Market Overview

Hercules Announces Third Quarter 2017 Financial Results and Declares a $0.31 per Share Quarterly Distribution

Share:

Company surpassed $7.0 billion milestone in Total Debt Commitments
since inception

Completed a $125.0 million strategic venture loan portfolio
acquisition from Ares Capital

Hercules to remain an "Internally Managed" BDC for the foreseeable
future

Q3 2017 Financial Achievements and Highlights

  • Net Investment Income "NII" of $24.0 million, or $0.29 per share
    • Total Investment Income of $45.9 million
    • New Debt and Equity Commitments of $154.4 million
    • Total Gross Fundings of $146.7 million
    • Unscheduled early principal repayments "early payoffs" of
      $114.7 million
  • Distributable Net Operating Income "DNOI," a non-GAAP measure, of
    $25.8 million, or $0.31 per share
  • 14.1% GAAP Effective Yields
  • $335.6 million of available liquidity for future portfolio and
    earnings growth, subject to existing terms and covenants
  • Net regulatory leverage of 49.4%(1) and
    regulatory leverage of 66.2%
  • Total Shareholder Returns "TSR" of 4.3%, 71.7% and 104.6%, one,
    five and seven-year, respectively, as of September 30, 2017
  • 12.1% Return on Average Equity "ROAE" (NII/Average Equity)
  • 6.4% Return on Average Assets "ROAA" (NII/Average Assets)

Year-to-date ending September 30, 2017 Financial Achievements and
Highlights

  • NII of $71.9 million for the nine months ending September 30, 2017,
    or $0.88 per share, an increase of 7.0%, compared to $67.2 million for
    the nine months ending September 30, 2016
    • Total Investment Income of $140.7 million
    • New Equity and Debt Commitments of $551.4 million
    • Total Gross Fundings of $487.3 million
    • Unscheduled early principal repayments of $381.4 million
  • Sixteen (16) Announced or Completed Portfolio Company M&A Liquidity
    Events
  • ~$0.19 per share, or ~$16.0 million of projected 2017 earnings
    spillover
    (2)

(1) Net regulatory leverage is defined as regulatory
leverage less cash balance at period end.

(2) Per share calculation based on weighted shares of
common stock outstanding of 82.1 million, and subject to change based on

Q4 2017 financial performance and any tax adjustments at 2017
year-end.

Hercules
Capital, Inc.
(NYSE:HTGC) ("Hercules" or the "Company"), the
leading specialty financing provider to innovative venture growth stage
companies backed by leading venture capital firms, today announced its
financial results for the third quarter ended September 30, 2017.

The Company also announced that its Board of Directors has declared a
third quarter cash distribution of $0.31 per share, that will be payable
on November 20, 2017, to shareholders of record as of November 13, 2017.

Manuel A. Henriquez, founder, chairman and chief executive officer of
Hercules, commented, "Our strong origination momentum continued in Q3
2017, despite this typically being our slowest period, with
approximately $154 million in new commitments, bringing us to a total of
over half a billion dollars in new commitments through the end of Q3
2017. In addition to our team's strong origination activities, we also
had gross fundings of more than $487 million, through the end of Q3
2017. During the quarter, we also continued to experience
higher-than-expected levels of unscheduled early payoffs of
approximately $115 million, $15 million higher than anticipated.
Finally, our ability to identify and work with some of the most
promising and innovative venture growth stage companies was evidenced by
the sixteen (16) portfolio company M&A liquidity events that were
announced or completed through the end Q3 2017."

Henriquez continued, "As we turn our attention to Q4 2017, we remain
well positioned to potentially achieve another record year for new
commitment originations. We expect to achieve this potential new record
while also completing several strategic initiatives that strengthen our
competitive leadership position and enhance our capabilities, as we
continue to pursue our ‘slow and steady' portfolio growth strategy and
increase shareholder value. First, we successfully closed our inaugural
investment grade institutional bond offering of $150 million of 4.625%
Notes, as we look to retire a portion of our 6.25% Notes, which is
expected to be accretive to shareholder value as well as optimize our
balance sheet and help lower our overall cost of capital. Second, we
recently announced an agreement with Ares Capital to acquire their
venture lending portfolio for approximately $125 million. The
transaction reinforces our position as the leading and largest
venture-focused BDC in the industry. In addition, the newly acquired
assets are expected to be immediately accretive to Hercules' Q4 2017
earnings by approximately $0.01 per share. Together, these events
demonstrate our continuous efforts to expand our growing market
leadership presence while enhancing our overall investment portfolio and
strengthening our balance sheet. These activities, in conjunction with
our disciplined investment approach, should allow the Company to
continue to navigate an increasingly competitive market."

Q3 2017 Review and Operating Results

Debt Investment Portfolio

Hercules successfully extended new debt and equity commitments to seven
(7) companies, five (5) new and two (2) existing companies, totaling
$154.4 million, and gross fundings of $146.7 million.

During the quarter, Hercules realized unscheduled early principal
repayments of $114.7 million, nearly $15.0 million higher than expected,
which along with normal scheduled amortization of $21.0 million,
totaling $135.7 million in total debt repayments.

Net investment loan portfolio decreased by ($9.7) million, which
included origination growth of $9.8 million, despite higher than
anticipated early repayments, offset by ($19.5) million of net changes
attributed to conversions, liquidations and fees.

The Company's total investment portfolio, (at cost and fair value) by
category, quarter-over-quarter is highlighted below:

Total Investment Portfolio: Q2 2017 to
Q3 2017

(in millions)   Debt   Equity   Warrants   Total Portfolio
Balances at Cost at 6/30/17 $ 1,324.0   $ 135.1   $ 42.0   $ 1,501.1  
New fundings(a) 145.5 0.6 0.6 146.7
Warrants not related to Q3 2017 fundings - - 0.1 0.1
Early payoffs(b) (114.7 ) - - (114.7 )
Principal payments received on investments (21.0 ) - - (21.0 )
Net changes attributed to conversions, liquidations, and fees   (19.5 )   (0.5 )   (3.2 )   (23.2 )
Net activity during Q3 2017   (9.7 )   135.2     (2.5 )   (12.1 )
Balances at Cost at 9/30/17 $ 1,314.3   $ 135.2   $ 39.5   $ 1,489.0  
 
       
Balances at Value at 6/30/17 $ 1,287.6   $ 75.4   $ 32.5   $ 1,395.5  
Net activity during Q3 2017 (9.7 ) 0.1 (2.5 ) (12.1 )
Net change in unrealized appreciation / (depreciation)   22.2     8.8     2.7     33.7  
Net activity during Q3 2017   12.5     8.9     0.2     21.6  
Balances at Value at 9/30/17 $ 1,300.1   $ 84.3   $ 32.7   $ 1,417.1  
 

(a) New fundings amount includes $10.0 million total
new fundings associated with revolver loans during Q3 2017

(b) Unscheduled paydowns include $6.5 million paydown
on revolvers during Q3 2017

 

Debt Investment Portfolio Balance

                             
(in millions)       Q3 2017       Q2 2017       Q1 2017       Q4 2016       Q3 2016
 
Ending Balance at Cost $1,314.3 $1,324.0 $1,399.2 $1,384.9 $1,275.9
 
Weighted Average Balance $1,300.0 $1,298.0 $1,381.0 $1,322.0 $1,236.0
                                       
 

As of September 30, 2017, 85.6% of the Company's debt investments were
in a "true first-lien" senior secured position.

Effective Portfolio Yield and Stable Core Portfolio Yield ("Core
Yield")

Effective Yields on our debt investment portfolio were 14.1% during Q3
2017, down from the previous quarter of 14.9%, attributed to a
materially lower level of unscheduled early repayments of $114.7 million
compared to $166.4 million in Q2 2017, or 31.1% lower early repayments.
Our effective portfolio yields generally include the effects of fees and
income accelerations attributed to early payoffs, and other one-time
events. Our effective yields are materially impacted by elevated levels
of unscheduled early principal repayments, and are derived by dividing
total investment income by the weighted average earning investment
portfolio assets outstanding during the quarter, which excludes
non-interest earning assets such as warrants and equity investments.

Core Yields were at 12.6% during Q3 2017, or slightly above our 2017
expected normalized levels of 11.5% to 12.5%, mostly attributed to older
lower yielding debt investments being refinanced or repaid during the
quarter and replaced by above average yielding debt investments.
Hercules defines Core Yield as yields that generally exclude any benefit
from income related to early debt repayments attributed to the
acceleration of unamortized income and prepayment fees, and includes
income from expired commitments.

Income Statement

Total investment income increased slightly in Q3 2017 to $45.9 million,
compared to $45.1 million in Q3 2016. The increase is primarily
attributable to debt investment portfolio growth, a greater weighted
average principal outstanding of the Company's debt investment portfolio
and a higher level of unscheduled early repayments.

Non-interest and fees expenses were slightly higher to $11.4 million in
Q3 2017, compared to $11.2 million in Q3 2016. The slight increase was
primarily attributed to new hires and variable compensation related to
investment origination activities.

Interest expense and fees were $10.5 million in Q3 2017, compared to
$10.1 million in Q3 2016. The increase was primarily due to the higher
weighted average note balances outstanding on our 6.25% notes due 2024
and our $230.0 million 4.375% convertible notes due 2022 ("Convertible
Notes"), offset by the retirement of our 7.00% Notes due 2019 ("2019
Notes").

The Company had a weighted average cost of borrowings comprised of
interest and fees, of 5.6% in Q3 2017 compared to 6.0% in Q3 2016. The
decrease was primarily related to the retirement of our 2019 Notes in Q1
2017.

NII – Net Investment Income

NII for Q3 2017 increased modestly to $24.0 million compared to $23.8
million in Q3 2016; or $0.29 per share, based on higher shares of 82.5
million basic weighted average shares outstanding in Q3 2017.

DNOI - Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q3 2017 was $25.8 million or $0.31 per
share, compared to $25.2 million, or $0.34 per share, in Q3 2016. The
increase in DNOI income is primarily attributable to the increase in the
weighted average loan balance and an increase in unscheduled early debt
repayment fees and accelerations, offset by a higher amount of
stock-based compensation, compared to the prior year period.

DNOI is a non-GAAP financial measure. The Company believes that DNOI
provides useful information to investors and management because it
measures Hercules' operating performance, exclusive of employee stock
compensation, which represents expense to the Company, but does not
require settlement in cash. DNOI includes income from payment-in-kind,
or "PIK," and back-end fees that are generally not payable in cash on a
regular basis, but rather at investment maturity. Hercules believes
disclosing DNOI and the related per share measures are useful and
appropriate supplements and not alternatives to GAAP measures for net
operating income, net income, earnings per share and cash flows from
operating activities.

Continued Credit Discipline and Strong Credit Performance Since
Inception

Hercules' net cumulative realized gain/(loss) position, since its first
origination activities in October 2004 through September 30, 2017,
(including net loan, warrant and equity activity) on investments,
totaled ($29.3) million, on a GAAP basis, spanning nearly 13 years of
investment activities.

When compared to cumulative total new debt investment commitments during
the same period of over $7.0 billion, the total cumulative realized
gain/(loss) since inception of ($29.3) million represents approximately
42 basis points "bps" or 0.42% of cumulative debt commitments, or an
effective annualized loss rate of 3 bps or 0.03%.

Realized Gains/(Losses)

During Q3 2017, Hercules had net realized gain/(loss) of ($24.5)
million, which included gross realized gains of $1.3 million primarily
from the sale or acquisition of existing warrant and equity positions.
These gains were offset by gross realized losses of ($25.8) million
primarily from the liquidation or write off of various warrant and
equity investments in seven (7) portfolio companies and debt investments
in three (3) portfolio companies.

Unrealized Appreciation/ (Depreciation)

A break-down of the net unrealized appreciation/(depreciation) in the
investment portfolio is highlighted below:

       
Three Months Ended September 30, 2017
(in millions) Debt Equity Warrants Total
Collateral Based Impairments $ (3.0 ) $ 4.0 $ (0.2 ) $ 0.8
Reversals of Prior Period Collateral Based Impairments
Reversals due to Debt Payoffs & Warrant/Equity Sales   25.9     (0.2 )   (2.5 )   23.2
Sub-total Impairments and Reversals 22.9 3.8 (2.7 ) 24.0
Fair Value Market/Yield Adjustments*
Level 1 & 2 Assets 5.7 0.4 6.1
Level 3 Assets   (0.7 )   (0.7 )   5.0     3.6
Sub-total Fair Value Market/Yield Adjustments (0.7 ) 5.0 5.4 9.7
       
Net Unrealized Appreciation/(Depreciation)* $ 22.2   $ 8.8   $ 2.8   $ 33.7
 
*Excludes unrealized depreciation from escrow receivable and taxes
payable
 

During Q3 2017, we recorded $33.7 million of net unrealized appreciation
from our debt, equity, and warrant investments. Approximately $22.2
million was attributed to net unrealized appreciation on our debt
investments which was primarily related to the reversal of $25.9 million
of unrealized depreciation upon payoff or liquidation or our debt
investments in three portfolio companies.

Approximately $8.8 million was attributed to net unrealized appreciation
on our equity investments which was primarily related to $4.0 million
reduction in collateral based impairment on one portfolio company and
$5.7 million of unrealized appreciation on our public equity portfolio
related to portfolio company performance.

Finally, approximately $2.8 million was attributed to net unrealized
appreciation on our warrant investments primarily due to $5.0 million
and $411,000 of unrealized appreciation on our private and public
warrant portfolio, respectively, related to portfolio company and
industry performance. This unrealized appreciation was partially offset
by the reversal of $2.5 million of net unrealized appreciation upon
being realized as a gain or loss due to the acquisition or liquidation
or our warrant investments.

Portfolio Asset Quality

As of September 30, 2017, the weighted average grade of the debt
investment portfolio continued to show signs of improvement, of 2.24, on
a cost basis, compared to 2.27 as of June 30, 2017, based on a scale of
1 to 5, with 1 being the highest quality. Hercules' policy is to
generally adjust the grading down on its portfolio companies as they
approach the need for additional equity capital, thereby increasing our
Grade 3 rated investments.

Additionally, we may downgrade our portfolio companies, from time to
time, if they are not meeting our financing criteria, underperforming
relative to their respective business plans, or approaching an
additional round of new equity capital investment. It is expected that
venture growth stage companies typically require multiple additional
rounds of equity capital, generally every 9-14 months, since they are
not generating positive cash flows for their operations. Various
companies in our portfolio will require additional rounds of funding
from time to time to maintain their operations.

As of September 30, 2017, grading of the debt investment portfolio at
fair value, excluding warrants and equity investments, was as follows:

Credit Grading at Fair Value, Q3 2017 - Q3 2016 ($ in millions)
          Q3   2017           Q2   2017           Q1   2017           Q4   2016           Q3   2016  
Grade 1 - High         $ 190.0   14.6 %         $ 267.1   20.7 %         $ 260.2   19.8 %         $ 275.8   20.8 %         $ 269.8   22.0 %
Grade 2 $ 696.2 53.6 % $ 613.7 47.6 % $ 591.7 45.1 % $ 590.5 44.4 % $ 516.5 42.3 %
Grade 3 $ 370.9 28.5 % $ 315.2 24.5 % $ 356.9 27.2 % $ 329.4 24.8 % $ 372.0 30.4 %
Grade 4 $ 43.0 3.3 % $ 87.0 6.8 % $ 78.9 6.0 % $ 58.9 4.4 % $ 40.8 3.3 %
Grade 5 - Low $ - 0.0 % $ 4.6 0.4 % $ 24.2 1.9 % $ 74.2 5.6 % $ 25.1 2.0 %
                                                                       
Weighted Avg.           2.24               2.27               2.43               2.41               2.32    
 

Non-Accruals

Non-accruals improved during the third quarter. As of September 30,
2017, the Company had five debt investments on non-accrual with a
cumulative investment cost and fair value of approximately $14.0 million
and $3.0 million, respectively, or 1.1% and 0.2% as a percentage of our
total investment portfolio at cost and value, respectively. As of
compared to June 30, 2017, the Company had seven debt investments on
non-accrual with cumulative investment cost and fair value of
approximately $43.6 million and $3.6 million, respectively, or 2.9% and
0.3% as a percentage of our total investment portfolio at cost and
value, respectively.

  Q3 2017       Q2 2017       Q1 2017       Q4 2016       Q3 2016
                       
Total Investments at Cost $1,314.3 $1,501.1 $1,525.1 $1,511.5 $1,388.2
 

Loans on non-accrual as a % of Total Investments at Value

0.2% 0.3% 1.3% 0.4% 0.7%
 

Loans on non-accrual as a % of Total Investments at Cost

1.1% 2.9% 7.0% 2.9% 3.3%

 

                                 
 

Liquidity and Capital Resources

The Company ended Q3 2017 with $335.6 million in available liquidity,
including $140.6 million in unrestricted cash and cash equivalents, and
$195.0 million in available credit facilities, subject to existing terms
and advance rates and regulatory and covenant requirements.

During Q3 2017, Hercules sold ~768,000 shares of common stock under its
At-the-Market "ATM" equity distribution agreement with JMP Securities
(the "Equity Distribution Agreement"), for total accumulated net
proceeds of $9.4 million, all accretive to net asset value. For YTD
through Q3 2017, Hercules has sold approximately 4.1 million shares of
common stock for total net proceeds of approximately $56.3 million, all
issuances accretive to net asset value.

Bank Facilities

As of September 30, 2017, Hercules has two committed credit facilities
with Wells Fargo Capital Finance ("WFCF"), part of Wells Fargo & Company
(NYSE:WFC) (the "Wells Fargo Facility") and Union Bank (the "Union Bank
Facility") for $120.0 million and $75.0 million, respectively. The Wells
Fargo and Union Bank Facilities both include an accordion feature that
enables the Company to increase the existing facilities to a maximum
value of $300.0 million and $200.0 million, respectively, or $500.0
million in aggregate. Pricing at September 30, 2017 under the Wells
Fargo Facility and Union Bank Facility were both LIBOR+3.25% with no
LIBOR floor. There were no outstanding borrowings under either facility
at September 30, 2017.

Leverage

Hercules' regulatory leverage, or debt to equity ratio, excluding our
Small Business Administration "SBA" debentures was 66.2% and net
regulatory leverage (excluding cash of approximately $140.6 million) of
49.4%, as of September 30, 2017. Hercules' GAAP leverage ratio,
including our SBA debentures, was 89.0%, as of September 30, 2017.

Hercules has an order from the Securities and Exchange Commission "SEC"
granting it exemptive relief, thereby allowing it to exclude from its
regulatory leverage limitations (1:1) of all its outstanding SBA
debentures of $190.2 million, providing the Company with the potential
capacity to add leverage of $282.3 million to its balance sheet as of
September 30, 2017, bringing the maximum potential leverage to $1.0
billion, or 122.7% (1.23:1), if it had access to such additional
leverage.

Available Unfunded Commitments – Representing only 3.5% of debt
investment balance, at cost

The Company's unfunded commitments and contingencies consist primarily
of unused commitments to extend credit in the form of loans to select
portfolio companies. A portion of these unfunded contractual commitments
are dependent upon the portfolio company reaching certain milestones in
order to gain access to additional funding. Furthermore, our credit
agreements contain customary lending provisions that allow us relief
from funding obligations for previously made commitments. In addition,
since a portion of these commitments may also expire without being
drawn, unfunded contractual commitments do not necessarily represent
future cash requirements.

As of September 30, 2017, the Company had $46.3 million of available
unfunded commitments at the request of portfolio companies and
unencumbered by any milestones, including undrawn revolving facilities,
representing 3.5% of Hercules' debt investment balance, at cost. This
decreased from the previous quarter of $57.6 million of available
unfunded commitments at the request of portfolio companies or 4.4% of
Hercules' debt investment balance, at cost, as we funded available
commitments.

Existing Pipeline and Signed Term Sheets

After closing $154.4 million in new commitments in Q3 2017, Hercules
finished Q3 2017 with $20.0 million in signed non-binding term sheets
outstanding. Since the close of Q3 2017 and as of October 30, 2017,
Hercules closed debt and equity commitments of $58.9 million to new and
existing portfolio companies, and funded $52.3 million.

Signed non-binding term sheets are subject to satisfactory completion of
Hercules' due diligence and final investment committee approval process
as well as negotiations of definitive documentation with the prospective
portfolio companies. These non-binding term sheets generally convert to
contractual commitments in approximately 90 days from signing. It is
important to note that not all signed non-binding term sheets are
expected to close and do not necessarily represent future cash
requirements or investments.

Net Asset Value

As of September 30, 2017, the Company's net assets were $836.3 million,
compared to $817.5 million at the end of Q2 2017, an increase of 2.3%.
NAV per share increased to $10.00 on 83.6 million outstanding shares as
of June 30, 2017, compared to $9.87 on 82.8 million outstanding shares
as of June 30, 2017. The increase in NAV per share was primarily
attributed to the unrealized appreciation on the debt investment
portfolio.

High Asset Sensitivity – Expected Increase in Prime Rate Will Benefit
Hercules Significantly – Will Help Drive Future Earnings Growth

We have purposely constructed a very asset sensitive debt investment
portfolio and have structured our debt borrowings for any eventual
increases in market rates that may occur in the near future. With 96.7%
of our debt investment portfolio being priced at floating interest rates
as of September 30, 2017, with a Prime or LIBOR-based interest rate
floor, coupled with 100% of our outstanding debt borrowings bearing
fixed interest rates, this leads to higher net investment income to our
shareholders.

Based on our Consolidated Statement of Assets and Liabilities as of
September 30, 2017, the following table shows the approximate annualized
increase in components of net income resulting from operations of
hypothetical base rate changes in interest rates, such as Prime Rate,
assuming no changes in our debt investments and borrowings. These
estimates are subject to change due to the impact from active
participation in the Company's equity ATM program.

We expect each 25-bps increase in the Prime Rate to contribute
approximately $2.6 million, or $0.03 per share, of net investment income
annually.

(in thousands)   Interest   Interest   Net   EPS(2)
Basis Point Change Income(1) Expense Income  
25 $ 2,630 $ - $ 2,630 $ 0.03
50 $ 5,505 $ - $ 5,505 $ 0.07
75 $ 8,380 $ - $ 8,380 $ 0.10
100 $ 11,406 $ - $ 11,406 $ 0.14
200 $ 24,161 $ - $ 24,161 $ 0.29
300 $ 37,169 $ - $ 37,169 $ 0.45
 

(1) Source: Hercules Capital Form 10-Q for Q3 2017

(2) EPS calculated on basic weighted shares outstanding
of 82,496. Estimates are subject to change due to impact from
active participation in the Company's equity ATM program.

 

Existing Equity and Warrant Portfolio – Potential Future Additional
Returns to Shareholders

Equity Portfolio

Hercules held equity positions in 55 portfolio companies with a fair
value of $84.3 million and a cost basis of $135.2 million as of
September 30, 2017, with one portfolio company (Solar Spectrum)
representing a fair value of $12.8 million and a cost basis of $61.5
million. On a fair value basis, 19.0% or $16.0 million is related to
existing public equity positions, at September 30, 2017.

Warrant Portfolio

Hercules held warrant positions in 128 portfolio companies with a fair
value of $32.7 million and a cost basis of $39.5 million as of September
30, 2017.

Portfolio Company IPO, M&A and Other Activity in Q3 2017

IPO Activity

As of October 31, 2017, Hercules held warrant and equity positions in
five (5) portfolio companies that had filed Registration Statements in
contemplation of a potential IPO, including:

  • In October 2017, Hercules portfolio company, ForeScout
    Technologies, Inc.
    (NASDAQ:FSCT), completed its IPO raising
    nearly $117 million. Hercules currently holds 319,099 shares of
    Preferred Series D stock and 80,587 shares of Preferred Series E stock
    as of September 30, 2017.
  • In October 2017, Hercules portfolio company, Aquantia Corporation,
    which previously filed confidentially under the JOBS Act, filed a Form
    S-1 Registration with the SEC in contemplation of potential public
    offering.
  • Three companies filed confidentially under the JOBS Act.

There can be no assurances that companies that have yet to complete
their IPOs will do so.

M&A Activity Completed or Announced and Other Pending Activity

      1.  

In August 2017, Hercules' portfolio companies Cempra, Inc.
(NASDAQ:CEMP), a clinical-stage pharmaceutical company focused on
developing differentiated anti-infectives for acute care and
community settings to meet critical medical needs in the treatment
of infectious diseases, and Melinta Therapeutics, Inc., a
privately held company focused on discovering, developing, and
commercializing novel antibiotics to treat serious bacterial
infections, announced that the companies had entered into a
definitive agreement under which Melinta will merge with a
subsidiary of Cempra. The merger is expected to create a
NASDAQ-listed company committed to discovering, developing, and
commercializing important anti-infective therapies for patients
and physicians in areas of significant unmet need. The merger is
expected to close in the fourth quarter of 2017, subject to the
approval of the stockholders of each company as well as other
customary conditions. Hercules committed $40.0 million in venture
debt financing to Cempra from 2011 to 2014. Hercules initially
committed $30.0 million in venture debt financing to Melinta in
December 2014 and currently holds 1,194,448 shares of Preferred
Series 4 stock as of September 30, 2017.

 
2.

In August 2017, Hercules' portfolio company CashStar, Inc.,
a leading provider of gift card commerce solutions at the
forefront of mobile payments and digital gifting innovation, was
acquired by Blackhawk Network, Inc., a global financial technology
company and a leader in connecting brands and people through
branded value solutions, for $175.0 million in cash. Hercules
initially committed $8.0 million in venture debt financing in June
2013, and held warrants for 727,272 shares of Preferred Series C-2
stock as of June 30, 2017. Upon the closing of the transaction,
the warrants were converted into cash and received by Hercules.

 
3.

In September 2017, Hercules' portfolio company Cloud Technology
Partners, Inc.
, a born-in-the-cloud services company with
strong enterprise experience, announced that Hewlett Packard
Enterprise intends to acquire the company to accelerate IT
services growth as they transition from a traditional hardware
business to a hybrid IT strategy. Terms of the deal were not
disclosed. Hercules initially committed $14.4 million in venture
debt financing in December 2016, and currently holds warrants for
113,960 shares of Preferred Series C stock as of June 30, 2017.
Upon closing of the transaction, the warrants were converted into
cash and received by Hercules.

 
4.

In September 2017, Hercules' portfolio company Exicure, Inc.,
the pioneer in developing three-dimensional Spherical Nucleic Acid
constructs as gene regulatory and immunotherapeutic agents,
announced the closing of a $20 million private placement financing
and the completion of a reverse merger transaction, with Max-1
Acquisition Corporation. Following the reverse merger transaction,
Max-1 changed its name to Exicure, Inc., and will continue the
historical business of Exicure.

 

Distributions

The Board of Directors has declared a third quarter cash distribution
of $0.31 per share. This distribution would represent the Company's 49th
consecutive distribution declaration since its IPO, bringing the total
cumulative distribution declared to date to $13.71 per share. The
following shows the key dates of our third quarter 2017 distribution
payment:

                Record Date         November 13, 2017
Payment Date November 20, 2017
 

Hercules' Board of Directors maintains a variable distribution policy
with the objective of distributing four quarterly distributions in an
amount that approximates 90% to 100% of the Company's taxable quarterly
income or potential annual income for a particular year. In addition, at
the end of the year, the Company's Board of Directors may choose to pay
an additional special distribution, or fifth distribution, so that the
Company may distribute approximately all its annual taxable income in
the year it was earned, or it can elect to maintain the option to spill
over the excess taxable income into the coming year for future
distribution payments.

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. Therefore, a determination made on a quarterly basis may not be
representative of the actual tax attributes of its distributions for a
full year. Of the distributions declared during the quarter ended
September 30, 2017, 100% were distributions derived from the Company's
current and accumulated earnings and profits. There can be no certainty
to stockholders that this determination is representative of what the
tax attributes of the Company's 2017 distributions to stockholders will
be.

Subsequent Events

      1.   As of October 30, 2017, Hercules has:
 
a. Closed debt and equity commitments of $58.9 million to new and
existing portfolio companies, and funded $52.3 million since the
close of the third quarter.
 
b. Pending commitments (signed non-binding term sheets) of $71.0
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, 2017 Closed Commitments(a)       $551.4
October 1, 2017 – October 30, 2017 Closed Commitments (a)       $58.9
Closed Commitments (as of October 30, 2017)(a)       $610.3
Pending Commitments (as of October 30, 2017)(b)       $71.0
Closed and Pending Commitments as of October 30, 2017       $681.3

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.
 
2. The Company has decided to suspend its review of alternative
investment management structures and will remain an internally
managed business development company for the foreseeable future.
 
3. On November 1, 2017, Hercules Capital, Inc. through a wholly owned
subsidiary, Bearcub Acquisitions LLC, entered into, and consummated
the transaction contemplated by, a definitive asset purchase
agreement with Ares Capital Corporation to acquire select venture
loan assets for approximately $125.8 million in cash.
 
4.

In October 2017, Hercules' portfolio company Neothetics, Inc.
(NASDAQ:NEOT)
a clinical-stage specialty pharmaceutical
company that has been focused on developing therapeutics for the
aesthetic market, announced they have entered into a definitive
agreement under which privately-held Evofem Biosciences will merge
with a wholly-owned subsidiary of Neothetics in an all-stock
transaction. Upon closing of the transaction, Neothetics will be
renamed Evofem Biosciences, Inc. Hercules initially committed
$10.0 million in venture debt financing in June 2014, and
currently holds warrants for 46,838 shares of common stock as of
September 30, 2017.

 
5. On October 23, 2017, we issued $150.0 million in aggregate principal
amount of 4.625% Notes due 2022 (the "2022 Notes"). The 2022 Notes
were issued pursuant to an Indenture, dated October 23, 2017,
between us and U.S. Bank, National Association, as trustee. The sale
of the 2022 Notes generated net proceeds of approximately $147.9
million. Aggregate estimated offering expenses in connection with
the transaction, including the underwriter's discount of
approximately $1.9 million, were approximately $2.1 million.
 
6. On October 24, 2017, the Company announced a partial redemption of
$75.0 million of outstanding aggregate principal amount of the 6.25%
Notes due 2024 (the "2024 Notes"), and notice for such redemption
has been provided. We have publicly announced its intention to
redeem this portion of the 2024 Notes on November 23, 2017.
 
7. Subsequent to September 30, 2017, and as of October 30, 2017, the
Company sold 567,000 shares of common stock for total accumulated
net proceeds of approximately $7.1 million, including $65,000 of
offering expenses, under the Equity Distribution Agreement. As of
October 30, 2017, approximately 10.7 million shares remain available
for issuance and sale under the equity ATM program.
 
8. In October 2017, Hercules announced the appointments of Brad Koenig,
former Head of Global Technology Investment Banking at Goldman
Sachs, and Jorge Titinger, former President and Chief Executive
Officer of Silicon Graphics International Corp. Mr. Koenig will
serve as an independent Class II director, effective October 25,
2017. Mr. Titinger was elected by the Company's board of directors
on October 25, 2017, which will be effective and ratified upon
shareholder approval at the Company's annual shareholder meeting on
December 13, 2017. Upon shareholder approval, Mr. Titinger will
serve as an independent Class I director.
 
9.

On October 27, 2017, the Company and Mark Harris mutually agreed
that Mr. Harris would separate from the Company and end his tenure
as Chief Financial Officer and Chief Accounting Officer effective
November 2, 2017. Mr. Harris' separation did not result from any
disagreements with the Company regarding its operations, policies,
practices or any issues regarding financial disclosures,
accounting or legal matters. Effective October 31, 2017, the Board
of Directors appointed David Lund, the Company's former Chief
Financial Officer, as the Company's Interim Chief Financial
Officer and Gerard R. Waldt, Jr., the Company's current
Controller, as the Company's Interim Chief Accounting Officer.

 

Conference Call

Hercules has scheduled its third quarter 2017 financial results
conference call for November 2, 2017 at 2:00 p.m. PDT (5:00 p.m. EDT).
To listen to the call, please dial (877) 304-8957 (or (408) 427-3709
internationally) and reference Conference ID: 98019960 if asked,
approximately 10 minutes prior to the start of the call. A taped replay
will be made available approximately three hours after the conclusion of
the call and will remain available for seven days. To access the replay,
please dial (855) 859-2056 or (404) 537-3406 and enter the passcode
98019960.

About Hercules Capital, Inc.

Hercules Capital, Inc. (NYSE:HTGC) ("Hercules") is the leading and
largest specialty finance company focused on providing senior secured
venture growth loans to high-growth, innovative venture capital-backed
companies in a broad variety of technology, life sciences and
sustainable and renewable technology industries. Since inception
(December 2003), Hercules has committed more than $7.0 billion to over
390 companies and is the lender of choice for entrepreneurs and venture
capital firms seeking growth capital financing. Companies interested in
learning more about financing opportunities should contact info@htgc.com,
or call 650.289.3060.

Hercules' common stock trades on the New York Stock Exchange (NYSE)
under the ticker symbol "HTGC." In addition, Hercules has three
outstanding bond issuances of 6.25% Unsecured Notes due July 2024 (NYSE: HTGX), 4.375% Convertible Senior Notes due February 2022 and 4.625%
Unsecured Investment Grade Notes due October 2022.

Forward-Looking Statements

This press release may contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You
should understand that under Section 27A(b)(2)(B) of the Securities Act
of 1933, as amended, and Section 21E(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 do
not apply to forward-looking statements made in periodic reports we file
under the Exchange Act.

The information disclosed in this press release is made as of the date
hereof and reflects Hercules most current assessment of its historical
financial performance. Actual financial results filed with the SEC may
differ from those contained herein due to timing delays between the date
of this release and confirmation of final audit results. These
forward-looking statements are not guarantees of future performance and
are subject to uncertainties and other factors that could cause actual
results to differ materially from those expressed in the forward-looking
statements including, without limitation, the risks, uncertainties,
including the uncertainties surrounding the current market volatility,
and other factors the Company identifies from time to time in its
filings with the SEC. Although Hercules believes that the assumptions on
which these forward-looking statements are based are reasonable, any of
those assumptions could prove to be inaccurate and, as a result, the
forward-looking statements based on those assumptions also could be
incorrect. You should not place undue reliance on these forward-looking
statements. The forward-looking statements contained in this release are
made as of the date hereof, and Hercules assumes no obligation to update
the forward-looking statements for subsequent events.

HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
(unaudited)
(dollars in thousands, except per share data)
   
September 30, 2017 December 31, 2016
Assets
Investments:
Non-control/Non-affiliate investments (cost of $1,374,173 and
$1,475,918, respectively)
1,360,146 1,414,210
Control investments (cost of $25,788 and $22,598, respectively) 23,382 4,700
Affiliate investments (cost of $89,050 and $13,010, respectively)   33,586     5,032  
Total investments in securities, at value (cost of $1,489,011 and
$1,511,526, respectively)
1,417,114 1,423,942
Cash and cash equivalents 140,568 13,044
Restricted cash 7,813 8,322
Interest receivable 10,507 11,614
Other assets   6,995     7,282  
Total assets $ 1,582,997   $ 1,464,204  
 
Liabilities
Accounts payable and accrued liabilities $ 19,057 $ 21,463
Credit Facilities 5,016
2021 Asset-Backed Notes, net (principal of $65,476 and $109,205,
respectively) (1)
64,860 107,972
Convertible Notes, net (principal of $230,000 and $0, respectively)(1) 223,097
2019 Notes, net (principal of $0 and $110,364, respectively) (1) 108,818
2024 Notes, net (principal of $258,510 and $252,873, respectively) (1) 251,716 245,490
Long-Term SBA Debentures, net (principal of $190,200 and $190,200,
respectively) (1)
  187,983     187,501  
Total liabilities $ 746,713 $ 676,260
 
Net assets consist of:
Common stock, par value 84 80
Capital in excess of par value 904,357 839,657
Unrealized depreciation on investments(2) (73,388 ) (89,025 )
Accumulated undistributed realized gains on investments 10,674 37,603
Distributions in excess of net investment income   (5,443 )   (371 )
Total net assets $ 836,284   $ 787,944  
Total liabilities and net assets $ 1,582,997   $ 1,464,204  
 
Shares of common stock outstanding ($0.001 par value, 200,000,000
authorized)
83,615 79,555
Net asset value per share $ 10.00 $ 9.90
 

(1) The Company's SBA Debentures, 2019 Notes, 2024 Notes, 2021
Asset-Backed Notes, and Convertible Notes, as each term is defined
herein, are presented net of the associated debt issuance costs
for each instrument.

 

(2) Amounts include $1.5 million and $1.4 million, respectively,
in net unrealized depreciation on other assets and accrued
liabilities, including escrow receivables, estimated taxes payable
and Citigroup warrant participation agreement liabilities.

 

HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share data)
         
Three Months Ended September 30, Nine Months Ended September 30,
  2017     2016     2017     2016  
Investment income:
Interest and PIK interest income
Interest income:
Non-control/Non-affiliate investments $ 39,361 $ 37,783 $ 117,388 $ 110,219
Control investments 321 7 994 7
Affiliate investments   246     30     248     145  
Total interest income 39,928 37,820 118,630 110,371
PIK interest income:
Non-control/Non-affiliate investments 2,364 2,124 6,661 5,668
Control investments   143     8     511     8  
Total PIK interest income   2,507     2,132     7,172     5,676  
Total interest and PIK interest income   42,435     39,952     125,802     116,047  
Fee Income:
Commitment, facility, and loan fee income
Non-control/Non-affiliate investments 2,239 3,274 7,613 8,700
Control investments 1 1 11 1
Affiliate investments   2         2      
Total commitment, facility, and loan fee income   2,242     3,275     7,626     8,701  
One-time fee income:
Non-control/Non-affiliate investments   1,188     1,875     7,254     2,831  
Total one-time fee income   1,188     1,875     7,254     2,831  
Total fee income   3,430     5,150     14,880     11,532  
Total investment income 45,865 45,102 140,682 127,579
Operating expenses:
Interest 9,185 8,717 28,046 23,306
Loan fees 1,314 1,432 5,500 3,698
General and administrative 3,548 4,114 12,362 12,095
Employee compensation:
Compensation and benefits 6,014 5,621 17,276 15,637
Stock-based compensation   1,831     1,442     5,573     5,616  
Total employee compensation   7,845     7,063     22,849     21,253  
Total operating expenses   21,892     21,326     68,757     60,352  
Net investment income 23,973 23,776 71,925 67,227
Net realized gain (loss) on investments
Non-control/Non-affiliate investments (8,911 ) 7,870 (10,940 ) 3,427
Control investments   (15,543 )       (15,989 )    
Total net realized gain (loss) on investments   (24,454 )   7,870     (26,929 )   3,427  
Net change in unrealized appreciation (depreciation) on
investments
Non-control/Non-affiliate investments 11,320 (1,387 ) 45,420 (11,005 )
Control investments 17,624 17,703 (3,421 )
Affiliate investments   4,609     553     (47,486 )   (1,646 )
Total net unrealized depreciation on investments   33,553     (834 )   15,637     (16,072 )
Total net realized and unrealized loss   9,099     7,036     (11,292 )   (12,645 )
Net increase in net assets resulting from operations $ 33,072   $ 30,812   $ 60,633   $ 54,582  
 
Net investment income before investment gains and losses per common
share:
Basic $ 0.29   $ 0.32   $ 0.87   $ 0.91  
Change in net assets resulting from operations per common share:
Basic $ 0.40   $ 0.41   $ 0.73   $ 0.74  
Diluted $ 0.40   $ 0.41   $ 0.73   $ 0.74  
Weighted average shares outstanding
Basic   82,496     74,122     82,073     72,685  
Diluted   82,607     74,157     82,173     72,702  
Distributions declared per common share:
Basic $ 0.31 $ 0.31 $ 0.93 $ 0.93
 
HERCULES CAPITAL, INC.

NON GAAP FINANCIAL MEASURES

(in thousands, except per share data)

 
Three Months Ended September 30,
Reconciliation of Net Investment Income to DNOI 2017   2016
Net investment income $ 23,973 $ 23,776
Stock-based compensation   1,831   1,442
DNOI $ 25,804 $ 25,218
 
DNOI per share-weighted average common shares
Basic $ 0.31 $ 0.34
 
Weighted average shares outstanding
Basic   82,496   74,122
 

Distributable Net Operating Income, "DNOI" represents net investment
income as determined in accordance with GAAP, adjusted for amortization
of employee restricted stock awards and stock options. Hercules views
DNOI and the related per share measures as useful and appropriate
supplements to net operating income, net income, earnings per share and
cash flows from operating activities. DNOI is a non-GAAP financial
measure. The Company believes that DNOI provides useful information to
investors and management because it serves as an additional measure of
Hercules' operating performance exclusive of employee restricted stock
amortization, which represents expenses of the Company but does not
require settlement in cash. DNOI does include PIK interest and back end
fee income which are generally not payable in cash on a regular basis,
but rather at investment maturity or when declared. DNOI should not be
considered as an alternative to net operating income, net income,
earnings per share and cash flows from operating activities (each
computed in accordance with GAAP). Instead, DNOI should be reviewed in
connection with net operating income, net income (loss), earnings (loss)
per share and cash flows from operating activities in Hercules'
consolidated financial statements, to help analyze how Hercules'
business is performing.

HERCULES CAPITAL, INC.

NON GAAP FINANCIAL MEASURES

(in thousands, except per share data)

 
September 30, 2017
Total Debt (Principal Outstanding) $ 744,186
Long-term SBA Debentures $ (190,200 )
Cash and cash equivalents   (140,568 )

Numerator: net debt (total debt less cash and cash equivalents and
SBA Debentures)

$ 413,418
Denominator: Total net assets $ 836,284
Net Leverage Ratio 49.4 %
 

Net leverage ratio is calculated by deducting the outstanding cash of
$140.6 million and long-term SBA debentures of $190.2 million, at
September 30, 2017 from total principal outstanding of $744.2 million
divided by our total equity of $836.3 million, resulting in a net
leverage ratio of 49.4%. Net leverage ratio is a non-GAAP measure and is
not intended to replace financial performance measures determined in
accordance with GAAP. Rather, they are presented as additional
information because management believes they are useful indicators of
the current financial performance of the Company's core businesses.

View Comments and Join the Discussion!