Market Overview

Hercules Capital Announces First Quarter 2018 Financial Results and Quarterly Distribution of $0.31 per Share

Share:

Achieved Strong Total New Debt and Equity Commitments and Total Gross
Fundings, up 39.3% and 54.1% Year-over-Year, Respectively

Maintains Low Regulatory Leverage of 72.0% and Net Regulatory
Leverage of 57.8 %
(1)

Completes Acquisition of Asset-Based Lender – Gibraltar Business
Capital

Highly Asset Sensitive Debt Investment Portfolio Stands to Benefit
from Any Further Rate Increases by the Federal Reserve Benchmark
Interest Rate

$16.1 Million, or $0.19 per Share, of Projected 2017 Earnings
Spillover
(2)

Q1 2018 Financial Achievements and Highlights

  • Net Investment Income "NII" of $26.1 million, up 15.0%
    year-over-year, or $0.31 per share
    • Total Investment Income of $48.7 million, up 5.0% year-over-year
    • New debt and equity commitments of $266.0 million, up 39.3%
      year-over-year
    • Total gross fundings of $236.3 million, up 54.1% year-over-year
    • Unscheduled principal repayments or "early loan pay-offs" of
      $243.5 million
  • Distributable Net Operating Income "DNOI," a non-GAAP measure, of
    $28.4 million, or $0.34 per share
  • 14.3% GAAP Effective Yields
  • $313.2 million of available liquidity for future portfolio and
    earnings growth, subject to existing terms and covenants
  • Regulatory leverage of 72.0% and net regulatory leverage, a
    non-GAAP measure, of 57.8%
    (1)
  • 12.7% Return on Average Equity "ROAE" (NII/Average Equity)
  • 6.5% Return on Average Assets "ROAA" (NII/Average Assets)

(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 84.6 million, subject to final tax filings in 2018
and overall performance during the year

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 first quarter ended March 31, 2018.

The Company announced that its Board of Directors has declared a first
quarter cash distribution of $0.31 per share, that will be payable on
May 21, 2018, to shareholders of record as of May 14, 2018.

"We are off to a strong start to 2018 as evidenced by our team's
impressive new debt origination activities during the quarter, which
resulted in $266 million in new debt and equity commitments and more
than $236 million in total new gross fundings," stated Manuel A.
Henriquez, chairman and chief executive officer of Hercules. "This solid
performance highlights the strength of the Hercules Capital platform, as
the growth capital partner of choice to many of the top leading venture
capital-backed companies in the U.S., which continue to overwhelmingly
choose Hercules as their partner. Furthermore, these results enabled us
to complete our desired portfolio rotation and served to offset our
anticipated elevated levels of early loan repayments."

Henriquez continued, "If the second half of the first quarter is any
indication of what to expect in 2018, then Hercules appears to be on
pace for another potential record year. We are very encouraged by the
recent elevated demands for growth capital by many of these innovative
and disruptive venture capital-backed companies. In addition, we see
early indications of a slight tapering of pre-payments activities which,
if realized, should allow us to see a return to debt investment growth
in the second half of 2018."

Henriquez added, "We finished Q1 2018 with a very strong liquidity
position of over $313 million, and we remain well positioned to fund our
expected portfolio growth with our recent new bond offering of $75
million as we prepare to enter the second half of 2018, while also
maintaining a highly flexible, low-leverage and highly asset sensitive
balance sheet that will benefit from future rate increases, as we
monitor the rapidly evolving broader market conditions."

Henriquez concluded, "I am delighted to see the strong bi-partisan
Congressional support for the passage of The Small Business Credit
Availability Act, which will help to ensure that U.S. small and medium
sizes businesses gain access to cost competitive capital to grow. The
recent legislation to increase leverage for BDCs is indeed a
game-changer and helps to level the playing field for the industry. Over
time, the eventual expected impact to Hercules Capital could be
material, particularly since we are already generating one of the BDC
industry's highest ROAEs, above 12.0%, while operating below the 1-to-1
leverage limits, currently. However, we have chosen not to immediately
seek approval to increase leverage, but rather pursue ‘a wait-and-see
strategy' to allow this new norm to be fully understood and processed by
all stakeholders, including the respective credit rating agencies and
institutional bond and equity holders. Together with our board of
directors, we look forward to further communications on this matter once
we evaluate the many options."

Q1 2018 Review and Operating Results

Debt Investment Portfolio

Hercules achieved another strong quarter, having successfully extended
new debt and equity commitments to ten (10) new companies and two (2)
existing companies, totaling $266.0 million, and gross fundings of
$236.3 million.

During the quarter, Hercules realized an anticipated above normal level
of early loan pay-offs of $243.5 million, along with normal scheduled
amortization of $29.8 million, or $273.3 million in total debt
repayments. Nearly half of the early loan pay-offs activities were
select sector portfolio rotations initiated by Hercules Capital.

Net debt investment portfolio decreased during the first quarter, on a
cost basis, by $71.4 million, driven by an anticipated higher level of
early loan pay-offs.

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

Total Investment Portfolio: Q4 2017 to
Q1 2018

(in millions)     Debt     Equity     Warrants     Total Portfolio
Balances at Cost at 12/31/17 $ 1,440.0   $ 136.2   $ 43.6   $ 1,619.8  
New fundings(a) 206.8 28.7 0.8 236.3
Warrants not related to Q1 2018 fundings - - (0.2 ) (0.2 )
Early payoffs(b) (243.5 ) - - (243.5 )
Principal payments received on investments (29.8 ) - - (29.8 )
Net changes attributed to conversions, liquidations, and fees   (4.9 )   -     (1.4 )   (6.3 )
Net activity during Q1 2018   (71.4 )   28.7     (0.8 )   (43.5 )
Balances at Cost at 3/31/18 $ 1,368.6   $ 164.9   $ 42.8   $ 1,576.3  
 
       
Balances at Value at 12/31/17 $ 1,416.0   $ 89.4   $ 36.8   $ 1,542.2  
Net activity during Q1 2018 (71.4 ) 28.7 (0.8 ) (43.5 )
Net change in unrealized appreciation / (depreciation)   (8.3 )   (4.1 )   (2.7 )   (15.1 )
Total net activity during Q1 2018   (79.7 )   24.6     (3.5 )   (58.6 )
Balances at Value at 3/31/18 $ 1,336.3   $ 114.0   $ 33.3   $ 1,483.6  
 

(a)

 

New fundings amount includes $1.9 million total new fundings
associated with revolver loans during Q1 2018.

(b)

Unscheduled paydowns include $5.7 million paydown on revolvers
during Q1 2018.

 

Debt Investment Portfolio Balance

(in millions)       Q1 2018       Q4 2017       Q3 2017       Q2 2017       Q1 2017
                         
Ending Balance at Cost $1,368.6 $1,440.0 $1,314.3 $1,324.0 $1,399.2
 
Weighted Average Balance   $1,364.0       $1,413.0       $1,300.0       $1,298.0       $1,381.0
 

As of March 31, 2018, 85.6% of the Company's debt investments were in a
senior secured first lien position.

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

Effective Yields on our debt investment portfolio were 14.3% during Q1
2018, an increase from the previous quarter of 14.2%, primarily due to a
significantly higher level of early loan pay-offs. We had $243.5 million
of early loan pay-offs in Q1 2018 compared to $124.2 million in Q4 2017,
or an increase of 96.1%. Our effective portfolio yields generally
include the effects of fees and income accelerations attributed to early
loan payoffs, and other one-time events. Our effective yields are
materially impacted by elevated levels of early loan pay-offs and
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 11.9% during Q1 2018, near the mid-point of our 2018
expected normalized levels of 11.5% to 12.5%, and down as compared to Q4
2017 core yields of 12.5%. 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 5.0% for Q1 2018 to $48.7 million,
compared to $46.4 million in Q1 2017. The increase is primarily
attributable to an expected high level of early loan pay-offs.

Non-interest and fee expenses increased to $12.1 million in Q1 2018
versus $11.2 million for Q1 2017. This was primarily due to an increase
in variable compensation related to origination activities and
stock-based compensation.

Interest expense and fees were $10.6 million in Q1 2018, compared to
$12.4 million in Q1 2017. The decrease was primarily due to the
redemption of the $110.4 million remaining outstanding balance of our
7.00% notes due 2019 and the partial redemption of $75.0 million of
outstanding aggregate principal amount of our 6.25% notes due 2024 (the
"2024 Notes"), which resulted in the one-time non-cash acceleration of
unamortized fees associated with the redemptions interest overlap due to
the 30-day notice redemption period.

The Company had a weighted average cost of borrowings comprised of
interest and fees, of 5.3% in Q1 2018 versus 6.3% during Q1 2017. The
decrease was primarily due to the redemption of the $110.4 million
remaining outstanding balance of our 7.00% notes due 2019 and the
partial redemption of $75.0 million of outstanding aggregate principal
amount of our 2024 Notes, which resulted in the one-time non-cash
acceleration of unamortized fees associated with the redemptions
interest overlap due to the 30-day notice redemption period.

NII – Net Investment Income

NII for Q1 2018 was $26.1 million, or $0.31 per share, based on 84.6
million basic weighted average shares outstanding, compared to $22.7
million, or $0.28 per share, based on 81.4 million basic weighted
average shares outstanding in Q1 2017.

This change in NII is primarily attributable to the increase to high
levels of early loan pay-offs year-over-year.

DNOI - Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q1 2018 was $28.4 million or $0.34 per
share, compared to $24.5 million, or $0.30 per share, in Q1 2017. The
increase is primarily attributable to an expected high level of early
loan pay-offs.

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

Hercules' net cumulative realized gain/(loss) position, since its first
origination activities in October 2004 through March 31, 2018,
(including net loan, warrant and equity activity) on investments,
totaled ($33.9) million, on a GAAP basis, spanning 14 years of
investment activities.

When compared to total new debt investment commitments during the same
period of over $7.6 billion, the total realized gain/(loss) since
inception of ($33.9) million represents approximately 45 basis points
"bps," or 0.45%, of cumulative debt commitments, or an effective
annualized loss rate of 3 bps, or 0.03%.

Realized Gains/(Losses)

During Q1 2018, Hercules had net realized losses of ($4.9) million,
which included gross realized gains of $1.1 million. These gains were
offset by gross realized losses of ($6.0) million primarily from the
liquidation or write-off of our warrant and equity investments in six
(6) portfolio companies and our debt investments in two (2) portfolio
companies.

Unrealized Appreciation/ (Depreciation)

During Q1 2018, we recorded $15.2 million of net unrealized
depreciation, of which $15.1 million was net unrealized depreciation
from our debt, equity, and warrant investments. Of the total, $3.3
million was related to our public securities holdings that were impacted
by the higher volatility during the quarter. We recorded $8.3 million of
net unrealized depreciation on our debt investments which was primarily
related to $13.5 million of unrealized depreciation on the debt
portfolio including $9.0 million of unrealized depreciation on
collateral-based impairments on seven (7) portfolio companies. This
unrealized depreciation was partially offset by $5.2 million of
reversals due to the write-off of two (2) portfolio companies.

Portfolio Asset Quality

As of March 31, 2018, the weighted average grade of the debt investment
portfolio was 2.43, on a cost basis, compared to 2.17 as of December 31,
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.

The decline in weighted average grading at March 31, 2018 from December
31, 2017 is primarily due to the payoff of our credit rating 1
positions, including Machine Zone, Inc. and Alimera Sciences, Inc., as
well as the downgrade of three (3) companies approaching capital raises,
from a credit rating 2 to a credit rating 3.

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 March 31, 2018, grading of the debt investment portfolio at fair
value, excluding warrants and equity investments, was as follows:

 
Credit Grading at Fair Value, Q1 2018 - Q1 2017 ($ in millions)
        Q1 2018       Q4 2017       Q3 2017       Q2 2017       Q1 2017
Grade 1 - High       $ 141.8     10.6%       $ 345.2     24.4%       $ 190.0     14.6%       $ 267.1     20.7%       $ 260.2     19.8%
Grade 2 $ 599.8 44.9% $ 583.0 41.2% $ 696.2 53.6% $ 613.7 47.6% $ 591.7 45.1%
Grade 3 $ 548.0 41.0% $ 443.8 31.3% $ 370.9 28.5% $ 315.2 24.5% $ 356.9 27.2%
Grade 4 $ 33.6 2.5% $ 41.7 2.9% $ 43.0 3.3% $ 87.0 6.8% $ 78.9 6.0%
Grade 5 - Low $ 13.2 1.0% $ 2.3 0.2% $ - 0.0% $ 4.6 0.4% $ 24.2 1.9%
                                                                       
Weighted Avg.         2.43               2.17               2.24               2.27               2.43      
 

Non-Accruals

Non-accruals decreased slightly for the first quarter of 2018. As of
March 31, 2018, the Company had four (4) debt investments on non-accrual
with a cumulative investment cost and fair value of approximately $12.3
million and $0.0 million, respectively, or 0.8% and 0.0% as a percentage
of our total investment portfolio at cost and value, respectively.
Compared to December 31, 2017, the Company had five (5) debt investments
on non-accrual with cumulative investment cost and fair value of
approximately $14.8 million and $0.3 million, respectively, or 0.9% and
0.0% as a percentage of our total investment portfolio at cost and
value, respectively. The decrease in the cumulative cost of debt
investments on non-accrual between March 31, 2018 and December 31, 2017
is the result of the liquidation of one debt investment that was on
non-accrual at December 31, 2017. We recognized a realized loss of
approximately $1.7 million on the write-off of the investment.

                   
Q1 2018     Q4 2017     Q3 2017     Q2 2017     Q1 2017
 
Total Investments at Cost $1,576.3 $1,619.8 $1,489.0 $1,501.1 $1,525.1

 

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

0.0% 0.0% 0.2% 0.3% 1.3%
 

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

0.8%     0.9%     0.9%     2.9%     7.0%
 

Liquidity and Capital Resources

The Company ended Q1 2018 with $313.2 million in available liquidity,
including $118.2 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 Q1 2018, the Company sold 478,000 shares of common stock, which
were issued under the Equity Distribution Agreement with JMP, for total
accumulated net proceeds of approximately $6.0 million, including
$312,000 of offering expenses.

Subsequent to March 31, 2018, and as of April 30, 2018, the Company sold
679,800 shares of common stock for total accumulated net proceeds of
approximately $8.2 million, including $74,000 of offering expenses,
under the Equity Distribution Agreement. As of April 30, 2018,
approximately 9.2 million shares remain available for issuance and sale
under the equity ATM program.

On February 9, 2018, the Company's Board of Directors approved a partial
redemption of $100.0 million of outstanding aggregate principal amount
of 2024 Notes, which were redeemed on April 2, 2018. The partial
redemption will result in an annual interest expense savings of
approximately $6.6 million, prior to a one-time non-cash expense of
approximately $2.4 million, or $0.03 per share of additional expense in
Q2 2018.

Subsequent to March 31, 2018, the Company issued $75.0 million in
aggregate principal of 5.25% notes due 2025 (the "2025 Notes") on April
26, 2018. The 2025 Notes were issued pursuant to the Fifth Supplemental
Indenture to the Base Indenture, dated April 26, 2018 (the "2025 Notes
Indenture"), between the Company and U.S. Bank, National Association, as
trustee. The sale of the 2025 Notes generated net proceeds of
approximately $73.0 million. Aggregate estimated offering expenses in
connection with the transaction, including the underwriter's discount
and commissions, were approximately $2.0 million. The 2025 Notes are
listed on the NYSE under the symbol "HCXZ."

Bank Facilities

As of March 31, 2018, Hercules has two committed credit facilities, one
with Wells Fargo Capital Finance, part of Wells Fargo & Company (NYSE: WFC) (the "Wells Fargo Facility"), and another with 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 March 31,
2018 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 March 31, 2018.

Leverage

Hercules' regulatory leverage, or debt to equity ratio, excluding our
Small Business Administration "SBA" debentures, was 72.0% and net
regulatory leverage, a non-GAAP measure (excluding cash of approximately
$118.2 million), was 57.8%, as of March 31, 2018. Hercules' GAAP
leverage ratio, including our SBA debentures, was 80.7%, as of March 31,
2018.

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 $231.6 million to its balance
sheet as of March 31, 2018, bringing the maximum potential leverage to
approximately $1.0 billion, or 123.0% (1.23:1), if it had access to such
additional leverage.

Available Unfunded Commitments – Representing 3.8% 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 March 31, 2018, the Company had $51.9 million of available
unfunded commitments at the request of the portfolio company and
unencumbered by any milestones, including undrawn revolving facilities,
representing 3.8% of Hercules' debt investment balance, at cost. This
decreased from the previous quarter of $73.6 million of available
unfunded commitments at the request of the portfolio company or 5.1% of
Hercules' debt investment balance, at cost.

Existing Pipeline and Signed Term Sheets

After closing $266.0 million in new commitments in Q1 2018, Hercules has
pending commitments of $210.0 million in signed non-binding term sheets
outstanding as of April 30, 2018. Since the close of Q1 2018 and as of
April 30, 2018, Hercules closed debt and equity commitments of $115.1
million to new and existing portfolio companies and funded $100.6
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 March 31, 2018, the Company's net assets were $828.7 million,
compared to $841.0 million at the end of Q4 2017. NAV per share
decreased to $9.72 on 85.2 million outstanding shares as of March 31,
2018, compared to $9.96 on 84.4 million outstanding shares as of
December 31, 2017. The decrease in NAV per share was primarily
attributed to a change in unrealized depreciation and realized losses
offset by accretive proceeds from our ATM activity during the quarter.

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

Hercules has purposely constructed an asset sensitive debt investment
portfolio and has structured its debt borrowings for any eventual
increases in market rates that may occur in the near future. With 96.5%
of our debt investment portfolio being priced at floating interest rates
as of March 31, 2018, 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 Hercules' Consolidated Statement of Assets and Liabilities as
of March 31, 2018, 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 Hercules' 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 $3.1 million, or $0.04 per share, of net investment income
annually.

                       
(in thousands) Interest Interest Net

  EPS(2)  

Basis Point Change Income(1) Expense

  Income  

 
25 $ 3,088 $ - $ 3,088 $ 0.04
50 $ 6,197 $ - $ 6,197 $ 0.07
75 $ 9,394 $ - $ 9,394 $ 0.11
100 $ 12,591 $ - $ 12,591 $ 0.15
200 $ 25,791 $ - $ 25,791 $ 0.30
300 $ 38,578 $ - $ 38,578 $ 0.46

(1)

 

Source: Hercules Capital Form 10-Q for Q1 2018

(2)

EPS calculated on basic weighted shares outstanding of 84,596.
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 53 portfolio companies with a fair
value of $114.0 million and a cost basis of $164.9 million as of March
31, 2018. On a fair value basis, 18.0% or $20.2 million is related to
existing public equity positions, at March 31, 2018.

Warrant Portfolio

Hercules held warrant positions in 134 portfolio companies with a fair
value of $33.3 million and a cost basis of $42.8 million as of March 31,
2018.

Portfolio Company IPO and M&A Activity in Q1 2018

IPO Activity

As of March 31, 2018, Hercules held warrant and equity positions in four
(4) portfolio companies that had filed Registration Statements in
contemplation of a potential IPO.

  • In March 2018, Hercules' portfolio company, DocuSign Inc., a
    company that provides electronic signature technology and digital
    transaction management services for facilitating electronic exchanges
    of contracts and signed documents, filed a Form S-1 Registration with
    the SEC in contemplation of a potential public offering. In April
    2018, DocuSign completed its IPO raising approximately $629 million
    pricing 21.7 million shares at $29 per share. Hercules currently holds
    385,000 shares of common stock as of March 31, 2018 and has a
    potential unrealized gain of $9.1 million, based on the closing price
    of DocuSign shares on May 2, 2018. The unrealized gain may increase or
    decrease as the stock price of DocuSign moves up or down from its
    closing price on May 2, 2018, thereby impacting Hercules' eventual
    realized gain or (loss).
  • Three (3) 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

  1. In September 2017, Hercules' portfolio company Inotek
    Pharmaceuticals Corporation
    (NASDAQ:ITEK), a clinical-stage
    biopharmaceutical company focused on the discovery, development and
    commercialization of therapies for ocular diseases, and Rocket
    Pharmaceuticals Ltd. (NASDAQ:RCKT), a leading US-based gene
    therapy company, announced they had entered into a definitive merger
    agreement. The deal was completed and announced on January 4, 2018.
    The combined company will be named Rocket Pharmaceuticals, Inc. and is
    now listed on the NASDAQ Global Market under the symbol "RCKT" and
    began trading on January 5, 2018. Hercules committed $1.5 million in
    venture debt financing to Inotek in August 2007 and held 944 shares of
    common stock as of March 31, 2018.
  2. 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 had 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. In January 2018,
    Evofem completed the reverse merger acquisition of Neothetics. The
    merged company is now operating as Evofem Biosciences, Inc. The stock
    began trading on the Nasdaq Capital Market under the ticker symbol
    "EVFM." Hercules initially committed $10.0 million in venture debt
    financing in June 2014, and currently holds warrants for 7,806 shares
    of common stock as of March 31, 2018.
  3. In March 2018, Hercules' portfolio company IntegenX Inc., the
    market leader of rapid human DNA identification technology for use in
    forensics and law enforcement applications, announced that they have
    been acquired by Thermo Fisher Scientific Inc., the world leader in
    serving science. Terms of the transaction were not disclosed. Hercules
    initially committed $17.5 million in venture debt financing in June
    2016.

Distributions

The Board of Directors has declared a first quarter cash distribution
of $0.31 per share. This distribution would represent the Company's 51st
consecutive distribution declaration since its IPO, bringing the total
cumulative distribution declared to date to $14.33 per share. The
following shows the key dates of our first quarter 2018 distribution
payment:

Record Date             May 14, 2018
Payment Date May 21, 2018
 

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 March
31, 2018, 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 2018 distributions to stockholders will be.

Subsequent Events

1. As of April 30, 2018, Hercules has:

a. Closed debt and equity commitments of $115.1 million to new and
existing portfolio companies, and funded $100.6 million since the close
of the first quarter.

b. Pending commitments (signed non-binding term sheets) of $210.0
million.

The table below summarizes our year-to-date closed and pending
commitments as follows:

 
Closed Commitments and Pending Commitments (in millions)
Q1 2018 Closed Commitments(a)           $266.0
Q2 2018 Closed Commitments (as of April 30, 2018)(a)           $115.1
Total Year-to-Date 2018 Closed Commitments(a)           $381.1
Q2 2018 Pending Commitments (as of April 30, 2018)(b)           $210.0
Year-to-date 2018 Closed and Pending Commitments           $591.1
         
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.
 

2. On February 9, 2018, the Company's Board of Directors approved a
partial redemption of $100.0 million of outstanding aggregate principal
amount of 2024 Notes, which were redeemed on April 2, 2018. The partial
redemption will result in an annual interest expense savings of
approximately $6.6 million, prior to a one-time non-cash expense of
approximately $2.4 million, or $0.03 per share of additional expense in
Q2 2018.

3. On April 26, 2018, the Company issued $75.0 million in aggregate
principal of the 2025 Notes. The 2025 Notes were issued pursuant to the
2025 Notes Indenture. The sale of the 2025 Notes generated net proceeds
of approximately $73.0 million. Aggregate estimated offering expenses in
connection with the transaction, including the underwriter's discount
and commissions, were approximately $2.0 million. The 2025 Notes are
listed on the NYSE under the symbol "HCXZ."

4. Subsequent to March 31, 2018, and as of April 30, 2018, the Company
sold 679,800 shares of common stock for total accumulated net proceeds
of approximately $8.2 million, including $74,000 of offering expenses,
under the Equity Distribution Agreement with JMP. As of April 30, 2018,
approximately 9.2 million shares remain available for issuance and sale
under the equity ATM program.

5. In March 2018, Hercules' portfolio company, DocuSign Inc., a
company that provides electronic signature technology and digital
transaction management services for facilitating electronic exchanges of
contracts and signed documents, filed a Form S-1 Registration with the
SEC in contemplation of a potential public offering. In April 2018,
DocuSign completed its IPO raising approximately $629 million pricing
21.7 million shares at $29 per share. Hercules currently holds 385,000
shares of common stock as of March 31, 2018 and has a potential
unrealized gain of $9.1 million, based on the closing price of DocuSign
shares on May 2, 2018. The unrealized gain may increase or decrease as
the stock price of DocuSign moves up or down from its closing price on
May 2, 2018, thereby impacting Hercules' eventual realized gain or
(loss).

Conference Call

Hercules has scheduled its first quarter 2018 financial results
conference call for May 3, 2018 at 2:00 p.m. PT (5:00 p.m. ET). To
listen to the call, please dial (877) 304-8957 (or (408) 427-3709
internationally) and reference Conference ID: 9468868 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
9468868.

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 $7.6 billion to over
420 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 four
outstanding bond issuances of 6.25% Notes due 2024 (NYSE:HTGX), 4.375%
Convertible Notes due 2022, 4.625% Notes due October 2022 and 5.25%
Notes due 2025 (NYSE:HCXZ).

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)
         
March 31, 2018 December 31, 2017
Assets
Investments:
Non-control/Non-affiliate investments (cost of $1,427,863 and
$1,506,454, respectively)
1,398,640 1,491,458
Control investments (cost of $60,992 and $25,419, respectively) 54,413 19,461
Affiliate investments (cost of $87,423 and $87,956, respectively)   30,525     31,295  
Total investments in securities, at value (cost of $1,576,278 and
$1,619,829, respectively)
1,483,578 1,542,214
Cash and cash equivalents 118,228 91,309
Restricted cash 3,632 3,686
Interest receivable 11,087 12,262
Other assets   3,187     5,244  
Total assets $ 1,619,712   $ 1,654,715  
 
Liabilities
Accounts payable and accrued liabilities $ 18,789 $ 26,896
2021 Asset-Backed Notes, net (principal of $33,575 and $49,153
respectively) (1)
33,156 48,650
2022 Convertible Notes, net (principal of $230,000 and $230,000,
respectively)(1)
223,878 223,488
2022 Notes, net (principal of $150,000 and $150,000, respectively) (1) 147,698 147,572
2024 Notes, net (principal of $183,510 and $183,510, respectively) (1) 179,161 179,001
SBA Debentures, net (principal of $190,200 and $190,200,
respectively) (1)
  188,299     188,141  
Total liabilities $ 790,981 $ 813,748
 
Net assets consist of:
Common stock, par value 85 85
Capital in excess of par value 916,738 908,501
Unrealized depreciation on investments(2) (94,957 ) (79,760 )
Accumulated undistributed realized gains (losses) on investments (25,294 ) (20,374 )
Undistributed net investment income   32,159     32,515  
Total net assets $ 828,731   $ 840,967  
Total liabilities and net assets $ 1,619,712   $ 1,654,715  
 
Shares of common stock outstanding ($0.001 par value, 200,000,000
authorized)
85,239 84,424
Net asset value per share $ 9.72 $ 9.96
 

(1) The Company's SBA Debentures, 2022, Notes, 2024 Notes, 2021
Asset-Backed Notes, and 2022 Convertible Notes, as each term is
defined herein, are presented net of the associated debt issuance
costs for each instrument.

(2) Amounts include $2.3 million and $2.1 million, respectively,
in net unrealized depreciation on other assets and accrued
liabilities, including escrow receivables, and estimated taxes
payable liabilities as of March 31, 2018 and December 31, 2017,
respectively.

 

       
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 
Three Months Ended March 31,
2018 2017
Investment income:
Interest income
Non-control/Non-affiliate investments $ 41,834 $ 42,345
Control investments 586 514
Affiliate investments   561     2  
Total interest income   42,981     42,861  
Fee Income
Commitment, facility and loan fee income:
Non-control/Non-affiliate investments 2,440 2,934
Control investments 5
Affiliate investments   108      
Total commitment, facility and loan fee income   2,548     2,939  
One-time fee Income:
Non-control/Non-affiliate investments   3,171     565  
Total one-time fee income   3,171     565  
Total fee income   5,719     3,504  
Total investment income 48,700 46,365
Operating expenses:
Interest 9,386 9,607
Loan fees 1,175 2,838
General and administrative 4,009 4,064
Employee compensation:
Compensation and benefits 5,758 5,345
Stock-based compensation   2,309     1,833  
Total employee compensation   8,067     7,178  
Total operating expenses 22,637 23,687
Other income (loss)        
Net investment income 26,063 22,678
Net realized gain (loss) on investments
Non-control/Non-affiliate investments (3,512 ) 3,288
Control investments   (1,408 )   (51 )
Total net realized gain (loss) on investments   (4,920 )   3,237  
Net change in unrealized appreciation (depreciation) on
investments
Non-control/Non-affiliate investments (14,340 ) (32,155 )
Control investments (620 ) 213
Affiliate investments   (237 )   439  
Total net unrealized appreciation (depreciation) on investments   (15,197 )   (31,503 )
Total net realized and unrealized gain/(loss)   (20,117 )   (28,266 )
Net increase(decrease) in net assets resulting from operations $ 5,946   $ (5,588 )
 
Net investment income before investment gains and losses per common
share:
Basic $ 0.31   $ 0.28  
Change in net assets resulting from operations per common share:
Basic $ 0.07   $ (0.07 )
Diluted $ 0.07   $ (0.07 )
Weighted average shares outstanding
Basic   84,596     81,420  
Diluted   84,666     81,420  
Distributions declared per common share:
Basic $ 0.31 $ 0.31
 
HERCULES CAPITAL, INC.
NON GAAP FINANCIAL MEASURES
(in thousands, except per share data)
 
      Three Months Ended March 31,
Reconciliation of Net Investment Income to DNOI 2018     2017
Net investment income $ 26,063 $ 22,678
Stock-based compensation   2,309   1,833
DNOI $ 28,371 $ 24,511
 
DNOI per share-weighted average common shares
Basic $ 0.34 $ 0.30
 
Weighted average shares outstanding
Basic   84,596   81,420
 

Distributable Net Operating Income, "DNOI" represents net investment
income as determined in accordance with U.S. generally accepted
accounting principles, or 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 paid-in-kind, or 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)
 
March 31, 2018
Total Debt (Principal Outstanding) $ 787,285
Long-term SBA Debentures $ (190,200 )
Cash and cash equivalents   (118,228 )

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

$ 478,857
Denominator: Total net assets $ 828,731
Net Leverage Ratio 57.8 %
 

Net leverage ratio is calculated by deducting the outstanding cash of
$118.2 million and long-term SBA debentures of $190.2 million, at March
31, 2018 from total principal outstanding of $787.3 million divided by
our total equity of $828.7 million, resulting in a net leverage ratio of
57.8%. 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.

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