Market Overview

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

Share:

Achieved Record Breaking Quarter for Total New Debt and Equity
Commitments and Total Gross Fundings of $462.7 Million and $327.5
Million, Respectively

Surpasses $8.0 Billion Mark in Total Debt Commitments since Inception
in December 2003

Record Total Assets and Total Debt Investments of $1.79 Billion and
$1.55 Billion, Respectively

Increased Net Asset Value ("NAV") per Share to $10.22, up 5.1% from
Q1 2018

Undistributed Earnings Spillover of $21.0 million or $0.24 Earnings
per Share
(1)

Q2 2018 Financial Achievements and Highlights

  • Net Investment Income "NII" of $22.8 million, or $0.26 per share,
    which includes the one-time expense of $2.4 million, or $0.03 per
    share, associated with the $100.0 million partial redemption (the
    "2024 Notes Redemption") of 6.25% notes due 2024 (the "2024 Notes")
    • Adjusted NII of $25.2 million, or $0.29 per share(2)
    • Total Investment Income of $49.6 million, up 2.3% year-over-year
  • Distributable Net Operating Income "DNOI," a non-GAAP measure, of
    $25.6 million, or $0.29 per share
    • Adjusted DNOI of $28.0 million, or $0.32 per share(2)
  • Record new debt and equity commitments of $462.7 million, up 124.6%
    year-over-year
    • Record total gross fundings of $327.5 million, up 74.8%
      year-over-year
  • Unscheduled early principal repayments or "early loan pay-offs" of
    $114.3 million
  • $221.2 million of available liquidity for future portfolio and
    earnings growth, subject to existing terms and covenants
  • 13.5% GAAP Effective Yields and strong growth in Core Yields, a
    non-GAAP measure, to 12.7%, up from 11.9% in Q1 2018
  • Regulatory leverage of 65.2% and net regulatory leverage, a
    non-GAAP measure, of 59.0%
    (3)

Year-to-date ending June 30, 2018 Financial Highlights

  • NII of $48.8 million for six months ending June 30, 2018, or $0.57
    per share, an increase of 1.8%, as compared to $48.0 million for the
    six months ending June 30, 2017, which includes the one-time expense
    of $2.4 million, or $0.03 per share, associated with the 2024 Notes
    Redemption
    • Adjusted NII of $51.2 million, or $0.60 per share(2)
  • Total Investment Income of $98.3 million, up 3.6% year-over-year
  • New Equity and Debt Commitments of $728.7 million, an
    increase of 83.6%, as compared to $397.0 million for the six months
    ending June 30, 2017
    • Total Gross Fundings of $563.7 million, an increase of 65.5%,
      as compared to $340.7 million for the six months ending June 30,
      2017
  • Unscheduled early principal repayments of $357.8 million

(1) Per Share calculation based on weighted shares of common
stock outstanding of 87.1 million, subject to final tax filings in 2018
and overall performance during the year

(2) Excludes the one-time impact of $2.4 million, or $0.03 per
share, associated with the 2024 Notes Redemption

(3) Net regulatory leverage is defined as regulatory leverage
less cash balance at period 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 second quarter ended June 30, 2018.

The Company announced that its Board of Directors has declared a second
quarter cash distribution of $0.31 per share, that will be payable on
August 20, 2018, to shareholders of record as of August 13, 2018.

"Our industry-leading platform and leadership position delivered another
historical record for both total debt and equity commitments of $462.7
million and total gross fundings $327.5 million in Q2 - while
maintaining our stringent underwriting standards and average funding
spreads," stated Manuel A. Henriquez, chairman and chief executive
officer of Hercules. "The Company continued its significant origination
momentum with $728.7 million in new commitments for the first half of
2018, strongly putting Hercules on pace to achieve another potential
record year and surpass $1 billion in total new commitments for the full
year."

Henriquez continued, "As expected, early loan pay-offs have started to
abate in Q2, which in turn helped to amplify our debt investment
portfolio growth. In addition, we also realized strong improvement in
core yields returning to higher normalized levels at 12.7% and an
increasing record debt investment portfolio balance of $1.55 billion. We
finished Q2 2018 with a strong liquidity position of $221.2 million, and
we remain well positioned to fund our expected loan portfolio growth in
the second half of the year. And finally, we were also very active in
the capital markets, completing several initiatives to further optimize
and strengthen our financial position. These initiatives included
successfully raising a new bond offering of $75.0 million 5.25% notes
due 2025, a successful equity offering of $81.3 million accretive to
NAV, continued effective utilization of our accretive equity ATM program
raising $25.4 million, and culminating with the increase in our Union
Bank Credit Facility to $100.0 million. As we enter the second half of
2018, we continue to maintain 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, "Our exceptional performance reflects the hard work
and diligent execution of our origination team. Their ability to reach
more than $728.7 million in new commitments in the first half of 2018 is
a testament to the strength and leadership position of the Hercules
Capital brand which is increasingly recognized as the growth capital
partner of choice to many of the leading venture capital-backed
companies in the U.S."

Q2 2018 Review and Operating Results

Debt Investment Portfolio

Hercules achieved another strong and record-breaking quarter, having
successfully extended new debt and equity commitments to 15 new
companies and 14 existing companies, totaling $462.7 million, and gross
fundings of $327.5 million.

During the quarter, Hercules realized early loan pay-offs of $114.3
million, which along with normal scheduled amortization of $16.7
million, totaled $131.0 million in debt repayments. Approximately $37.2
million of the early loan repayments were received from prior portfolio
companies that had previous credit ratings in the 3-5 range.

Our strong new debt investment origination and funding activities lead
to net debt investment portfolio growth of $185.6 million during the
second quarter, on a cost basis.

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: Q1
2018 to Q2 2018

       
(in millions) Debt Equity Warrants Total Portfolio
Balances at Cost at 3/31/18 $ 1,368.6   $ 164.9   $ 42.8   $ 1,576.3  
New fundings(a) 323.3 3.7 0.5 327.5
Warrants not related to Q2 2018 fundings 0.4 0.4
Early payoffs(b) (114.3 ) (114.3 )
Principal payments received on investments (16.8 ) (16.8 )
Net changes attributed to conversions, liquidations, and fees   (6.6 )   (4.4 )   (4.5 )   (15.5 )
Net activity during Q2 2018   185.6     (0.7 )   (3.6 )   181.3  
Balances at Cost at 6/30/18 $ 1,554.2   $ 164.2   $ 39.2   $ 1,757.6  
 
       
Balances at Value at 3/31/18 $ 1,336.3   $ 114.0   $ 33.3   $ 1,483.6  
Net activity during Q2 2018 185.6 (0.7 ) (3.6 ) 181.3

Net change in unrealized appreciation (depreciation)

  24.1     8.2     4.7     37.0  
Total net activity during Q2 2018   209.7     7.5     1.1     218.3  
Balances at Value at 6/30/18 $ 1,546.0   $ 121.5   $ 34.4   $ 1,701.9  
 

(a) New fundings amount does not include revolver loans
during Q2 2018.

(b) Unscheduled paydowns does not include any paydowns
on revolvers during Q2 2018.

 

Debt Investment Portfolio Balances by Quarter

                         
(in millions) Q2 2018       Q1 2018       Q4 2017       Q3 2017       Q2 2017
 
Ending Balance at Cost $1,554.2 $1,368.6 $1,440.0 $1,314.3 $1,324.0
 
Weighted Average Balance $1,470.0       $1,364.0       $1,413.0       $1,300.0       $1,298.0
 

As of June 30, 2018, 85.9% of the Company's debt investments were in a
senior secured first lien position.

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

Effective yields on our debt investment portfolio were 13.5% during Q2
2018, a decrease from the previous quarter of 14.3%, primarily due to a
significantly lower level of early loan pay-offs during the quarter. We
realized $114.3 million of early loan pay-offs in Q2 2018 compared to
$243.5 million in Q1 2018, or a decrease of 53.1%. 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 rose to 12.7% during Q2 2018, exceeding the upper end of our
2018 expected range of 11.5% to 12.5%, and materially higher than Q1
2018 core yields of 11.9%. Hercules defines core yield as yields that
generally exclude any benefit from income related to early pay-offs
attributed to the acceleration of unamortized income and prepayment fees
and includes income from expired commitments.

Income Statement

Total investment income increased to $49.6 million for Q2 2018, compared
to $48.5 million in Q2 2017. The increase is primarily attributable to a
higher level of loan origination activity occurring early in the quarter
along with an overall increase in the core yield from 12.1% in Q2 2017
to 12.7% in Q2 2018.

Non-interest and fee expenses increased to $13.5 million in Q2 2018
versus $12.6 million for Q2 2017. The increase was primarily due to an
increase in variable compensation related to a record level of new
origination activities.

Interest expense and fees were $13.2 million in Q2 2018, compared to
$10.6 million in Q2 2017. The increase was due to the one-time non-cash
acceleration of unamortized fees associated with the 2024 Notes
Redemption, along with the higher weighted average borrowings from the
issuance of our 4.625% Notes due 2022 in October 2017, and 5.25% Notes
due 2025 (the "2025 Notes") in April 2018, and interest related to our
credit facilities during the period.

The Company had a weighted average cost of borrowings comprised of
interest and fees, of 6.4% in Q2 2018 versus 5.5% during Q2 2017. The
increase was primarily due to the one-time non-cash acceleration of
unamortized fees associated with the 2024 Notes Redemption.

NII – Net Investment Income

NII for Q2 2018 was $22.8 million, or $0.26 per share, based on 87.1
million basic weighted average shares outstanding, which includes the
one-time expense of $2.4 million, or $0.03 per share, associated with
the 2024 Notes Redemption, compared to $25.3 million, or $0.31 per
share, based on 82.3 million basic weighted average shares outstanding
in Q2 2017.

Adjusted NII was $25.2 million, or $0.29 per share, adding back the
one-time non-cash expense of $0.03 per share associated with the 2024
Notes Redemption.

DNOI - Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q2 2018 was $25.6 million or $0.29 per
share, compared to $27.2 million, or $0.33 per share, in Q2 2017. The
decrease in DNOI is primarily attributable to the increase in variable
compensation related to a record level of origination activities and to
the one-time non-cash acceleration of unamortized fees associated with
the 2024 Notes Redemption.

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 June 30, 2018, (including
net loan, warrant and equity activity) on investments, totaled ($42.8)
million, on a GAAP basis, spanning nearly 14 years of investment
activities.

When compared to total new debt investment commitments during the same
period of over $8.0 billion, the total realized gain/(loss) since
inception of ($42.8) million represents approximately 54 basis points
"bps," or 0.54%, of cumulative debt commitments, or an effective
annualized loss rate of 4 bps, or 0.04%.

Realized Gains/(Losses)

During Q2 2018, Hercules had gross realized gains/(losses) of ($15.8)
million primarily from the liquidation or write-off of our warrant and
equity investments in seven (7) portfolio companies and our debt
investments in two (2) portfolio companies, which were offset by gross
realized gains of $6.9 million, resulting in net realized losses of
($8.9) million.

Unrealized Appreciation/(Depreciation)

During Q2 2018, we recognized valuation gains from our venture capital
related investments and equity and warrant assets that helped drive
$38.2 million of net unrealized appreciation, of which $37.1 million was
net unrealized depreciation from our debt, equity, and warrant
investments. We recorded $24.2 million of net unrealized appreciation on
our debt investments which was attributable to $20.1 million of
unrealized appreciation primarily due to the reversal of unrealized
depreciation upon write-off of one portfolio company and loan repayments
from three portfolio companies, along with $4.1 million of unrealized
appreciation on the debt portfolio, including $1.8 million of unrealized
appreciation on collateral-based impairments on one (1) portfolio
company.

Portfolio Asset Quality

As of June 30, 2018, the weighted average grade of the debt investment
portfolio materially improved to 2.21, on a cost basis, compared to 2.43
as of March 31, 2018, based on a scale of 1 to 5, with 1 being the
highest quality. Hercules' policy is to generally adjust the credit
grading down on its portfolio companies as they approach their expected
additional growth equity capital to fund their respective operations for
the next 9-14 months.

Additionally, we may selectively 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 June 30, 2018, grading of the debt investment portfolio at fair
value, excluding warrants and equity investments, was as follows:

                                                               
Credit Grading at Fair Value, Q2 2018 - Q2 2017 ($ in millions)
     

Q2 2018

         

Q1 2018

         

Q4 2017

         

Q3 2017

         

Q2 2017

Grade 1 - High $ 247.5 16.0 % $ 141.8 10.6 % $ 345.2 24.4 % $ 190.0 14.6 % $ 267.1 20.7 %
Grade 2 $ 791.9 51.2 % $ 599.8 44.9 % $ 583.0 41.2 % $ 696.2 53.6 % $ 613.7 47.6 %
Grade 3 $ 463.7 30.0 % $ 548.0 41.0 % $ 443.8 31.3 % $ 370.9 28.5 % $ 315.2 24.5 %
Grade 4 $ 42.0 2.7 % $ 33.6 2.5 % $ 41.7 2.9 % $ 43.0 3.3 % $ 87.0 6.8 %
Grade 5 - Low $ 0.9 0.1 % $ 13.2 1.0 % $ 2.3 0.2 % $ - 0.0 % $ 4.6 0.4 %
                                                                                     
Weighted Avg.       2.21                   2.43                   2.17                   2.24                   2.27      
 

Non-Accruals

Non-accruals decreased slightly for the second quarter of 2018. As of
June 30, 2018, the Company had two (2) debt investments on non-accrual
with a cumulative investment cost and fair value of approximately $2.8
million and $0.0 million, respectively, or 0.2% and 0.0% as a percentage
of our total investment portfolio at cost and value, respectively.

Compared to March 31, 2018, the Company had four (4) debt investments on
non-accrual with 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. The decrease in the cumulative cost of debt
investments on non-accrual between June 30, 2018 and March 31, 2018 is
the result of the write-off of one debt investment that was on
non-accrual and one previously written down company fully paying off and
representing a full recovery to our cost basis at March 31, 2018.

                         
Q2 2018       Q1 2018       Q4 2017       Q3 2017       Q2 2017
 
Total Investments at Cost $1,757.6 $1,576.3 $1,619.8 $1,489.0 $1,501.1
 

 

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

0.0% 0.0% 0.0% 0.2% 0.3%
 

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

0.2%       0.8%       0.9%       0.9%       2.9%

 

Liquidity and Capital Resources

The Company ended Q2 2018 with $221.2 million in available liquidity,
including $59.5 million in unrestricted cash and cash equivalents, and
$161.7 million in available credit facilities, subject to existing terms
and advance rates and regulatory and covenant requirements.

In June 2018, the Company sold 6.9 million shares of its common stock in
a public offering for net proceeds of approximately $81.3 million to
fund debt and equity investment growth.

During Q2 2018, the Company sold 2.1 million shares of common stock,
which were issued under the equity ATM program, for total accumulated
net proceeds of approximately $25.4 million.

For the six months ended June 30, 2018, the Company sold 2.6 million
shares of common stock under the equity ATM program for total
accumulated net proceeds of approximately $31.4 million, including
$877,000 of offering expenses.

Subsequent to June 30, 2018, and as of July 30, 2018, the Company sold
1.6 million shares of common stock for total accumulated net proceeds of
approximately $19.8 million, including $150,000 of offering expenses,
under the equity ATM program. As of July 30, 2018, approximately 6.2
million shares remain available for issuance and sale under the equity
ATM program.

In April 2018, the Company issued $75.0 million in aggregate principal
of 2025 Notes. The 2025 Notes were issued pursuant to the Fifth
Supplemental Indenture to the Base Indenture, dated April 26, 2018,
between the Company and U.S. Bank, National Association, as trustee. The
sale of the 2025 Notes generated net proceeds of approximately $72.6
million. Aggregate estimated offering expenses in connection with the
transaction, including the underwriter's discount and commissions, were
approximately $2.4 million. The 2025 Notes are listed on the NYSE under
the symbol "HCXZ."

Also, in April 2018, the Company completed the partial 2024 Notes
Redemption, which resulted in a one-time non-cash expense of
approximately $2.4 million, or $0.03 per share of additional expense in
Q2 2018.

Bank Facilities

As of June 30, 2018, Hercules has two committed accordion 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 $100.0 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 June 30,
2018 under the Wells Fargo Facility and Union Bank Facility were both
LIBOR+3.25%, and no floor, respectively. There were $58.3 million in
outstanding borrowings under the Union Bank Facility at June 30, 2018.

Leverage

Hercules' GAAP leverage ratio, including our SBA debentures, was 84.9%,
as of June 30, 2018. Hercules' regulatory leverage, or debt to equity
ratio, excluding our Small Business Administration "SBA" debentures, was
65.2% and net regulatory leverage, a non-GAAP measure (excluding cash of
approximately $59.5 million), was 59.0%, as of June 30, 2018. Hercules'
net leverage ratio, including our SBA debentures, was 78.7%, as of June
30, 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 $335.8 million to its balance
sheet as of June 30, 2018, bringing the maximum potential leverage to
approximately $1.15 billion, or 119.7% (1.20:1), if it had access to
such additional leverage.

Available Unfunded Commitments – Representing 8.3% 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 June 30, 2018, the Company had $129.7 million of available
unfunded commitments at the request of the portfolio company and
unencumbered by any milestones, including undrawn revolving facilities,
representing 8.3% of Hercules' debt investment balance, at cost. This
increased from the previous quarter of $51.9 million of available
unfunded commitments at the request of the portfolio company or 3.8% of
Hercules' debt investment balance, at cost.

Existing Pipeline and Signed Term Sheets

After closing $462.7 million in new debt and equity commitments in Q2
2018, Hercules has pending commitments of $136.0 million in signed
non-binding term sheets outstanding as of July 30, 2018. Since the close
of Q2 2018 and as of July 30, 2018, Hercules closed debt and equity
commitments of $34.2 million to new and existing portfolio companies and
funded $24.2 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 June 30, 2018, the Company's net assets were $963.7 million,
compared to $828.7 million at the end of Q1 2018. NAV per share
increased 5.1% to $10.22 on 94.3 million outstanding shares as of June
30, 2018, compared to $9.72 on 85.2 million outstanding shares as of
March 31, 2018. The increase in NAV per share was primarily attributed
to a change in unrealized depreciation and realized and unrealized
gains, and accretive proceeds from our ATM activity and public equity
offering during the quarter.

High Asset Sensitivity – Expected Increase in Prime Rate Will Benefit
Hercules and 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 97.2%
of our debt investment portfolio being priced at floating interest rates
as of June 30, 2018, with a Prime or LIBOR-based interest rate floor,
coupled with 94% 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 June 30, 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 $3.5 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 $ 3,489 $ 36 $ 3,453 $ 0.04
50 $ 7,061 $ 71 $ 6,990 $ 0.08
75 $ 10,632 $ 107 $ 10,525 $ 0.12
100 $ 14,353 $ 143 $ 14,210 $ 0.16
200 $ 28,988 $ 286 $ 28,702 $ 0.33
300 $ 43,172 $ 429 $ 42,743 $ 0.49

 

(1)

 

Source: Hercules Capital Form 10-Q for Q2 2018

(2)

EPS calculated on basic weighted shares outstanding of 87,125.
Estimates are subject to change due to impact from active
participation in the Company's equity ATM program and any future
equity offerings.

 

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 $121.5 million and a cost basis of $164.2 million as of June
30, 2018. On a fair value basis, 30.0% or $36.7 million is related to
existing public equity positions, at June 30, 2018.

Warrant Portfolio

Hercules held warrant positions in 133 portfolio companies with a fair
value of $34.4 million and a cost basis of $39.2 million as of June 30,
2018.

Portfolio Company IPO and M&A Activity in Q2 2018

IPO Activity

As of June 30, 2018, Hercules held warrant and equity positions in two
(2) portfolio companies that had filed Registration Statements in
contemplation of a potential IPO.

  1. In April 2018, Hercules' portfolio company, DocuSign Inc. (NASDAQ: DOCU), a company that provides electronic signature technology and
    digital transaction management services for facilitating electronic
    exchanges of contracts and signed documents, completed its IPO debut
    raising approximately $725.0 million pricing 25.0 million shares of
    common stock at $29 per share.

    Hercules currently holds
    385,000 shares of common stock at $15.79 per share as of June 30,
    2018, representing an unrealized gain of approximately $13.8 million
    and $0.16 in NAV increase, based on the closing price of $51.71 for DocuSign
    on July 30, 2018. The unrealized gain may increase or decrease as the
    stock price of DocuSign moves up or down from its closing price
    on July 30, 2018, thereby impacting Hercules' eventual realized gain
    or (loss).
  2. In June 2018, Hercules' portfolio company, Tricida, Inc. (NASDAQ: TCDA), a late-stage pharmaceutical company focused on the development
    and commercialization of its lead product candidate, TRC101, a
    non-absorbed, orally-administered polymer drug design to treat
    metabolic acidosis in patients with chronic kidney disease, completed
    its IPO raising approximately $255.6 million pricing 13.5 million
    shares of common stock at $19.00 per share.

    Hercules
    initially committed $75.0 million in venture debt financing in
    February 2018. Hercules currently holds warrants for 53,458 shares of
    common stock and holds 105,260 shares of common stock as of June 30,
    2018, and has a potential unrealized gain of approximately $440,000,
    based on the closing price of $23.18 for Tricida on July 30,
    2018. The unrealized gain may increase or decrease as the stock price
    of Tricida moves up or down from its closing price on July 30,
    2018, thereby impacting Hercules' eventual realized gain or (loss).
  3. In June 2018, Hercules' portfolio company, Eidos Therapeutics, Inc.
    (NASDAQ:EIDX), a clinical stage biopharmaceutical company focused on
    addressing the large and growing unmet need in disease caused by
    amyloidosis, which is a majority-owned subsidiary of Hercules'
    portfolio company, BridgeBio Inc., a clinical-stage biotech
    company developing novel, genetically targeted therapies to improve
    the lives of patients, completed its IPO raising approximately $122.2
    million pricing 7.2 million shares of common stock at $17.00 per share.

    Hercules
    currently holds 15,000 shares of common stock as of July 30, 2018 and
    has a potential unrealized gain of approximately $6,000 based on the
    closing stock price of $17.38 for Eidos on July 30, 2018. The
    unrealized gain may increase or decrease as the stock price of Eidos
    moves up or down from its closing price on July 30, 2018, thereby
    impacting Hercules' eventual realized gain or (loss).
  4. Two (2) 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 May 2018, Hercules' portfolio company RazorGator Inc., an
    online ticket reselling platform for sports, theater and concert
    tickets, and vacation packages for sporting events, was acquired by
    TickPick, an online ticket marketplace to buy, bid on and sell tickets
    on sports, concerts and other live events. Terms of the transaction
    were not disclosed.

    Hercules initially committed $5.0
    million in venture debt financing in January 2005, and currently holds
    34,783 shares of Preferred Series AA stock as of June 30, 2018.
  2. In July 2018, Hercules' portfolio company FanDuel, a leading
    U.S. daily fantasy sports operator, was acquired by Paddy Power
    Betfair plc (LON: PPB), an international, multi-channel sports betting
    and gaming operator, and combined with Paddy Power's U.S. business
    (Betfair US). Under the agreement, the cash contribution was used to
    pay down existing FanDuel debt and fund working capital of the
    new combined businesses.

Realized Gain Events

  1. In October 2017, Hercules' portfolio company ForeScout
    Technologies, Inc.
    (NASDAQ:FSCT), a leading Internet of Things
    security company, completed its IPO. Hercules held 199,842 shares of
    common stock, as of March 31, 2018.

    In Q2 2018, Hercules
    liquidated its entire position in ForeScout and recognized a
    net realized gain of approximately $5.3 million from the IPO.
  2. In July 2018, Hercules' portfolio company FanDuel was acquired
    by Paddy Power Betfair plc (LON: PPB). Hercules initially committed
    $20.0 million in venture debt financing, including $1.0 million in
    convertible debt, in October 2016, and held warrants for 15,570 shares
    of common stock and 4,648 shares of Preferred Series A stock as of
    March 31, 2018. Subsequent to the close of the transaction, Hercules'
    term loan was paid off in full, along with the convertible debt and
    warrants. The realized gain from the transaction is approximately $1.1
    million.

Distributions

The Board of Directors has declared a second quarter cash distribution
of $0.31 per share. This distribution would represent the Company's 52nd
consecutive distribution declaration since its IPO, bringing the total
cumulative distribution declared to date to $14.64 per share. The
following shows the key dates of our second quarter 2018 distribution
payment:

                                 
Record Date August 13, 2018
Payment Date August 20, 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 June
30, 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 July 30, 2018, Hercules has:

a. Closed debt and equity commitments of $34.2 million to new and
existing portfolio companies and funded $24.2 million since the close of
the second quarter.

b. Pending commitments (signed non-binding term sheets) of $126.0
million.

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

 
Closed Commitments and Pending Commitments (in millions)
January 1 – June 30, 2018 Closed Commitments(a)   $728.7
Q3 2018 Closed Commitments (as of July 30, 2018)(a)   $34.2
Total Year-to-Date 2018 Closed Commitments(a)   $762.9
Q3 2018 Pending Commitments (as of July 30, 2018)(b)   $136.0
Year-to-date 2018 Closed and Pending Commitments   $898.9
 

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.

  1. Subsequent to June 30, 2018, and as of July 30, 2018, the Company sold
    1.6 million shares of common stock for total accumulated net proceeds
    of approximately $19.8 million, including $150,000 of offering
    expenses, under the equity ATM program. As of July 30, 2018,
    approximately 6.2 million shares remain available for issuance and
    sale under the equity ATM program.
  2. On July 13, 2018, the Company completed repayment of the $41.2 million
    outstanding HT II debentures.
  3. On July 31, 2018, the Company entered into a further amendment to the
    Wells Facility to extend the maturity date and fully repay the
    pro-rata portion of outstanding balances of Alostar Bank of Commerce
    and Everbank Commercial Finance Inc., thereby resigning both as
    lenders and terminating their commitments thereunder.

Conference Call

Hercules has scheduled its second quarter 2018 financial results
conference call for August 2, 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: 3759759 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
3759759.

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 $8.0 billion to over
430 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)
 
June 30, 2018 December 31, 2017
Assets
Investments:
Non-control/Non-affiliate investments (cost of $1,614,160 and
$1,506,454, respectively)
1,616,515 1,491,458
Control investments (cost of $59,337 and $25,419, respectively) 56,716 19,461
Affiliate investments (cost of $84,063 and $87,956, respectively)   28,705     31,295  
Total investments in securities, at value (cost of $1,757,560 and
$1,619,829, respectively)
1,701,936 1,542,214
Cash and cash equivalents 59,461 91,309
Restricted cash 15,886 3,686
Interest receivable 14,408 12,262
Other assets   906     5,244  
Total assets $ 1,792,597   $ 1,654,715  
 
Liabilities
Accounts payable and accrued liabilities $ 25,115 $ 26,896
2021 Asset-Backed Notes, net (principal of $31,088 and $49,153
respectively) (1)
30,698 48,650
2022 Convertible Notes, net (principal of $230,000 and $230,000,
respectively)(1)
224,269 223,488
2022 Notes, net (principal of $150,000 and $150,000, respectively) (1) 147,728 147,572
2024 Notes, net (principal of $83,510 and $183,510, respectively) (1) 81,694 179,001
2025 Notes, net (principal of $75,000 and $0, respectively)(1) 72,616
SBA Debentures, net (principal of $190,200 and $190,200,
respectively) (1)
188,457 188,141
Credit Facilities   58,323      
Total liabilities $ 828,900 $ 813,748
 
Net assets consist of:
Common stock, par value 94 85
Capital in excess of par value 1,026,313 908,501
Unrealized appreciation(depreciation) on investments(2) (56,760 ) (79,760 )
Accumulated undistributed realized gains (losses) on investments (34,205 ) (20,374 )
Undistributed net investment income   28,255     32,515  
Total net assets $ 963,697   $ 840,967  
Total liabilities and net assets $ 1,792,597   $ 1,654,715  
 
Shares of common stock outstanding ($0.001 par value, 200,000,000
authorized)
94,260 84,424
Net asset value per share $ 10.22 $ 9.96
 

(1) The Company's SBA Debentures, 2025 Notes, 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 $1.1 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 June 30, 2018 and December 31, 2017,
respectively.

 

 
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share data)
       
Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Investment income:
Interest income
Non-control/Non-affiliate investments $ 44,535 $ 39,979 $ 86,369 $ 82,324
Control investments 841 527 1,427 1,041
Affiliate investments   500         1,061     2  
Total interest income   45,876     40,506     88,857     83,367  
Fee Income
Commitment, facility and loan fee income:
Non-control/Non-affiliate investments 1,930 2,440 4,370 5,374
Control investments 5 10
Affiliate investments   84         192      
Total commitment, facility and loan fee income   2,014     2,445     4,562     5,384  
One-time fee Income:
Non-control/Non-affiliate investments   1,672     5,501     4,843     6,066  
Total one-time fee income   1,672     5,501     4,843     6,066  
Total fee income   3,686     7,946     9,405     11,450  
Total investment income 49,562 48,452 98,262 94,817
Operating expenses:
Interest 9,878 9,254 19,264 18,861
Loan fees 3,362 1,348 4,537 4,186
General and administrative
Legal Expenses 637 2,141 1,212 2,867
Other Expenses   3,037     2,609     6,471     5,947  
Total general and administrative   3,674     4,750     7,683     8,814  
Employee compensation:
Compensation and benefits 7,017 5,916 12,775 11,262
Stock-based compensation   2,857     1,909     5,166     3,742  
Total employee compensation   9,874     7,825     17,941     15,004  
Total operating expenses   26,788     23,177     49,425     46,865  
Net investment income 22,774 25,275 48,837 47,952
Net realized gain (loss) on investments
Non-control/Non-affiliate investments (3,953 ) (5,319 ) (7,465 ) (2,030 )
Control investments (2,900 ) (394 ) (4,308 ) (445 )
Affiliate investments   (2,058 )       (2,058 )    
Total net realized gain (loss) on investments   (8,911 )   (5,713 )   (13,831 )   (2,475 )
Net change in unrealized appreciation (depreciation) on
investments
Non-control/Non-affiliate investments 32,700 66,255 18,360 34,100
Control investments 3,957 (53,349 ) 3,337 (53,135 )
Affiliate investments   1,540     681     1,303     1,119  
Total net unrealized appreciation (depreciation) on investments   38,197     13,587     23,000     (17,916 )
Total net realized and unrealized gain(loss)   29,286     7,874     9,169     (20,391 )
Net increase(decrease) in net assets resulting from operations $ 52,060   $ 33,149   $ 58,006   $ 27,561  
 
Net investment income before investment gains and losses per common
share:
Basic $ 0.26   $ 0.31   $ 0.57   $ 0.58  
Change in net assets resulting from operations per common share:
Basic $ 0.59   $ 0.40   $ 0.67   $ 0.33  
Diluted $ 0.59   $ 0.40   $ 0.67   $ 0.33  
Weighted average shares outstanding
Basic   87,125     82,292     85,868     81,858  
Diluted   87,199     82,395     85,939     81,953  
Distributions declared per common share:
Basic $ 0.31 $ 0.31 $ 0.62 $ 0.62
 
 
HERCULES CAPITAL, INC.

NON GAAP FINANCIAL MEASURES

(in thousands, except per share data)

  Three Months Ended June 30,
Reconciliation of Net Investment Income to DNOI 2018   2017
Net investment income $ 22,774 $ 25,275
Stock-based compensation   2,857   1,909
DNOI $ 25,631 $ 27,184
 
DNOI per share-weighted average common shares
Basic $ 0.29 $ 0.33
 
Weighted average shares outstanding
Basic   87,125   82,292
 

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)

 
June 30, 2018
Total Debt (Principal Outstanding) $ 818,121
Long-term SBA Debentures $ (190,200 )
Cash and cash equivalents   (59,461 )

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

$ 568,460
Denominator: Total net assets $ 963,697
Net Leverage Ratio 59.0 %

Net leverage ratio is calculated by deducting the outstanding cash of
$59.5 million and long-term SBA debentures of $190.2 million, at June
30, 2018 from total principal outstanding of $818.1 million divided by
our total equity of $963.7 million, resulting in a net leverage ratio of
59.0%. 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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