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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-00702

 

HERCULES CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

 

74-3113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

 

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

 

94301

(Zip Code)

 

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $0.001 per share

HTGC

New York Stock Exchange

5.25% Notes due 2025

HCXZ

New York Stock Exchange

6.25% Notes due 2033

HCXY

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 

On October 22, 2020, there were 114,616,652 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 


 

HERCULES CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

3

 

Item 1.

 

 

Consolidated Financial Statements

  

3

 

 

 

Consolidated Statements of Assets and Liabilities as of September 30, 2020 and December 31, 2019 (unaudited)

  

3

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

  

5

 

 

 

Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 and 2019 (unaudited)

  

6

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

  

7

 

 

 

Consolidated Schedule of Investments as of September 30, 2020 (unaudited)

  

9

 

 

 

Consolidated Schedule of Investments as of December 31, 2019 (unaudited)

  

20

 

 

 

Notes to Consolidated Financial Statements (unaudited)

  

30

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

64

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

  

83

Item 4.

 

 

Controls and Procedures

  

84

 

PART II. OTHER INFORMATION

  

85

 

Item 1.

 

Legal Proceedings

  

85

Item 1A.

 

 

Risk Factors

 

85

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

87

Item 3.

 

Defaults Upon Senior Securities

  

87

Item 4.

 

 

Mine Safety Disclosures

  

87

Item 5.

 

 

Other Information

  

87

Item 6.

 

 

Exhibits and Financial Statement Schedules

  

88

 

SIGNATURES

  

91

 

 

 

 

2


 

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts, unless the context otherwise requires.

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(unaudited)

(in thousands, except per share data)

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments (cost of $2,352,003 and $2,248,524, respectively)

 

$

2,355,935

 

 

$

2,232,972

 

Control investments (cost of $65,242 and $65,333, respectively)

 

 

55,092

 

 

 

59,746

 

Affiliate investments (cost of $88,584 and $88,175, respectively)

 

 

9,800

 

 

 

21,808

 

Total investments in securities, at value (cost of $2,505,829 and $2,402,032, respectively)

 

 

2,420,827

 

 

 

2,314,526

 

Cash and cash equivalents

 

 

27,554

 

 

 

64,393

 

Restricted cash

 

 

20,507

 

 

 

50,603

 

Interest receivable

 

 

19,506

 

 

 

20,207

 

Right of use asset

 

 

9,884

 

 

 

11,659

 

Other assets

 

 

5,723

 

 

 

580

 

Total assets

 

$

2,504,001

 

 

$

2,461,968

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

28,782

 

 

$

30,306

 

Operating lease liability

 

 

9,753

 

 

 

11,538

 

SBA Debentures, net (principal of $99,000 and $149,000, respectively) (1)

 

 

98,668

 

 

 

148,165

 

2022 Notes, net (principal of $150,000 and $150,000, respectively) (1)

 

 

148,907

 

 

 

148,514

 

July 2024 Notes, net (principal of $105,000 and $105,000, respectively) (1)

 

 

103,869

 

 

 

103,685

 

February 2025 Notes, net (principal of $50,000 and $0, respectively) (1)

 

 

49,493

 

 

 

 

2025 Notes, net (principal of $75,000 and $75,000, respectively) (1)

 

 

73,256

 

 

 

72,970

 

June 2025 Notes, net (principal of $70,000 and $0, respectively) (1)

 

 

69,233

 

 

 

 

2033 Notes, net (principal of $40,000 and $40,000, respectively) (1)

 

 

38,582

 

 

 

38,501

 

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (1)

 

 

197,521

 

 

 

197,312

 

2028 Asset-Backed Notes, net (principal of $250,000 and $250,000, respectively) (1)

 

 

247,579

 

 

 

247,395

 

2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively) (1)

 

 

227,786

 

 

 

226,614

 

Credit Facilities

 

 

37,492

 

 

 

103,919

 

Total liabilities

 

$

1,330,921

 

 

$

1,328,919

 

 

 

 

 

 

 

 

 

 

Net assets consist of:

 

 

 

 

 

 

 

 

Common stock, par value

 

 

115

 

 

 

108

 

Capital in excess of par value

 

 

1,225,823

 

 

 

1,145,106

 

Total distributable earnings (loss)

 

 

(52,858

)

 

 

(12,165

)

Total net assets

 

$

1,173,080

 

 

$

1,133,049

 

Total liabilities and net assets

 

$

2,504,001

 

 

$

2,461,968

 

 

 

 

 

 

 

 

 

 

Shares of common stock outstanding ($0.001 par value and 200,000,000 authorized)

 

 

114,317

 

 

 

107,364

 

Net asset value per share

 

$

10.26

 

 

$

10.55

 

 

(1)

The Company’s SBA debentures, 2022 Notes, July 2024 Notes, February 2025 Notes, June 2025 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 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. See “Note 4 – Borrowings”.

See notes to consolidated financial statements

3


 

The following table presents the assets and liabilities of our consolidated securitization trusts for the 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes (see Note 4 - Borrowings”), which are variable interest entities, or VIEs. The assets of our securitization VIEs can only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statements of Assets and Liabilities above.

 

(Dollars in thousands)

 

September 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Restricted Cash

 

 

20,507

 

 

$

50,603

 

2027 Asset-Backed Notes, investments in securities, at value (cost of $300,671 and $283,891, respectively)

 

 

300,402

 

 

 

283,658

 

2028 Asset-Backed Notes, investments in securities, at value (cost of $364,022 and $347,295, respectively)

 

 

364,948

 

 

 

347,929

 

Total assets

 

$

685,857

 

 

$

682,190

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (1)

 

$

197,521

 

 

$

197,312

 

2028 Asset-Backed Notes, net (principal of $250,000 and $250,000, respectively) (1)

 

 

247,579

 

 

 

247,395

 

Total liabilities

 

$

445,100

 

 

$

444,707

 

 

(1)

The Company’s 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4 – Borrowings”.

See notes to consolidated financial statements

4


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

64,403

 

 

$

62,696

 

 

$

192,408

 

 

$

176,568

 

Control investments

 

 

740

 

 

 

1,055

 

 

 

2,117

 

 

 

3,119

 

Affiliate investments

 

 

232

 

 

 

493

 

 

 

609

 

 

 

1,740

 

Total interest income

 

 

65,375

 

 

 

64,244

 

 

 

195,134

 

 

 

181,427

 

Fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment, facility and loan fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

2,985

 

 

 

3,591

 

 

 

10,692

 

 

 

11,069

 

Control investments

 

 

5

 

 

 

5

 

 

 

15

 

 

 

13

 

Affiliate investments

 

 

 

 

 

26

 

 

 

 

 

 

186

 

Total commitment, facility and loan fee income

 

 

2,990

 

 

 

3,622

 

 

 

10,707

 

 

 

11,268

 

One-time fee income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

1,974

 

 

 

1,372

 

 

 

6,085

 

 

 

4,602

 

Total one-time fee income

 

 

1,974

 

 

 

1,372

 

 

 

6,085

 

 

 

4,602

 

Total fee income

 

 

4,964

 

 

 

4,994

 

 

 

16,792

 

 

 

15,870

 

Total investment income

 

 

70,339

 

 

 

69,238

 

 

 

211,926

 

 

 

197,297

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

14,807

 

 

 

13,857

 

 

 

44,415

 

 

 

39,927

 

Loan fees

 

 

1,824

 

 

 

1,138

 

 

 

5,268

 

 

 

5,793

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal expenses

 

 

673

 

 

 

1,586

 

 

 

2,563

 

 

 

4,212

 

Tax expenses

 

 

994

 

 

 

815

 

 

 

3,028

 

 

 

1,706

 

Other expenses

 

 

3,624

 

 

 

3,967

 

 

 

11,622

 

 

 

10,398

 

Total general and administrative

 

 

5,291

 

 

 

6,368

 

 

 

17,213

 

 

 

16,316

 

Employee compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

7,181

 

 

 

7,559

 

 

 

22,575

 

 

 

23,372

 

Stock-based compensation

 

 

2,522

 

 

 

1,443

 

 

 

7,477

 

 

 

8,716

 

Total employee compensation

 

 

9,703

 

 

 

9,002

 

 

 

30,052

 

 

 

32,088

 

Total operating expenses

 

 

31,625

 

 

 

30,365

 

 

 

96,948

 

 

 

94,124

 

Net investment income

 

 

38,714

 

 

 

38,873

 

 

 

114,978

 

 

 

103,173

 

Net realized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

(48,501

)

 

 

4,807

 

 

 

(41,393

)

 

 

13,633

 

Total net realized gain (loss) on investments

 

 

(48,501

)

 

 

4,807

 

 

 

(41,393

)

 

 

13,633

 

Net change in unrealized appreciation (depreciation) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

 

54,299

 

 

 

(26,351

)

 

 

19,483

 

 

 

15,533

 

Control investments

 

 

646

 

 

 

2,489

 

 

 

(4,563

)

 

 

421

 

Affiliate investments

 

 

(2,111

)

 

 

(547

)

 

 

(12,416

)

 

 

(3,773

)

Total net unrealized appreciation (depreciation) on investments

 

 

52,834

 

 

 

(24,409

)

 

 

2,504

 

 

 

12,181

 

Total net realized and unrealized gain (loss)

 

 

4,333

 

 

 

(19,602

)

 

 

(38,889

)

 

 

25,814

 

Net increase (decrease) in net assets resulting from operations

 

$

43,047

 

 

$

19,271

 

 

$

76,089

 

 

$

128,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income before investment gains and losses per common share:

 

Basic

 

$

0.34

 

 

$

0.37

 

 

$

1.03

 

 

$

1.03

 

Change in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

 

$

0.18

 

 

$

0.68

 

 

$

1.29

 

Diluted

 

$

0.38

 

 

$

0.18

 

 

$

0.67

 

 

$

1.29

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

113,489

 

 

 

104,314

 

 

 

111,342

 

 

 

99,615

 

Diluted

 

 

113,744

 

 

 

104,655

 

 

 

111,590

 

 

 

100,043

 

Distributions paid per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

0.34

 

 

$

1.04

 

 

$

0.98

 

 

See notes to consolidated financial statements

5


 

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Net

 

For the Three Months Ended September 30, 2020

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)

 

 

Assets

 

Balance at June 30, 2020

 

114,230

 

 

$

115

 

 

$

1,223,263

 

 

$

(59,348

)

 

$

1,164,030

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

43,047

 

 

 

43,047

 

Public offering, net of offering expenses

 

 

 

 

 

 

 

(96

)

 

 

 

 

 

(96

)

Issuance of common stock under restricted stock plan

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(24

)

 

 

 

 

 

(391

)

 

 

 

 

 

(391

)

Distributions reinvested in common stock

 

77

 

 

 

 

 

 

923

 

 

 

 

 

 

923

 

Distributions

 

 

 

 

 

 

 

 

 

 

(36,557

)

 

 

(36,557

)

Stock-based compensation (1)

 

 

 

 

 

 

 

2,124

 

 

 

 

 

 

2,124

 

Balance at September 30, 2020

 

114,317

 

 

$

115

 

 

$

1,225,823

 

 

$

(52,858

)

 

$

1,173,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

107,364

 

 

$

108

 

 

$

1,145,106

 

 

$

(12,165

)

 

$

1,133,049

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

76,089

 

 

 

76,089

 

Public offering, net of offering expenses

 

5,966

 

 

 

6

 

 

 

73,560

 

 

 

 

 

 

73,566

 

Issuance of common stock due to stock option exercises

 

29

 

 

 

 

 

 

362

 

 

 

 

 

 

362

 

Retired shares from net issuance

 

(24

)

 

 

 

 

 

(376

)

 

 

 

 

 

(376

)

Issuance of common stock under restricted stock plan

 

835

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

(51

)

 

 

 

 

 

(1,553

)

 

 

 

 

 

(1,553

)

Distributions reinvested in common stock

 

198

 

 

 

 

 

 

2,393

 

 

 

 

 

 

2,393

 

Distributions

 

 

 

 

 

 

 

 

 

 

(116,782

)

 

 

(116,782

)

Stock-based compensation (1)

 

 

 

 

 

 

 

6,332

 

 

 

 

 

 

6,332

 

Balance at September 30, 2020

 

114,317

 

 

$

115

 

 

$

1,225,823

 

 

$

(52,858

)

 

$

1,173,080

 

 

(1)

Stock-based compensation includes $31 and $76 of restricted stock and option expense related to director compensation for the three and nine months ended September 30, 2020, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Distributable

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

excess

 

 

Earnings

 

 

Treasury

 

 

Net

 

For the Three Months Ended September 30, 2019

 

Shares

 

 

Par Value

 

 

of par value

 

 

(loss)(2)

 

 

Stock

 

 

Assets

 

Balance at June 30, 2019

 

 

104,282

 

 

$

104

 

 

$

1,149,774

 

 

$

(45,194

)

 

$

 

 

$

1,104,684

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

19,271

 

 

 

 

 

 

19,271

 

Public offering, net of offering expenses

 

 

 

 

 

 

 

 

(331

)

 

 

 

 

 

 

 

 

(331

)

Issuance of common stock due to stock option exercises

 

 

23

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

300

 

Issuance of common stock under restricted stock plan

 

 

770

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Retired shares for restricted stock vesting

 

 

(482

)

 

 

 

 

 

(4,471

)

 

 

 

 

 

 

 

 

(4,471

)

Distributions reinvested in common stock

 

 

43

 

 

 

 

 

 

544

 

 

 

 

 

 

 

 

 

544

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

(35,555

)

 

 

 

 

 

(35,555

)

Stock-based compensation (2)

 

 

 

 

 

 

 

 

1,239

 

 

 

 

 

 

 

 

 

1,239

 

Balance at September 30, 2019

 

 

104,636

 

 

$

105

 

 

$

1,147,054

 

 

$

(61,478

)

 

$

 

 

$

1,085,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

96,501

 

 

$

96

 

 

$

1,052,269

 

 

$

(92,859

)

 

$

(4,062

)

 

$

955,444

 

Net increase (decrease) in net assets resulting from operations

 

 

 

 

 

 

 

 

 

 

 

128,987

 

 

 

 

 

 

128,987

 

Public offering, net of offering expenses

 

 

7,700

 

 

 

8

 

 

 

95,084

 

 

 

 

 

 

 

 

 

95,092

 

Issuance of common stock due to stock option exercises