ 170,364       $ 170,364   
  

 

 

    

 

 

 

April 2019 Notes

The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGZ.”

The April 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75.0 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our Credit Facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under our revolving senior secured credit facility with Wells Fargo Capital Finance, LLC.

 

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The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring our compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the First Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period.

The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement.

In July 2012, we reopened our April 2019 Notes and issued an additional $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount.

September 2019 Notes

The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGY.”

The September 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under our revolving senior secured credit facility with Wells Fargo Capital Finance.

The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period.

The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement.

In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount.

 

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For the three and nine-months ended September 30, 2013 and 2012 (unaudited), the components of interest expense and cash paid for interest expense for the April 2019 Notes and September 2019 Notes are as follows:

 

     Three Months Ended September 30,  
(in thousands)    2013      2012  

Stated interest expense

   $ 2,981       $ 1,509   

Amortization of debt issuance cost

     243         130   
  

 

 

    

 

 

 

Total interest expense and fees

   $ 3,224       $ 1,639   
  

 

 

    

 

 

 

Cash paid for interest expense and fees

   $ 2,981       $ —     
     Nine Months Ended September 30,  
(in thousands)    2013      2012  

Stated interest expense

   $ 8,944       $ 2,128   

Amortization of debt issuance cost

     725         179   
  

 

 

    

 

 

 

Total interest expense and fees

   $ 9,669       $ 2,307   
  

 

 

    

 

 

 

Cash paid for interest expense and fees

   $ 8,944       $ —     

As of September 30, 2013, we are in compliance with the terms of the indenture, and respective supplemental indenture, governing the April 2019 Notes and September 2019 Notes. See Note 4 to our consolidated financial statements for more detail on the 2019 Notes.

Asset-Backed Notes

On December 19, 2012, we completed a $230.7 million term debt securitization in connection with which an affiliate of ours made an offering of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “Asset-Backed Notes”), which Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes were issued by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among us, Hercules Capital Funding 2012-1 LLC, as Trust Depositor (the “Trust Depositor”), Hercules Capital Funding Trust 2012-1, as Issuer (the “Issuer”), and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The Asset-Backed Notes have a stated maturity of December 16, 2017.

As part of this transaction, we entered into a sale and contribution agreement with the Trust Depositor under which we have agreed to sell or have contributed to the Trust Depositor certain senior loans made to certain of our portfolio companies (the “Loans”). We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the Loans as of the date of their transfer to the Trust Depositor.

In connection with the issuance and sale of the Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The Asset-Backed Notes are secured obligations of the Issuer and are non-recourse to us. The Issuer also entered into an indenture governing the Asset-Backed Notes, which indenture includes customary representations, warranties and covenants. The Asset-Backed Notes were sold without being registered under the Securities Act of 1933, as amended (the “Securities Act”), to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act. In addition, the Trust Depositor entered into an amended and restated trust agreement, which includes customary representation, warranties and covenants.

The Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the Loans. We are entitled to receive a monthly fee from the Issuer for servicing the Loans. This servicing fee equals the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the Loans, excluding all defaulted Loans and all purchased Loans, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013).

We also serve as administrator to the Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At September 30, 2013 and December 31, 2012, the Asset Backed Notes had an outstanding balance of $102.5 million and $129.3 million, respectively.

 

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Under the terms of the Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. We have segregated these funds and classified them as Restricted Cash. There was approximately $3.6 million of Restricted Cash as of September 30, 2013 funded through interest collections. There was no cash segregated at December 31, 2012 due to immaterial monthly interest collections for the period ended December 31, 2012.

Dividends

The following table summarizes our dividends declared and paid or to be paid on all shares, including restricted stock, to date:

 

Date Declared

  

Record Date

  

Payment Date

   Amount Per Share  

October 27, 2005

   November 1, 2005    November 17, 2005    $ 0.03   

December 9, 2005

   January 6, 2006    January 27, 2006      0.30   

April 3, 2006

   April 10, 2006    May 5, 2006      0.30   

July 19, 2006

   July 31, 2006    August 28, 2006      0.30   

October 16, 2006

   November 6, 2006    December 1, 2006      0.30   

February 7, 2007

   February 19, 2007    March 19, 2007      0.30   

May 3, 2007

   May 16, 2007    June 18, 2007      0.30   

August 2, 2007

   August 16, 2007    September 17, 2007      0.30   

November 1, 2007

   November 16, 2007    December 17, 2007      0.30   

February 7, 2008

   February 15, 2008    March 17, 2008      0.30   

May 8, 2008

   May 16, 2008    June 16, 2008      0.34   

August 7, 2008

   August 15, 2008    September 19, 2008      0.34   

November 6, 2008

   November 14, 2008    December 15, 2008      0.34   

February 12, 2009

   February 23, 2009    March 30, 2009      0.32

May 7, 2009

   May 15, 2009    June 15, 2009      0.30   

August 6, 2009

   August 14, 2009    September 14, 2009      0.30   

October 15, 2009

   October 20, 2009    November 23, 2009      0.30   

December 16, 2009

   December 24, 2009    December 30, 2009      0.04   

February 11, 2010

   February 19, 2010    March 19, 2010      0.20   

May 3, 2010

   May 12, 2010    June 18, 2010      0.20   

August 2, 2010

   August 12, 2010    September 17, 2010      0.20   

November 4, 2010

   November 10, 2010    December 17, 2010      0.20   

March 1, 2011

   March 10, 2011    March 24, 2011      0.22   

May 5, 2011

   May 11, 2011    June 23, 2011      0.22   

August 4, 2011

   August 15, 2011    September 15, 2011      0.22   

November 3, 2011

   November 14, 2011    November 29, 2011      0.22   

February 27, 2012

   March 12, 2012    March 15, 2012      0.23   

April 30, 2012

   May 18, 2012    May 25, 2012      0.24   

July 30, 2012

   August 17, 2012    August 24, 2012      0.24   

October 26, 2012

   November 14, 2012    November 21, 2012      0.24   

February 26, 2013

   March 11, 2013    March 19, 2013      0.25   

April 29, 2013

   May 14, 2013    May 21, 2013      0.27   

July 29, 2013

   August 13, 2013    August 20, 2013      0.28   

November 4, 2013

   November 18, 2013    November 25, 2013      0.31   
        

 

 

 
         $ 8.75   
        

 

 

 

 

* Dividend paid in cash and stock.

On November 4, 2013 the Board of Directors increased the quarterly dividend by $0.03, or approximately 10.7%, and declared a cash dividend of $0.31 per share to be paid on November 25, 2013 to shareholders of record as of November 18, 2013. This dividend will represent our thirty-third consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $8.75 per share.

Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90 - 100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income.

 

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Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the year ended December 31, 2012 and 2011, 100% were distributions of ordinary income. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2013 distributions to stockholders will actually be.

Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders.

We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital.

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act.

We intend to distribute approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013.

We maintain an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, cash dividends will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash dividends.

 

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Critical Accounting Policies

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.

Valuation of Portfolio Investments

The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). At September 30, 2013, approximately 80.1% of our total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Our debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, our investments in these portfolio companies are generally considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, we value substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.

Our Board of Directors may from time to time engage an independent valuation firm to provide us with valuation assistance with respect to certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below:

(1) our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and business based assumptions are discussed with our investment committee;

(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment committee which incorporates the results of the independent valuation firm as appropriate.

(4) the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the valuation committee.

ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

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We have categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company.

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of September 30, 2013. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements.

 

Investment Type - Level Three Debt Investments

   Fair Value at
September 30, 2013
   

Valuation Techniques/

Methodologies

 

Unobservable Input (a)

  Range
     (in thousands)              

Pharmaceuticals - Debt

   $ 271,642      Market Comparable Companies  

Hypothetical Market Yield

Premium/(Discount)

  12.84% - 17.62%

(1.0%) - 0.00%

     3,258      Option Pricing Model (b)  

Average Industry Volatility (c)

Risk Free Interest Rate Estimated Time to Exit (in months)

  55.86%

0.04%

6.07

     1,033      Liquidation   Investment Collateral   $1.0 - $3.2 million

Medical Devices - Debt

     60,557      Market Comparable Companies  

Hypothetical Market Yield

Premium/(Discount)

  13.54% - 18.41%

(1.0%) - 1.0%

Technology - Debt

     148,459      Market Comparable Companies  

Hypothetical Market Yield

Premium/(Discount)

  7.84% - 21.22%

(1.0%) - 2.0%

     2,377      Liquidation   Investment Collateral   $0.4 - $5.4 million

Clean Tech - Debt

     174,487      Market Comparable Companies  

Hypothetical Market Yield

Premium/(Discount)

  13.29% - 17.86%

(0.5%) - 1.5%

Lower Middle Market - Debt

     232,580      Market Comparable Companies  

Hypothetical Market Yield

Premium/(Discount)

  12.67% - 17.17%

(0.5%) - 0.75%

     100        Investment Collateral   $0.00 - $2.1 million
  

 

 

       

Total Level Three Debt Investments

   $ 894,493         
  

 

 

       

 

(a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Schedule of Investments are included in the industries note above as follows:

Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments.

Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments.

Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Schedule of Investments.

Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments. Clean Tech, above, aligns with the Clean Tech industry in the Schedule of Investments.

 

(b) An option pricing model valuation technique was used to derive the fair value of the conversion feature of convertible notes.
(c) Represents the range of industry volatility used by market participants when pricing the investment.

 

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Investment Type -

   Fair Value at
September 30, 2013
   

Valuation Techniques/
Methodologies

 

Unobservable Input (a)

  Range
     (in thousands)              

Level Three Equity Investments

   $ 45,063      Market Comparable Companies  

EBITDA Multiple (b)

Revenue Multiple (b)

Discount for Lack of Marketability (c)

  5.7x - 47.0x

1.2x - 5.7x

10.8% - 27.4%

Level Three Warrant Investments

     26,393      Market Comparable Companies  

EBITDA Multiple (b)

Revenue Multiple (b)

Discount for Lack of Marketability (c)

  5.7x - 47.0x

1.2x - 5.7x

10.8% - 27.4%

Warrant positions additionally subject to:

     Option Pricing Model  

Average Industry Volatility (d)

Risk-Free Interest Rate

Estimated Time to Exit (in months)

  34.9% - 103.5%

0.1% - 1.3%

12 - 48

  

 

 

       

Total Level Three Warrant and Equity Investments

   $ 71,456         
  

 

 

       

 

(a) The significant unobservable inputs used in the fair value measurement of our warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date.
(b) Represents amounts used when we have determined that market participants would use such multiples when pricing the investments.
(c) Represents amounts used when we have determined market participants would take into account these discounts when pricing the investments.
(d) Represents the range of industry volatility used by market participants when pricing the investment.

Debt Investments

We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. Our debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries at all stages of development. Given the nature of lending to these types of businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged.

In making a good faith determination of the value of our investments, we generally start with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest which has been accrued to principal as earned. We then apply the valuation methods as set forth below.

We apply a procedure for debt investments that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. We use pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. We consider each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.

Our process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. We value our syndicated loans using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.

We record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security were to be less than amortized cost of the investment. Conversely, where appropriate, we record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost.

 

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When originating a debt instrument, we generally receive warrants or other equity-related securities from the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan.

Equity-Related Securities and Warrants

Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date.

We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate our valuation of the warrant and equity related securities. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date.

Income Recognition

We record interest income on the accrual basis and we recognize it as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At September 30, 2013, we had seven loans on non-accrual with a cumulative fair value of approximately $3.1 million compared to one loan on non-accrual at December 31, 2012 with no fair market value.

Paid-In-Kind and End of Term Income

Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an end-of-term payment that we amortize into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $889,000 and $2.7 million in PIK income in the three and nine-month periods ended September 30, 2013, respectively. The Company recorded approximately $297,000 and $866,000 in PIK income in the three and nine-month periods ended September 30, 2012, respectively.

Fee Income

Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees.

We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding.

 

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Equity Offering Expenses

Our offering costs are charged against the proceeds from equity offerings when received.

Debt Issuance Costs

Debt issuance costs are being amortized over the life of the related debt instrument using the straight line method, which closely approximates the effective yield method.

Stock-Based Compensation

We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We follow ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock options granted. Under ASC 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period.

Federal Income Taxes

We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code. We are subject to a non-deductible federal excise tax if we do not distribute at least 98% of our taxable income and 98.2% of our capital gain net income for each one year period ending on October 31. At December 31, 2012, 2011, 2010 and 2009, no excise tax was recorded. We intend to distribute approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we anticipate no impacts from adopting this standard on our statement of assets and liabilities or results of operations. We are currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

 

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Subsequent Events

Dividend Declaration

On November 4, 2013 the Board of Directors increased the quarterly dividend by $0.03, or approximately 10.7%, and declared a cash dividend of $0.31 per share to be paid on November 25, 2013 to shareholders of record as of November 18, 2013. This dividend will represent our thirty-third consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $8.75 per share.

Closed and Pending Commitments

As of November 4, Hercules has:

 

  a. Closed commitments of approximately $27.3 million to new and existing portfolio companies, and funded approximately $19.5 million since the close of the third quarter.

 

  b. Pending commitments (signed non-binding term sheets) of approximately $91.5 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, 2013 Closed Commitments

   $ 579.3   

Q4-13 Closed Commitments (as of November 4, 2013)

     27.3   
  

 

 

 

Total Year-to-date 2013 Closed Commitments(a)

   $ 606.6   

Pending Commitments (as of November 4, 2013)(b)

     91.5   
  

 

 

 

Year to date 2013 Closed and Pending Commitments

   $ 698.1   
  

 

 

 

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.

Portfolio Company Developments

In October 2013, ADMA Biologics, Inc. (OTCBB: ADMA) completed its initial public offering of 3,352,941 shares of its common stock at $8.50 per share.

In October 2013, Western Digital Corp (NASDAQ: WDC) completed its acquisition of Hercules portfolio company Virident Systems, Inc. This liquidity event represents a net realized gain of approximately $7.5 million, an internal rate of return of 76.5% (excluding proceeds in escrow) and a gross multiple of 2.5x on Hercules total investment in Virident Systems, Inc.

In October 2013, EnerSys (NYSE: ENS) completed its acquisition of Hercules portfolio company Purcell Systems, Inc. This liquidity event represents a net realized gain of approximately $617,000, an internal rate of return of 15.6% (excluding proceeds in escrow), and a gross multiple of 6.0x on Hercules total investment in Purcell Systems, Inc.

In November 2013, Biomet, Inc. completed its acquisition of Hercules portfolio company Lanx, Inc. This liquidity event represents an expected net realized gain of approximately $1.9 million, an expected internal rate of return of 38.6% (excluding proceeds in escrow), and an expected gross multiple of 2.3x on Hercules total investment in Lanx, Inc.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our investment income will be affected by changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments include variable interest rates. As of September 30, 2013, approximately 98.0% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates, or variable rates with a floor. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio.

Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2013, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings.

 

(in thousands)

Basis Point Change (1)

   Interest
Income
     Interest
Expense
     Net
Income
 

100

   $ 7,267       $ —         $ 7,267   

200

   $ 13,114       $ —         $ 13,114   

300

   $ 20,018       $ —         $ 20,018   

400

   $ 26,977       $ —         $ 26,977   

500

   $ 33,935       $ —         $ 33,935   

 

(1) A decline in interest rates would not have a material impact on our Consolidated Financial Statements.

We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During the nine-month period ended September 30, 2013, we did not engage in interest rate hedging activities.

Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio, and other business developments, including borrowings under our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes and Asset-Based Notes, that could affect the net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio.

For additional information regarding the interest rate associated with each of our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes and Asset-Based Notes, please refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources – Outstanding Borrowings” in this quarterly report on Form 10-Q.

 

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our chief executive and chief financial officers, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this quarterly report on Form 10-Q, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no other changes in our internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended, that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.

 

ITEM 1A. RISK FACTORS

In addition to the risks discussed below, important risk factors that could cause results or events to differ from current expectations are described in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on February 28, 2013.

Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at September 30, 2013 (unaudited) that represent greater than 5% of our net assets:

 

     September 30, 2013  
(in thousands)    Fair
Value
     Percentage of
Net Assets
 

Merrimack Pharmaceuticals, Inc.

   $ 41,526         6.5

BrightSource Energy, Inc.

   $ 35,573         5.5

Tectura Corporation

   $ 32,170         5.0

Merrimack Pharmaceuticals, Inc. is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines paired with companion diagnostics for the treatment of serious diseases, with an initial focus on cancer.

Brightsource Energy, Inc. designs, develops and sells solar thermal power systems that deliver reliable, clean energy to utilities and industrial companies.

Tectura Corporation provides technology solutions, consulting services, including ERP implementations and solutions, to businesses worldwide.

 

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Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected.

A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations.

As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future (currently February 2014) unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations. A failure by Congress to raise the debt limit would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. If the U.S. Government fails to complete its budget process or to provide for a continuing resolution before the expiration of the current continuing resolution (currently January 2014), another federal government shutdown may result. Such a failure or the perceived risk of such a failure consequently could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies. Consequently, the continued uncertainty in the general economic environment, including the recent government shutdown and potential debt ceiling implications, as well in specific economies of several individual geographic markets in which our portfolio companies operate, could adversely affect our business, financial condition and results of operations.

Results may fluctuate and may not be indicative of future performance.

Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our debt investments, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions.

Investing in publicly traded companies can involve a high degree of risk and can be speculative.

We have invested, and expect to continue to invest, a portion of our portfolio in publicly traded companies or companies that are in the process of completing their initial public offering, or IPO. As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, which may restrict our ability to sell our positions and may have a material impact on us.

It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business.

Under our borrowings and Credit Facilities, current lenders have, and any future lender or lenders may have, fixed dollar claims on our assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to our assets in the collateral pool. Our Credit Facilities and borrowings also subject us to various financial and operating covenants, including, but not limited to, maintaining certain financial ratios and minimum tangible net worth amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we may grant a securities interest in our assets in connection with any such credit facilities and borrowings.

Our Credit Facilities generally contain customary default provisions such as a minimum net worth amount, a profitability test, and a restriction on changing our business and loan quality standards. In addition, our Credit Facilities require or are expected to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially the business of our portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other things, in termination of the availability of further funds under the facilities and accelerated maturity dates for all amounts outstanding under the facilities, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we finance through the facilities. This could reduce our revenues and, by delaying any cash payment allowed to us under our facilities until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and our ability to make distributions sufficient to maintain our status as a RIC.

The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain sufficient capital in the future, we may be forced to reduce or discontinue our operations, not be able to make new investments, or otherwise respond to changing business conditions or competitive pressures.

 

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To the extent original issue discount and paid-in-kind interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income.

Our investments may include original issue discount, or OID, instruments and contractual payment-in-kind, or PIK, interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:

 

   

OID instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments;

 

   

OID accruals may create uncertainty about the source of our distributions to stockholders;

 

   

OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral; and

 

   

OID and PIK instruments may represent a higher credit risk than coupon loans.

If we are unable to satisfy Code requirements for qualification as a RIC, then we will be subject to corporate-level income tax, which would adversely affect our results of operations and financial condition.

We elected to be treated as a RIC for federal income tax purposes with the filing of our federal corporate income tax return for 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of income, asset diversification and distribution requirements contained in Subchapter M of the Code, or if we fail to maintain our election to be regulated as a business development company under the 1940 Act. If we fail to qualify for the federal income tax benefits allowable to RICs for any reason and become subject to a corporate-level income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to our stockholders and the actual amount of our distributions. Such a failure would have a material adverse effect on us, the net asset value of our common stock and the total return, if any, obtainable from your investment in our common stock. Any net operating losses that we incur in periods during which we qualify as a RIC will not offset net capital gains (i.e., net realized long-term capital gains in excess of net realized short-term capital losses), and we cannot pass such net operating losses through to our stockholders.

We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income.

In accordance with U.S. federal tax requirements, we include in income for tax purposes certain amounts that we have not yet received in cash, such as contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances, certain loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees or prepayment fees. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such payment-in-kind interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax purposes certain other amounts prior to receiving the related cash.

Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that we receive. This will generally result in “original issue discount” for tax purposes, which we must recognize as ordinary income, increasing the amount that we are required to distribute to qualify for the federal income tax benefits applicable to RICs. Because these warrants generally will not produce distributable cash for us at the same time as we are required to make distributions in respect of the related original issue discount, we would need to obtain cash from other sources or to pay a portion of our distributions using shares of newly issued common stock, consistent with Internal Revenue Service requirements, to satisfy such distribution requirements.

Other features of the debt instruments that we hold may also cause such instruments to generate original issue discount, resulting in a dividend distribution requirement in excess of current cash interest received. Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the RIC tax requirement to distribute generally an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Under such circumstances, we may have to sell some of our assets, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify for the federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level income tax on all our income.

 

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Our realized gains are reduced by amounts paid pursuant to the warrant participation agreement.

Citigroup, a former credit facility provider to Hercules, has an equity participation right through a warrant participation agreement on the pool of loans and certain warrants formerly collateralized under its then existing credit facility (the “Citigroup Facility”). Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. As a result, Citigroup is entitled to 10% of the realized gains on certain warrants until the realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citigroup Facility is terminated until the Maximum Participation Limit has been reached.

During the nine-months ended September 30, 2013, we reduced our realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising a portfolio company warrant which was included in the collateral pool. We recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $54,000 as a result of current quarter appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $268,000 as of September 30, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid $1.6 million under the warrant participation agreement thereby reducing our realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and January 2017.

SBA regulations limit the outstanding dollar amount of SBA guaranteed debentures that may be issued by an SBIC or group of SBICs under common control.

The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to $150.0 million or to a group of SBICs under common control to $225.0 million. A proposed bill in the U.S. Senate, the Expanding Access to Capital for Entrepreneurial Act, or Senate Bill 511, would increase the total SBIC leverage capacity for affiliated SBIC funds from $225 million to $350 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted.

Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities.

Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the nine month period ended September 30, 2013, we issued approximately 142,000 shares of common stock to shareholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value the shares of our common stock issued under our dividend reinvestment plan was approximately $1.9 million.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5. OTHER INFORMATION

Not Applicable

 

ITEM 6. EXHIBITS

 

Exhibit
Number

  

Description

31.1    Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      HERCULES TECHNOLOGY GROWTH CAPITAL, INC. (Registrant)
Dated: November 7, 2013      

/S/    MANUEL A. HENRIQUEZ

      Manuel A. Henriquez
      Chairman, President, and Chief Executive Officer
Dated: November 7, 2013      

/S/    JESSICA BARON

      Jessica Baron
      Vice President, Finance and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description

31.1    Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

* Filed herewith.

 

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