Hercules Capital, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Investments

Investments

3 Months Ended

Mar. 31, 2023

Schedule Of Investments [Abstract]

Investments

4. Investments

Control and Affiliate Investments

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”. Under the 1940 Act, the Company is generally 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 generally 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. For purposes of determining the classification of its investments, the Company has included consideration of any voting securities or board appointment rights held by the Adviser Funds.

The following table summarizes the Company’s realized gains and losses and changes in unrealized appreciation and depreciation on control and affiliate investments for the three months ended March 31, 2023 and 2022.


(in thousands)				Three Months Ended March 31, 2023
Portfolio Company(1)	Type	Fair Value as of March 31, 2023		Interest Income		Fee Income		Net Change in Unrealized Appreciation (Depreciation)			Realized Gain (Loss)
Control Investments
Coronado Aesthetics, LLC	Control	$	256	$	—	$	—	$	(63	)	$	—
Gibraltar Acquisition LLC (p.k.a. Gibraltar Business Capital, LLC)	Control		40,701		796		19		3,735			—
Hercules Adviser LLC	Control		36,595		150		—		5,442			—
Tectura Corporation	Control		7,774		170		—		(268	)		—
Total Control Investments		$	85,326	$	1,116	$	19	$	8,846		$	—

(in thousands)				Three Months Ended March 31, 2022
Portfolio Company(1)	Type	Fair Value as of March 31, 2022		Interest Income		Fee Income		Net Change in Unrealized Appreciation (Depreciation)			Realized Gain (Loss)
Control Investments
Coronado Aesthetics, LLC	Control	$	614	$	—	$	—	$	49		$	—
Gibraltar Business Capital, LLC	Control		42,622		834		16		(1,227	)		—
Hercules Adviser LLC	Control		24,694		111		—		2,554			—
Tectura Corporation	Control		8,347		170		—		78			—
Total Control Investments		$	76,277	$	1,115	$	16	$	1,454		$	—

Affiliate Investments
Black Crow AI, Inc.(2)	Affiliate	$	—	$	—	$	—	$	(120	)	$	3,772
Pineapple Energy LLC (2)	Affiliate		4,830		1,047		—		873			—
Total Affiliate Investments		$	4,830	$	1,047	$	—	$	753		$	3,772
Total Control & Affiliate Investments		$	81,107	$	2,162	$	16	$	2,207		$	3,772

(1)

In accordance with Rules 3-09, 4-08(g), and Rule 10-01(b)(1) of Regulation S-X, (“Rule 3-09”, “Rule 4-08(g)”, and “Rule 10-01(b)(1)”, respectively), the Company must determine if its unconsolidated subsidiaries are considered “significant subsidiaries”. As of March 31, 2023 and March 31, 2022, there were no unconsolidated subsidiaries that are considered “significant subsidiaries”.

(2)

As of September 30, 2022, Black Crow AI, Inc. and Pineapple Energy LLC were no longer affiliates as defined under the 1940 Act.

Portfolio Composition

The following table shows the fair value of the Company’s portfolio of investments by asset class as of March 31, 2023 and December 31, 2022:


(in thousands)	March 31, 2023					December 31, 2022

	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
Senior Secured Debt	$	2,910,526		93.0	%	$	2,741,388		92.5	%
Unsecured Debt		58,125		1.9	%		54,056		1.8	%
Preferred Stock		40,345		1.3	%		41,488		1.4	%
Common Stock		84,072		2.7	%		92,484		3.1	%
Warrants		33,210		1.0	%		30,646		1.1	%
Investment Funds & Vehicles		3,900		0.1	%		3,893		0.1	%
Total	$	3,130,178		100.0	%	$	2,963,955		100.0	%

A summary of the Company’s investment portfolio, at value, by geographic location as of March 31, 2023 and December 31, 2022 is shown as follows:


(in thousands)	March 31, 2023					December 31, 2022
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
United States	$	2,829,873		90.4	%	$	2,670,520		90.1	%
United Kingdom		174,678		5.6	%		171,629		5.8	%
Netherlands		89,952		2.9	%		88,915		3.0	%
Canada		11,132		0.4	%		19,472		0.7	%
Israel		19,432		0.6	%		9,052		0.3	%
Denmark		3,739		0.1	%		—		0.0	%
Germany		893		0.0	%		990		0.0	%
Other		479		0.0	%		573		0.0	%
Ireland		—		0.0	%		2,804		0.1	%
Total	$	3,130,178		100.0	%	$	2,963,955		100.0	%

The following table shows the fair value of the Company’s portfolio by industry sector as of March 31, 2023 and December 31, 2022:


(in thousands)	March 31, 2023					December 31, 2022
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
Drug Discovery & Development	$	1,220,057		39.0	%	$	1,150,707		38.8	%
Software		828,712		26.5	%		798,264		26.9	%
Consumer & Business Services		474,883		15.2	%		439,384		14.8	%
Healthcare Services, Other		214,199		6.8	%		198,763		6.7	%
Communications & Networking		107,201		3.4	%		101,833		3.5	%
Diversified Financial Services		87,805		2.8	%		68,569		2.3	%
Information Services		62,039		2.0	%		60,759		2.1	%
Manufacturing Technology		48,993		1.6	%		46,109		1.6	%
Biotechnology Tools		33,032		1.1	%		32,825		1.1	%
Electronics & Computer Hardware		21,476		0.7	%		21,517		0.7	%
Sustainable and Renewable Technology		12,899		0.4	%		15,486		0.5	%
Media/Content/Info		9,956		0.3	%		35		0.0	%
Surgical Devices		4,189		0.1	%		3,038		0.1	%
Consumer & Business Products		2,593		0.1	%		2,821		0.1	%
Medical Devices & Equipment		1,155		0.0	%		1,834		0.1	%
Semiconductors		966		0.0	%		21,921		0.7	%
Drug Delivery		23		0.0	%		90		0.0	%
Total	$	3,130,178		100.0	%	$	2,963,955		100.0	%

No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of March 31, 2023 or December 31, 2022.

Concentrations of Credit Risk

The Company’s customers are primarily privately held companies and public companies which are active in the “Drug Discovery & Development", "Software”, “Consumer & Business Services”, “Healthcare Services, Other”, and “Communications & Networking" 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.

Industry and sector concentrations vary as new loans are recorded and loans are paid off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and warrant or other equity 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.

As of March 31, 2023 and December 31, 2022, the Company’s ten largest portfolio companies represented approximately 29.5% and 29.0% of the total fair value of the Company’s investments in portfolio companies, respectively. As of March 31, 2023 and December 31, 2022, the Company had six and eight portfolio companies, respectively, that represented 5% or more of the Company’s net assets. As of March 31, 2023, the Company had four equity investments representing approximately 48.6% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity investments. As of December 31, 2022, the Company had four equity investments which represented approximately 39.8% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments.

Investment Collateral

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. The Company's investments were collateralized as follows as of March 31, 2023 and December 31, 2022:


	Percentage of debt investments (at fair value), as of
	March 31, 2023			December 31, 2022
Senior Secured First Lien
All assets including intellectual property		44.4	%		42.0	%
All assets with negative pledge on intellectual property		25.6	%		26.1	%
“Last-out” with security interest in all of the assets		11.5	%		11.6	%
Total senior secured first lien position		81.5	%		79.7	%
Second lien		16.5	%		18.4	%
Unsecured		2.0	%		1.9	%
Total debt investments at fair value		100.0	%		100.0	%

Investment Income

The Company’s investment portfolio generates interest, fee, and dividend income. The composition of the Company’s interest income and fee income is as follows:


(in thousands)	Three Months Ended March 31,
	2023		2022
Contractual interest income	$	82,791	$	49,544
Exit fee interest income		9,382		6,726
PIK interest income		5,528		4,975
Other interest income (1)		2,196		1,007
Total interest income	$	99,897	$	62,252


(in thousands)	Three Months Ended March 31,
	2023		2022
Recurring fee income	$	2,040	$	1,779
Fee income - expired commitments		243		87
Accelerated fee income - early repayments		2,910		1,039
Total fee income	$	5,193	$	2,905

(1)

Other interest income includes OID interest income and interest recorded on other assets.

As of March 31, 2023 and December 31, 2022, unamortized capitalized fee income was recorded as follows:


(in millions)	March 31,		December 31,
	2023		2022
Offset against debt investment cost	$	44.6	$	43.1
Deferred obligation contingent on funding or other milestone		10.9		10.9
Total Unamortized Fee Income	$	55.5	$	54.0

As of March 31, 2023 and December 31, 2022, loan exit fees receivable were recorded as follows:



(in millions)	March 31,		December 31,
	2023		2022
Included within debt investment cost	$	33.0	$	32.5
Deferred receivable related to expired commitments		3.4		5.0
Total Exit Fees Receivable	$	36.4	$	37.5