Market Overview

Hercules Capital Reports Third Quarter 2018 Financial Results

Share:

New Debt and Equity Commitments of $235.1 Million, up 52.3%
Year-over-Year

Net Investment Income of $0.31 per Share provides 100% Coverage of
Regular Distribution Payout

Declared Supplemental Distribution of $0.02 per Share

Increased Net Asset Value ("NAV") per Share to $10.38, up 1.6% from
Q2 2018

Received BBB Investment Grade Credit and Corporate Rating from DBRS,
Inc.

Q3 2018 Financial Achievements and Highlights

  • Net Investment Income "NII" of $29.3 million, or $0.31 per share,
    an increase of 22.2% year-over-year
    • Total Investment Income of $52.6 million, an increase of 14.7%
      year-over-year
  • Distributable Net Operating Income(1)
    "DNOI," a non-GAAP measure, of $32.6 million, or $0.34 per share
  • New debt and equity commitments of $235.1 million, up 52.3%
    year-over-year
    • Total gross fundings of $142.4 million
  • Unscheduled early principal repayments or "early loan pay-offs" of
    $64.9 million
  • $137.3 million of available liquidity for future portfolio and
    earnings growth, subject to existing terms and covenants
  • Regulatory leverage of 66.0% and net regulatory leverage, a
    non-GAAP measure, of 61.7%
    (2)
  • 13.5% GAAP Effective Yields and 12.7% Core Yields(3),
    a non-GAAP measure
  • 12.7% Return on Average Equity "ROAE" (NII/Average Equity)
  • 6.9% Return on Average Assets "ROAA" (NII/Average Assets)

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

  • NII increased 8.5% to $78.1 million for nine months ending
    September 30, 2018, or $0.87 per share, as compared to $71.9 million
    for the nine months ending September 30, 2017
    • Total Investment Income of $150.9 million, up 7.2%
      year-over-year
  • New Equity and Debt Commitments increased 74.8% to $963.8 million,
    as compared to $551.4 million for the nine months ending September 30,
    2017
    • Total Gross Fundings increased 44.9% to $706.1 million, as
      compared to $487.4 million for the nine months ending September
      30, 2017
  • Unscheduled early principal repayments of $422.7 million

(1) 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.

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

(3) Core Yield excludes Early Loan Pay-offs and One-Time
Fees, and includes income and fees from expired commitments

Hercules
Capital, Inc.
(NYSE:HTGC) ("Hercules" or the "Company"), the
leading specialty financing provider to innovative venture growth stage
companies backed by leading venture capital firms, today announced its
financial results for the third quarter ended September 30, 2018.

The Company announced that its Board of Directors has declared a third
quarter base and supplemental cash distribution of $0.31 and $0.02 per
share, respectively, that will each be payable on November 19, 2018, to
shareholders of record as of November 12, 2018.

"We delivered strong Q3 2018 financial results, exceeding all of our key
operating metrics, delivering portfolio growth, fully covering the
dividend from NII and declaring a special supplemental distribution of
$0.02 per share," stated Manuel A. Henriquez, chairman and chief
executive officer of Hercules.  "During the quarter, we benefitted from
our industry-leading venture debt platform and market leadership
position, which resulted in total debt and equity commitments of $235.1
million and total gross fundings $142.4 million. This investment
performance was especially gratifying since it occurred in the third
quarter, which is typically the slowest period of the year. The Company
achieved a new historical record with $963.8 million in total new
commitments just in the first nine months of 2018 and has already
surpassed $1.0 billion in total new commitments year-to-date."

Henriquez continued, "Our balance sheet continues to be highly asset
sensitive and our debt investment portfolio continues to benefit from
the various rise in short-term rates, delivering strong core yields
above normalized levels of 12.7% and reduced early loan pay-offs in the
quarter, which were below our expectations.  In addition, we ended the
quarter with a record debt investment portfolio balance of $1.60
billion.  We finished Q3 2018 with a strong liquidity position of $137.3
million, and we remain well positioned to fund our expected loan
portfolio growth for the remainder of the year. Finally, we remain very
active in the capital markets, having recently completed our third
securitization, recently raising $200.0 million.  This transaction caps
off a remarkable year for Hercules in which we raised approximately
$458.0 million of new debt and equity capital year-to-date, expanding
and diversifying our sources of capital and providing long-dated
maturities to help support our growth and deliver increased earnings in
2018 and beyond."  

Q3 2018 Review and Operating Results

Debt Investment Portfolio

Hercules achieved another strong quarter, having successfully extended
new debt and equity commitments to eight (8) new companies and 11
existing companies, totaling $235.1 million, and gross fundings of
$142.4 million.

During the quarter, Hercules realized early loan pay-offs of $64.9
million, which along with normal scheduled amortization of $20.4
million, totaled $85.3 million in debt repayments.

The strong new debt investment origination and funding activities lead
to net debt investment portfolio growth of $53.8 million during the
third 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: Q2
2018 to Q3 2018

 
(in millions)   Debt       Equity       Warrants       Total Portfolio
Balances at Cost at 6/30/18 $ 1,554.2   $ 164.2   $ 39.2   $ 1,757.6  
New fundings(a) 136.2 5.4 0.8 142.4
Warrants not related to Q3 2018 fundings -
Early payoffs(b) (20.4 ) (20.4 )
Principal payments received on investments (64.9 ) (64.9 )
Net changes attributed to conversions, liquidations, and fees   2.9     (1.0 )   (3.5 )   (1.6 )
Net activity during Q3 2018   53.8     4.4     (2.7 )   55.5  
Balances at Cost at 9/30/18 $ 1,608.0   $ 168.6   $ 36.5   $ 1,813.1  
 
       
Balances at Value at 6/30/18 $ 1,546.0   $ 121.5   $ 34.4   $ 1,701.9  
Net activity during Q3 2018 53.8 4.4 (2.7 ) 55.5
Net change in unrealized appreciation (depreciation)   3.5     1.5     (1.9 )   3.1  
Total net activity during Q3 2018   57.3     5.9     (4.6 )   58.6  
Balances at Value at 9/30/18 $ 1,603.3   $ 127.4   $ 29.8   $ 1,760.5  
 

(a) New fundings amount does not include revolver loans
during Q3 2018.

(b) Unscheduled paydowns include $1M paydown on
revolvers during Q3 2018.

 

Debt Investment Portfolio Balances by Quarter

 
(in millions)   Q3 2018       Q2 2018       Q1 2018       Q4 2017       Q3 2017
                         
Ending Balance at Cost $ 1,608.0 $ 1,554.2 $ 1,368.6 $ 1,440.0 $ 1,314.3
 
Weighted Average Balance $ 1,555.0 $ 1,470.0 $ 1,364.0 $ 1,413.0 $ 1,300.0
                                   

As of September 30, 2018, 84.4% 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 Hercules' debt investment portfolio were 13.5%
during Q3 2018, the same level as Q2 2018. The Company realized $64.9
million of early loan pay-offs in Q3 2018 compared to $114.3 million in
Q2 2018, or a decrease of 43.2%. The early loan pay-offs in Q3 2018
experienced a higher level of accelerations as compared to Q2 2018.
Effective portfolio yields generally include the effects of fees and
income accelerations attributed to early loan payoffs, and other
one-time events. 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 12.7% during Q3 2018, exceeding the upper end of the
Company's 2018 expected range of 11.5% to 12.5%, and at the same level
as Q2 2018. 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 $52.6 million for Q3 2018, compared
to $45.9 million in Q3 2017, an increase of 14.7% year-over-year.  The
increase is primarily attributable to a higher average debt investment
balance between periods along with a slight increase in the core yield
from 12.6% in Q3 2017 to 12.7% in Q3 2018.

Non-interest and fee expenses increased to $12.3 million in Q3 2018
versus $11.4 million for Q3 2017. The increase was primarily due to an
increase in G&A and stock-based compensation expenses, offset by lower
variable compensation expenses.

Interest expense and fees were $11.0 million in Q3 2018, compared to
$10.5 million in Q3 2017. The increase was due to the higher weighted
average borrowings from the issuance of 4.625% Notes due 2022 in October
2017, 5.25% Notes due 2025 in April 2018, 6.25% Notes due 2033 in
October 2018, and interest related to the Company's credit facilities
during the period.

The Company had a weighted average cost of borrowings comprised of
interest and fees, of 5.6% in Q3 2018, the same level as Q3 2017.

NII – Net Investment Income

NII for Q3 2018 was $29.3 million, or $0.31 per share, based on 95.5
million basic weighted average shares outstanding, compared to $24.0
million, or $0.29 per share, based on 82.5 million basic weighted
average shares outstanding in Q3 2017, an increase of 22.2%
year-over-year.

DNOI - Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q3 2018 was $32.6 million or $0.34 per
share, compared to $25.8 million, or $0.31 per share, in Q3 2017. The
increase is primarily attributable to a higher average debt investment
balance between periods along with a slight increase in the core yield
from 12.6% in Q3 2017 to 12.7% in Q3 2018.

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 September 30, 2018,
(including net loan, warrant and equity activity) on investments,
totaled ($39.5) million, on a GAAP basis, spanning nearly 15 years of
investment activities.

When compared to total new debt investment commitments during the same
period of over $8.2 billion, the total realized gain/(loss) since
inception of ($39.5) million represents approximately 48 basis points
"bps," or 0.48%, of cumulative debt commitments, or an effective
annualized loss rate of 3 bps, or 0.03%.

Realized Gains/(Losses)

During Q3 2018, Hercules had gross realized gains/(losses) of $3.3
million primarily from gross realized gains of $4.6 million, offset by
the liquidation or write-off of warrant and equity investments in seven
(7) portfolio companies and a debt investment in one portfolio company,
of ($1.3) million.

Unrealized Appreciation/(Depreciation)

During Q3 2018, we recorded $3.0 million of net unrealized appreciation
which was mainly from debt, equity and warrant investments. Hercules
recorded $3.5 million of net unrealized appreciation on its debt
investments which was attributable to $4.2 million of unrealized
appreciation on the debt portfolio, including $0.3 million of unrealized
appreciation on collateral-based impairments on four (4) portfolio
companies, along with $0.7 million of unrealized depreciation primarily
due to the reversal of unrealized appreciation upon pay-off of three (3)
portfolio companies.

Hercules recorded $1.5 million of net unrealized appreciation on equity
investments and $1.9 million of net unrealized depreciation on warrant
investments during the three months ended September 30, 2018. This net
unrealized depreciation of $0.4 million was primarily attributable to
$1.3 million of unrealized depreciation due to the reversal of
unrealized appreciation upon acquisition or liquidation of equity and
warrant investments. This is partially offset by $0.9 million of
unrealized appreciation on the equity and warrant portfolio investments.

Portfolio Asset Quality

As of September 30, 2018, the weighted average grade of the debt
investment portfolio materially improved to 2.23, on a cost basis,
compared to 2.21 as of June 30, 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, Hercules may selectively downgrade portfolio companies,
from time to time, if they are not meeting the Company's 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 the portfolio will require additional
rounds of funding from time to time to maintain their operations.

As of September 30, 2018, grading of the debt investment portfolio at
fair value, excluding warrants and equity investments, was as follows:

Credit Grading at Fair Value, Q3 2018 - Q3 2017 ($ in millions)
   

Q3 2018

       

Q2 2018

       

Q1 2018

       

Q4 2017

       

Q3 2017

Grade 1 - High   $ 150.2     9.4 %         $ 247.5     16.0 %         $ 141.8     10.6 %         $ 345.2     24.4 %         $ 190.0     14.6 %
Grade 2 $ 987.5 61.6 % $ 791.9 51.2 % $ 599.8 44.9 % $ 583.0 41.2 % $ 696.2 53.6 %
Grade 3 $ 420.2 26.2 % $ 463.7 30.0 % $ 548.0 41.0 % $ 443.8 31.3 % $ 370.9 28.5 %
Grade 4 $ 44.5 2.7 % $ 42.0 2.7 % $ 33.6 2.5 % $ 41.7 2.9 % $ 43.0 3.3 %
Grade 5 - Low $ 0.9 0.1 % $ 0.9 0.1 % $ 13.2 1.0 % $ 2.3 0.2 % $ - 0.0 %
                                                                           
Weighted Avg.     2.23                 2.21                 2.43                 2.17                 2.24      
 

Non-Accruals

Non-accruals remained the same for the third quarter of 2018. As of
September 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 the Company's total investment portfolio at cost
and value, respectively.

Compared to June 30, 2018, the Company had two (2) debt investments on
non-accrual with 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 the total investment portfolio at cost and
value, respectively.

  Q3 2018         Q2 2018         Q1 2018         Q4 2017         Q3 2017
                               
Total Investments at Cost $ 1,813.1 $ 1,757.6 $ 1,576.3 $ 1,619.8 $ 1,489.0
 
Loans on non-accrual as a % of Total
Investments at Value 0.0 % 0.0 % 0.0 % 0.0 % 0.2 %
 
Loans on non-accrual as a % of Total

 

 

 

 

 

Investments at Cost

0.2

%

0.2

%

0.8

%

0.9

%

0.9

%

                                         

Liquidity and Capital Resources

The Company ended Q3 2018 with $137.3 million in available liquidity,
including $43.2 million in unrestricted cash and cash equivalents, and
$94.1 million in available credit facilities, subject to existing terms
and advance rates and regulatory and covenant requirements.

In September 2018, the Company issued $40.0 million in aggregate
principal amount of 6.25% notes due 2033 (the "2033 Notes") to fund debt
and equity investment growth. The 2033 Notes are listed on the NYSE
under the symbol "HCXY."

On July 13, 2018, the Company completed repayment of the $41.2 million
outstanding debentures of Hercules Technology II, L.P. and subsequently
surrendered the SBA license.

During Q3 2018, the Company sold 2.4 million shares of common stock,
which were issued under the equity ATM program, for total accumulated
net proceeds of approximately $30.9 million, including $540,000 of
offering expenses.

For the nine months ended September 30, 2018, the Company sold 5.0
million shares of common stock under the equity ATM program for total
accumulated net proceeds of approximately $62.3 million, including $1.4
million of offering expenses.

On November 1, 2018, the Company completed a term debt securitization in
connection with which an affiliate of the Company made an offering of
$200,000,000 in aggregate principal amount of fixed-rate asset-backed
notes (the "2027 Asset-Backed Notes"). The 2027 Asset-Backed Notes were
rated A(sf) by Kroll Bond Rating Agency, Inc. ("KBRA"). Interest on the
2027 Asset-Backed Notes will be paid, to the extent of funds available,
at a fixed rate of 4.605% per annum. The 2027 Asset-Backed Notes have a
stated maturity of November 22, 2027.

Bank Facilities

As of September 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 $75.0 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 September 30,
2018 under the Wells Fargo Facility and Union Bank Facility were both
LIBOR+3.25%, and no floor, respectively. There were $42.4 million in
outstanding borrowings under the Union Bank Facility and $38.5 million
in outstanding borrowings under the Wells Fargo Facility, for a total of
$80.9 million at September 30, 2018.

On July 31, 2018, the Company entered into an 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.

On October 26, 2018, the Company entered into a further amendment to the
Wells Facility to, among other things, extend the maturity date.

Leverage

Hercules' GAAP leverage ratio, including its SBA debentures, was 80.9%,
as of September 30, 2018. Hercules' regulatory leverage, or debt to
equity ratio, excluding our Small Business Administration "SBA"
debentures, was 66.0% and net regulatory leverage, a non-GAAP measure
(excluding cash of approximately $43.2 million), was 61.7%, as of
September 30, 2018. Hercules' net leverage ratio, including its SBA
debentures, was 76.6%, as of September 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 $149.0 million, providing the Company with the
potential capacity to add leverage of $341.3 million to its balance
sheet as of September 30, 2018, bringing the maximum potential leverage
to approximately $1.15 billion, or 114.8% (1.15:1), if it had access to
such additional leverage.

On September 4, 2018, Hercules' Board of Directors approved the
application to reduce its asset coverage requirement from 200% to 150%
under the Small Business Credit Availability Act ("SBCAA"), which passed
into law on March 23, 2018. This change will go into effect on September
4, 2019. The Company and the Board of Directors unanimously determined
that the best course of action is to seek stockholder approval to
accelerate the application of the reduced asset coverage requirements to
the Company at a Special Meeting to be held on December 6, 2018.

If the proposal is approved by stockholders at the Special Meeting, the
Company would become subject to an asset coverage ratio of at least 150%
the day after the Special Meeting instead of September 4, 2019.

Available Unfunded Commitments – Representing 10.7% of debt
investment balance, at cost

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

As of September 30, 2018, the Company had $171.9 million of available
unfunded commitments at the request of the portfolio company and
unencumbered by any milestones, including undrawn revolving facilities,
representing 10.7% of Hercules' debt investment balance, at cost. This
increased from the previous quarter of $129.7 million of available
unfunded commitments at the request of the portfolio company or 8.3% of
Hercules' debt investment balance, at cost.

Existing Pipeline and Signed Term Sheets

After closing $235.1 million in new debt and equity commitments in Q3
2018, Hercules has pending commitments of $31.0 million in signed
non-binding term sheets outstanding as of October 29, 2018. Since the
close of Q3 2018 and as of October 29, 2018, Hercules closed debt and
equity commitments of $53.0 million to new and existing portfolio
companies and funded $90.0 million.

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

Net Asset Value

As of September 30, 2018, the Company's net assets were $1.0 billion,
compared to $963.7 million at the end of Q2 2018. NAV per share
increased 1.6% to $10.38 on 96.8 million outstanding shares of common
stock as of September 30, 2018, compared to $10.22 on 94.3 million
outstanding shares of common stock as of June 30, 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 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 97.0%
of our debt investment portfolio being priced at floating interest rates
as of September 30, 2018, with a Prime or LIBOR-based interest rate
floor, coupled with 90.0% 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 September 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 $4.3 million, or $0.04 per share, of net investment income
annually.

(in thousands)
Basis Point Change

       

Interest
Income(1)

       

Interest
Expense

       

Net
Income

       

EPS(2)

25 $ 4,303 $ 46 $ 4,257 $ 0.04
50 $ 7,921 $ 93 $ 7,828 $ 0.08
75 $ 11,720 $ 139 $ 11,581 $ 0.12
100 $ 15,518 $ 186 $ 15,332 $ 0.16
200 $ 31,188 $ 372 $ 30,816 $ 0.32
300 $ 45,681 $ 558 $ 45,123 $ 0.47
 
 

(1) Source: Hercules Capital Form 10-Q for Q3 2018

(2) EPS calculated on basic weighted shares outstanding of
95,460. 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 52 portfolio companies with a fair
value of $127.4 million and a cost basis of $168.6 million as of
September 30, 2018. On a fair value basis, 31.0% or $39.2 million is
related to existing public equity positions, at September 30, 2018.

Warrant Portfolio

Hercules held warrant positions in 130 portfolio companies with a fair
value of $29.8 million and a cost basis of $36.5 million as of September
30, 2018.

Portfolio Company IPO and M&A Activity in Q3 2018

IPO Activity

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

• Stealth Bio Therapeutics filed a public registration with the Hong
Kong Exchange (HKEX) in contemplation of a potential public offering.

• One (1) portfolio company 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 August 2018, Hercules' portfolio company NuGEN Technologies, Inc.,
    a leading provider for innovative next-generation sequencing kits and
    genomic sample preparation solutions for the fastest growing field
    within the genomics area, was acquired by the Tecan Group (SIX Swiss
    Exchange: TECN), a leading global provider of laboratory instruments
    and solutions in biopharmaceuticals, forensics and clinical
    diagnostics. Terms of the acquisition were not disclosed. Hercules
    initially committed $3.5 million in venture debt financing beginning
    in April 2007.
  2. In August 2018, Hercules' portfolio company Avnera Corporation,
    a fabless semiconductor firm making custom Analog System-on-Chip
    (ASoC) solutions for audio, voice, speech, sensor and artificial
    intelligence (AI) applications, was acquired by Skyworks Solutions,
    Inc. (NASDAQ:SWKS), an innovator of high-performance analog
    semiconductors connecting people, places and things. Skyworks paid
    $405.0 million in cash to Avnera equity holders at closing with
    up to an additional $20.0 million if certain performance targets are
    exceeded over a 12-month period post-closing period. Hercules
    initially committed $12.5 million in venture debt financing beginning
    in March 2014.
  3. In September 2018, Hercules' portfolio company INXPO, Inc., a
    provider of feature-rich webcasting and online events for the
    enterprise, announced it has entered into an agreement to be acquired
    by West Corporation, a leading technology enablement company that
    connects people around the world, making companies more efficient and
    improving lives. Terms of the acquisition were not disclosed. The
    closing of the transaction is subject to customary closing conditions.
    Hercules initially committed $6.0 million in venture debt financing
    beginning in March 2011.
  4. In September 2018, Hercules' portfolio company NewVoiceMedia Limited,
    a leading global provider of cloud contact center technology that
    enables businesses to create exceptional, emotive customer experiences
    to serve better and sell more, announced it has entered into an
    agreement to be acquired by Vonage Holding Corporation (NYSE:VG), a
    internet telephony service provider, providing business and
    residential telecommunication services based on voice over Internet
    Protocol, for $350.0 million in cash. The closing of the transaction
    is expected to close in the fourth quarter of 2018 and is subject to
    standard regulatory review and customary closing conditions. Hercules
    initially committed $25.0 million in venture debt financing beginning
    in December 2014, and currently holds 669,173 shares of Preferred
    Series E common stock and warrants for 225,586 shares of Preferred
    Series E stock as of September 30, 2018.
  5. In September 2018, Hercules' portfolio company Clustrix, a
    leading provider of distributed relational NewSQL databases for
    transactional big-data applications, was acquired by MariaDB
    Corporation, a developer of open source database technology. Terms of
    the acquisition were not disclosed. Hercules initially committed $4.0
    million in venture debt financing beginning in November 2012.

Distributions

The Board of Directors declared a third quarter cash distribution
of $0.31 per share. This distribution would represent the Company's 53rd
consecutive distribution declaration since its IPO, bringing the total
cumulative distribution declared to date to $14.95 per share. In
addition, the Board of Directors declared a supplemental cash
distribution of $0.02 per share. The following shows the key dates of
each of our third quarter 2018 distribution payments:

         
Record Date November 12, 2018
Payment Date November 19, 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,
during the year, the Company's Board of Directors may choose to pay
additional supplemental distributions, so that the Company may
distribute approximately all its annual taxable income in the year it
was earned, or it can elect to maintain the option to spill over the
excess taxable income into the coming year for future distribution
payments.

The determination of the tax attributes of the Company's distributions
is made annually as of the end of the Company's fiscal year based upon
its taxable income for the full year and distributions paid for the full
year. Therefore, a determination made on a quarterly basis may not be
representative of the actual tax attributes of its distributions for a
full year. Of the distributions declared during the quarter ended
September 30, 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 October 29, 2018, Hercules has:

    a. Closed debt and
    equity commitments of $53.0 million to new and existing portfolio
    companies and funded $90.0 million since the close of the third
    quarter.

    b. Pending commitments (signed non-binding term
    sheets) of $31.0 million.

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

Closed Commitments and Pending Commitments (in millions)
January 1 – September 30, 2018 Closed Commitments(a)                     $963.8
Q4 2018 Closed Commitments (as of October 29, 2018)(a)                     $53.0
Total Year-to-Date 2018 Closed Commitments(a)                     $1016.8
Q4 2018 Pending Commitments (as of October 29, 2018)(b)                     $31.0
Year-to-date 2018 Closed and Pending Commitments                     $1,047.8
   
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. On November 1, 2018, the Company completed a term debt securitization
    in connection with which an affiliate of the Company made an offering
    of $200,000,000 in aggregate principal amount of 2027 Asset-Backed
    Notes. The 2027 Asset-Backed Notes were rated A(sf) by KBRA. Interest
    on the 2027 Asset-Backed Notes will be paid, to the extent of funds
    available, at a fixed rate of 4.605% per annum. The 2027 Asset-Backed
    Notes have a stated maturity of November 22, 2027.
  2. On October 26, 2018, the Company entered into a further amendment to
    the Wells Facility to, among other things, extend the maturity date.
  3. In July 2018, changes in the payment schedule of obligors in the 2021
    Asset-Backed Notes collateral pool triggered a rapid amortization
    event in accordance with the sale and servicing agreement for the 2021
    Asset-Backed Notes. Due to this event, the 2021 Asset-Backed Notes
    were fully repaid as of October 16, 2018.

Conference Call

Hercules has scheduled its third quarter 2018 financial results
conference call for November 1, 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: 2699117 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
2699117.

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 $8.2 billion to over
440 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 five
outstanding bond issuances of 6.25% Notes due 2024 (NYSE:HTGX), 4.375%
Convertible Notes due 2022, 4.625% Notes due 2022, 5.25% Notes due 2025
(NYSE:HCXZ) and 6.25% Notes due 2033 (NYSE:HCXY).

Forward-Looking Statements

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

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

 
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
(unaudited)
(dollars in thousands, except per share data)
 
  September 30, 2018           December 31, 2017
Assets
Investments:
Non-control/Non-affiliate investments (cost of $1,663,658 and
$1,506,454, respectively)
1,670,034 1,491,458
Control investments (cost of $64,630 and $25,419, respectively) 62,387 19,461
Affiliate investments (cost of $84,821 and $87,956, respectively)   28,095     31,295  
Total investments in securities, at value (cost of $1,813,109 and
$1,619,829, respectively)
1,760,516 1,542,214
Cash and cash equivalents 43,212 91,309
Restricted cash 2,429 3,686
Interest receivable 15,722 12,262
Other assets   1,175     5,244  
Total assets $ 1,823,054   $ 1,654,715  
 
Liabilities
Accounts payable and accrued liabilities $ 21,473 $ 26,896
2021 Asset-Backed Notes, net (principal of $3,515 and $49,153
respectively) (1)
3,423 48,650
2022 Convertible Notes, net (principal of $230,000 and $230,000,
respectively)(1)
224,660 223,488
2022 Notes, net (principal of $150,000 and $150,000, respectively) (1) 147,859 147,572
2024 Notes, net (principal of $83,510 and $183,510, respectively) (1) 81,791 179,001
2025 Notes, net (principal of $75,000 and $0, respectively)(1) 72,495
2033 Notes, net (principal of $40,000 and $0, respectively)(1) 38,752
SBA Debentures, net (principal of $149,000 and $190,200,
respectively) (1)
147,527 188,141
Credit Facilities   80,894      
Total liabilities $ 818,874 $ 813,748
 
Net assets consist of:
Common stock, par value 96 85
Capital in excess of par value 1,060,875 908,501
Unrealized appreciation(depreciation) on investments(2) (53,784 ) (79,760 )
Accumulated undistributed realized gains (losses) on investments (30,855 ) (20,374 )
Undistributed net investment income   27,848     32,515  
Total net assets $ 1,004,180   $ 840,967  
Total liabilities and net assets $ 1,823,054   $ 1,654,715  
 
Shares of common stock outstanding ($0.001 par value, 200,000,000
authorized)
96,751 84,424
Net asset value per share $ 10.38 $ 9.96
 

(1) The Company's SBA Debentures, 2033 Notes, 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 $1.2 million and $2.1 million,
respectively, in net unrealized depreciation on other assets and
accrued liabilities, including escrow receivables, and estimated
taxes payable as of September 30, 2018 and December 31, 2017,
respectively.

 
 
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 
 
  Three Months Ended September 30,           Nine Months Ended September 30,
  2018         2017     2018         2017  
Investment income:
Interest income
Non-control/Non-affiliate investments $ 47,662 $ 41,725 $ 134,031 $ 124,049
Control investments 921 464 2,348 1,505
Affiliate investments   509     246     1,570     248  
Total interest income   49,092     42,435     137,949     125,802  
Fee Income
Commitment, facility and loan fee income:
Non-control/Non-affiliate investments 1,858 2,239 6,228 7,613
Control investments 1 1 1 11
Affiliate investments   71     2     263     2  
Total commitment, facility and loan fee income   1,930     2,242     6,492     7,626  
One-time fee Income:
Non-control/Non-affiliate investments   1,580     1,188     6,423     7,254  
Total one-time fee income   1,580     1,188     6,423     7,254  

Total fee income

 

3,510

   

3,430

   

12,915

   

14,880

 
Total investment income 52,602 45,865 150,864 140,682
Operating expenses:
Interest 9,451 9,185 28,715 28,046
Loan fees 1,502 1,314 6,039 5,500
General and administrative
Legal Expenses 677 925 1,889 3,792
Other Expenses   3,044     2,623     9,515     8,570  
Total general and administrative   3,721     3,548     11,404     12,362  
Employee compensation:
Compensation and benefits 5,294 6,014 18,069 17,276
Stock-based compensation   3,332     1,831     8,498     5,573  
Total employee compensation   8,626     7,845     26,567     22,849  
Total operating expenses   23,300     21,892     72,725     68,757  
Net investment income 29,302 23,973 78,139 71,925
Net realized gain (loss) on investments
Non-control/Non-affiliate investments 3,350 (8,911 ) (4,115 ) (10,940 )
Control investments (15,543 ) (4,308 ) (15,989 )
Affiliate investments           (2,058 )    
Total net realized gain (loss) on investments   3,350     (24,454 )   (10,481 )   (26,929 )
Net change in unrealized appreciation (depreciation) on
investments
Non-control/Non-affiliate investments 3,967 11,320 22,327 45,420
Control investments 378 17,624 3,715 17,703
Affiliate investments   (1,368 )   4,609     (66 )   (47,486 )
Total net unrealized appreciation (depreciation) on investments   2,977     33,553     25,976     15,637  
Total net realized and unrealized gain(loss)   6,327     9,099     15,495     (11,292 )
Net increase(decrease) in net assets resulting from operations $ 35,629   $ 33,072   $ 93,634   $ 60,633  
 
Net investment income before investment gains and losses per common
share:
Basic $ 0.31   $ 0.29   $ 0.87   $ 0.87  
Change in net assets resulting from operations per common share:
Basic $ 0.37   $ 0.40   $ 1.04   $ 0.73  
Diluted $ 0.37   $ 0.40   $ 1.04   $ 0.73  
Weighted average shares outstanding
Basic   95,460     82,496     89,100     82,073  
Diluted   95,671     82,607     89,212     82,173  
Distributions declared per common share:
Basic $ 0.31 $ 0.31 $ 0.93 $ 0.93
 
HERCULES CAPITAL, INC.
NON GAAP FINANCIAL MEASURES

(in thousands, except per share data)

 
  Three Months Ended September 30,
Reconciliation of Net Investment Income to DNOI 2018   2017
Net investment income $ 29,302 $ 23,973
Stock-based compensation   3,332   1,831
DNOI $ 32,634 $ 25,804
 
DNOI per share-weighted average common shares
Basic $ 0.34 $ 0.31
 
Weighted average shares outstanding
Basic   95,460   82,496
 

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)
 
  September 30, 2018
Total Debt (Principal Outstanding) $ 811,919
Long-term SBA Debentures $ (149,000 )
Cash and cash equivalents   (43,212 )

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

$ 619,707
Denominator: Total net assets $ 1,004,180
Net Leverage Ratio 61.7 %
 

Net leverage ratio is calculated by deducting the outstanding cash of
$43.2 million and long-term SBA debentures of $149.0 million, at
September 30, 2018 from total principal outstanding of $811.9 million
divided by our total equity of $1.0 billion, resulting in a net leverage
ratio of 61.7%. 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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