Hercules Capital Reports First Quarter 2019 Financial Results

Achieved New Debt and Equity Commitments of $414.8 Million, up 56.0%
Year-over-Year

Grew Debt Investment Portfolio by $160.5 Million, Leading to Record
Total Debt Investments of $1.91 Billion, at Cost

Set Record Total Portfolio Investments of $2.15 Billion, at Cost

Increased NAV per Share to $10.26, up 3.6% from $9.90 in Q4 2018

Increased the Company’s Quarterly Base Cash Distribution to $0.32 per
Share

Declared Supplemental Cash Distribution of $0.01 per Share

Q1 2019 Financial Achievements and Highlights

  • Net Investment Income “NII” of $29.0 million, or $0.30 per share,
    which includes the one-time expense of $1.6 million, or $0.02 per
    share, associated with the $83.5 million full redemption (the “2024
    Notes Redemption”) of 6.25% notes due 2024 (the “2024 Notes”)

    • Adjusted NII of $30.6 million, or $0.32 per share(1)
    • Total Investment Income of $58.8 million, an increase of 20.7%
      year-over-year
  • Distributable Net Operating Income(2)
    “DNOI,” a non-GAAP measure, of $32.5 million, or $0.34 per share
  • New debt and equity commitments of $414.8 million

    • Total gross fundings of $239.6 million
  • Unscheduled early principal repayments or “early loan repayments”
    of $47.5 million
  • 12.8% Return on Average Equity “ROAE” (NII/Average Equity)(3)
  • 6.2% Return on Average Assets “ROAA” (NII/Average Assets)(3)
  • Regulatory leverage of 99.9% and net regulatory leverage, a
    non-GAAP measure, of 98.2%
    (4)
  • 13.0% GAAP Effective Yields and 12.7% Core Yields(5),
    a non-GAAP measure

Footnotes:

(1) Adjusted NII represents net investment income as
determined in accordance with U.S. generally accepted accounting
principles, or GAAP, excluding the one-time impact of $1.6 million, or
$0.02 per share, associated with the full 2024 Notes Redemption

(2) Distributable Net Operating Income, “DNOI” represents net
investment income as determined in accordance with GAAP, adjusted for
amortization of employee restricted stock awards and stock options.

(3) Includes the one-time impact associated with the full 2024
Notes Redemption

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

(5) Core Yield excludes Early Loan Repayments and One-Time
Fees, and includes income and fees from expired commitments

PALO ALTO, Calif.–(BUSINESS WIRE)–Hercules
Capital, Inc.
(NYSE: HTGC) (“Hercules” or the “Company”), the
largest and leading specialty financing provider to innovative venture
growth stage companies backed by some of the leading and top-tier
venture capital and select private equity firms, today announced its
financial results for the first quarter ended March 31, 2019.

The Company announced that its Board of Directors has increased and
declared a first quarter base and supplemental cash distribution of
$0.32 and $0.01 per share, respectively, that will be payable on May 20,
2019, to shareholders of record as of May 13, 2019.

“Our Q1 financial results were very strong on multiple fronts and
provided a terrific start to 2019,” stated Scott Bluestein, interim
chief executive officer and chief investment officer of Hercules. “This
performance was driven by the dedicated efforts of our best-in-class
investment professionals who delivered the second highest quarter in
Hercules’ history with $414.8 million in new debt and equity
commitments—bringing our total cumulative commitments since inception to
$8.9 billion—and net debt and equity portfolio growth of $172.8 million
in Q1. Cumulatively, these results helped our total investment portfolio
cross the $2.0 billion mark for the first time as our market-leading
position in venture lending continues to grow and strengthen.”

Bluestein continued, “We grew our debt investment portfolio 40.0%
year-over-year by employing the same historical underwriting discipline,
credit focus and investment selectivity that we have utilized on a
consistent basis since inception. The vibrant venture capital investing
and fundraising environment in Q1 2019 remained at similar levels as the
end of 2018, and this along with an IPO market that exhibits
ever-increasing signs of strength continued to fuel our investment
pipeline. Many notable companies completed their IPO debuts year-to-date
including six of our own portfolio companies, with five more that have
filed for their respective IPO debuts.”

Bluestein concluded, “With our debt investment portfolio at $1.9
billion, at cost, along with the size and quality of our deal pipeline,
combined with our ample earnings spillover of $36.2 million, or $0.38
per share, we have made the decision to increase our quarterly base
distribution to $0.32 per share, along with the declaration of a
supplemental distribution of $0.01 per share for the first quarter.
Given our strong start to 2019, we anticipate continued NII growth in
2019 along with sustained portfolio growth and stable yields, assuming,
of course, that market conditions remain favorable.”

Q1 2019 Review and Operating Results

Debt Investment Portfolio

Hercules achieved a strong start to 2019 with new debt and equity
commitments totaling $414.8 million and gross fundings totaling $239.6
million.

During the first quarter, Hercules realized early loan repayments of
$47.5 million, which along with normal scheduled amortization of $18.3
million, resulted in total debt repayments of $65.8 million.

The strong new debt investment origination and funding activities lead
to net debt investment portfolio growth of $160.5 million during the
first 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
2019 to Q4 2018

       
(in millions) Debt Equity Warrants Total Portfolio
Balances at Cost at 12/31/18 $ 1,752.9   $ 191.9   $ 35.7   $ 1,980.5  
New fundings(a) 224.5 13.9 1.3 239.7
Warrants not related to Q1 2019 fundings (0.1 ) (0.1 )
Early payoffs(b) (47.5 ) (47.5 )
Principal payments received on investments (18.3 ) (18.3 )
Net changes attributed to conversions, liquidations, and fees   1.8     (0.2 )   (2.6 )   (1.0 )
Net activity during Q1 2019   160.5     13.7     (1.4 )   172.8  
Balances at Cost at 3/31/19 $ 1,913.4   $ 205.6   $ 34.3   $ 2,153.3  
 
       
Balances at Value at 12/31/18 $ 1,733.5   $ 120.2   $ 26.7   $ 1,880.4  
Net activity during Q1 2019 160.5 13.7 (1.5 ) 172.7
Net change in unrealized appreciation (depreciation)   3.1     23.1     1.7     27.9  
Total net activity during Q1 2019   163.6     36.8     0.2     200.6  
Balances at Value at 3/31/19 $ 1,897.1   $ 157.0   $ 26.9   $ 2,081.0  
 
(a)New fundings amount includes $1.3M fundings associated
with revolver loans during Q1 2019.
(b)Early payoffs include $2.6M in unscheduled paydowns on
revolvers during Q1 2019.
 

Debt Investment Portfolio Balances by Quarter

                 
(in millions) Q1 2019     Q4 2018     Q3 2018     Q2 2018     Q1 2018
 
Ending Balance at Cost $1,913.4 $1,752.9 $1,608.0 $1,554.2 $1,368.6
 
Weighted Average Balance $1,806.0 $1,685.0 $1,555.0 $1,470.0 $1,364.0
                         

As of March 31, 2019, 82.0% of the Company’s debt investments were in a
senior secured first lien position.

Effective Portfolio Yield and Core Portfolio Yield (“Core Yield”)

Effective yields on Hercules’ debt investment portfolio were 13.0%
during Q1 2019, as compared to 13.5% for Q4 2018. The Company realized
$47.5 million of early loan repayments in Q1 2019 compared to $63.9
million in Q4 2018, or a decrease of 25.7%. Effective portfolio yields
generally include the effects of fees and income accelerations
attributed to early loan repayments, and other one-time events.
Effective yields are materially impacted by the elevated or reduced
levels of early loan repayments 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, a non-GAAP measure, were 12.7% during Q1 2019, near the
mid-point of the Company’s 2019 expected range of 12.5% to 13.0%, and
slightly lower than the 12.9% level achieved in Q4 2019, due to a
sequentially lower level of expired commitments. Hercules defines core
yield as yields that generally exclude any benefit from income related
to early repayments attributed to the acceleration of unamortized income
and prepayment fees and includes income from expired commitments.

Income Statement

Total investment income increased to $58.8 million for Q1 2019, compared
to $48.7 million in Q1 2018, an increase of 20.7% year-over-year. The
increase is primarily attributable to a higher average debt investment
balance between periods along with an increase in the core yields from
11.9% in Q1 2018 to 12.7% in Q1 2019.

Non-interest and fee expenses increased to $14.2 million in Q1 2019
versus $12.1 million for Q1 2018. The increase was primarily due to an
increase in variable compensation expense and stock-based compensation
due to year-over-year growth in the business.

Interest expense and fees were $15.6 million in Q1 2019, compared to
$10.6 million in Q1 2018. The increase was due to the one-time non-cash
acceleration of unamortized fees associated with the 2024 Notes
Redemption, along with a higher weighted-average borrowings as well as
increased average borrowing under our credit facilities.

The Company had a weighted average cost of borrowings comprised of
interest and fees, of 5.8% in Q1 2019, which included the one-time
expense of $1.6 million associated with the 2024 Notes Redemption, as
compared to 5.3% for Q1 2018.

NII – Net Investment Income

NII for Q1 2019 was $29.0 million, or $0.30 per share, based on 96.2
million basic weighted average shares outstanding, compared to $26.1
million, or $0.31 per share, based on 84.6 million basic weighted
average shares outstanding in Q1 2018, an increase of 11.4%
year-over-year. The increase is primarily attributable to a higher
average debt investment balance between periods along with an increase
in the core yield from 11.9% in Q1 2018 to 12.7% in Q1 2019.

Adjusted NII, a non-GAAP measure, was $30.6 million, or $0.32 per share,
adding back the one-time non-cash expense of $0.02 per share associated
with the 2024 Notes Redemption.

DNOI – Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q1 2019 was $32.5 million, or $0.34 per
share, compared to $28.4 million, or $0.34 per share, in Q1 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 March 31, 2019,
(including net loan, warrant and equity activity) on investments,
totaled ($35.5) million, on a GAAP basis, spanning more than 15 years of
investment activities.

When compared to total new debt investment commitments during the same
period of over $8.9 billion, the total realized gain/(loss) since
inception of ($35.5) million represents approximately 40 basis points
“bps,” or 0.40%, of cumulative debt commitments, or an effective
annualized loss rate of 3 bps, or 0.03%.

Realized Gains/(Losses)

During Q1 2019, Hercules had net realized gains/(losses) of $4.6 million
primarily from gross realized gains of $8.8 million from the sale of
holdings due to merger and acquisitions, partially offset by the gross
realized losses of ($4.2) million primarily from the liquidation or
write-off of certain of our debt, equity and warrant positions during
the quarter.

Unrealized Appreciation/(Depreciation)

During Q1 2019, Hercules recorded $28.0 million of net unrealized
appreciation primarily related to the positive impact of our public
equity and warrant investments, as well as our private investments, from
the reversal of mark-to-market due to the market volatility experienced
in Q4 2018.

Portfolio Asset Quality

As of March 31, 2019, the weighted average grade of the debt investment
portfolio remained level at 2.19, on a cost basis, compared to 2.18 as
of December 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
need for 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 Company’s portfolio will require
additional rounds of funding from time to time to maintain their
operations.

As of March 31, 2019, grading of the debt investment portfolio at fair
value, excluding warrants and equity investments, was as follows:

 
Credit Grading at Fair Value, Q1 2019 – Q1 2018 ($ in millions)
   

Q1 2019

    Q4 2018     Q3 2018     Q2 2018     Q1 2018
Grade 1 – High   $ 299.2   15.8%     $ 311.6   18.0%     $ 150.2   9.4%     $ 247.5   16.0%     $ 141.8   10.6%
Grade 2 $ 1,056.4 55.7% $ 885.1 51.1% $ 987.5 61.6% $ 791.9 51.2% $ 599.8 44.9%
Grade 3 $ 469.7 24.7% $ 474.9 27.3% $ 420.2 26.2% $ 463.7 30.0% $ 548.0 41.0%
Grade 4 $ 66.5 3.5% $ 60.3 3.5% $ 44.5 2.7% $ 42.0 2.7% $ 33.6 2.5%
Grade 5 – Low $ 5.3 0.3% $ 1.6 0.1% $ 0.9 0.1% $ 0.9 0.1% $ 13.2 1.0%
                                                 
Weighted Avg.     2.19           2.18           2.23           2.21           2.43    
 

Non-Accruals

Non-accruals remained relatively flat as a percentage of the overall
investment portfolio in the first quarter of 2019. As of March 31, 2019,
the Company had two (2) debt investments on non-accrual with an
investment cost and fair value of approximately $2.4 million and $0.5
million, respectively, or 0.1% and 0.02% as a percentage of the
Company’s total investment portfolio at cost and value, respectively.

Compared to December 31, 2018, the Company had two (2) debt investments
on non-accrual with an investment cost and fair value of approximately
$2.7 million and $0.0 million, respectively, or 0.1% and 0.0% as a
percentage of the total investment portfolio at cost and value,
respectively.

                 
Q1 2019     Q4 2018     Q3 2018     Q2 2018     Q1 2018
 
Total Investments at Cost $2,153.3 $1,980.5 $1,813.1 $1,757.6 $1,576.3
 
Loans on non-accrual as a % of Total
Investments at Value 0.02% 0.0% 0.0% 0.0% 0.0%
 
Loans on non-accrual as a % of Total 0.1% 0.1% 0.2% 0.2% 0.8%
Investments at Cost                          
 

Liquidity and Capital Resources

The Company ended Q1 2019 with $247.2 million in available liquidity,
including $16.5 million in unrestricted cash and cash equivalents, and
$230.7 million in available credit facilities, subject to existing terms
and advance rates and regulatory and covenant requirements.

On January 22, 2019, the Company completed a term debt securitization in
connection with an affiliate of the Company which made an offering of
$250.0 million in aggregate principal amount of fixed-rate asset-backed
notes due 2028 (the “2028 Asset-Backed Notes”). The 2028 Asset-Backed
Notes were rated A(sf) by KBRA. Interest on the 2028 Asset-Backed Notes
will be paid, to the extent of funds available, at a fixed rate of
4.703% per annum. The 2028 Asset-Backed Notes have a stated maturity of
February 22, 2028.

On December 7, 2018, the Board of Directors approved a full redemption,
in two equal transactions, of $83.5 million of the outstanding aggregate
principal amount of the 2024 Notes. The 2024 Notes were fully redeemed
on January 14, 2019 and February 4, 2019.

Bank Facilities

As of March 31, 2019, 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 $200.0 million,
respectively. The Wells Fargo and Union Bank Facilities both include an
uncommitted accordion feature that enables the Company to increase the
existing facilities to a maximum value of $125.0 million and $300.0
million, respectively, or $425.0 million in aggregate. Pricing at March
31, 2019 under the Wells Fargo Facility and Union Bank Facility were
LIBOR+3.00% and LIBOR+2.70%, respectively. There were $39.7 million in
outstanding borrowings under the Union Bank Facility and $4.6 million in
outstanding borrowings under the Wells Fargo Facility, for a total of
$44.3 million at March 31, 2019.

On January 11, 2019, the Company entered into the Seventh Amendment to
the Wells Facility. Among others, the amendment amends certain key
provisions of the Wells Facility to increase Wells Fargo Capital
Finance’s commitments thereunder from $75.0 million to $125.0 million,
reduces the current interest rate to LIBOR plus 3.00% with a natural
floor of 3.00%, and extends the maturity date to January 2023. The
advance rate was increased to 55.0% against eligible loans.

On February 20, 2019, the Company replaced its existing $100.0 million
credit facility with MUFG Union Bank with a new credit facility under
which City National, Umpqua Bank, Hitachi Capital America Corporation
and Mutual of Omaha Bank, together with MUFG Union Bank, have committed
a total of $200.0 million in credit capacity subject to borrowing base,
leverage and other restrictions. The new credit facility also includes
an uncommitted accordion feature of $100.0 million. The interest rate
applicable to borrowings under the new credit facility has been reduced
to LIBOR plus 2.70%. The new credit facility matures in February 2022,
plus a 12-month amortization period. The advance rate under the new
credit facility has been increased to 55.0% against eligible loans.

Leverage

Hercules’ GAAP leverage ratio, including its SBA debentures, was 114.9%,
as of March 31, 2019. Hercules’ regulatory leverage, or debt to equity
ratio, excluding our Small Business Administration “SBA” debentures, was
99.9% and net regulatory leverage, a non-GAAP measure (excluding cash of
approximately $16.5 million), was 98.2%, as of March 31, 2019. Hercules’
net leverage ratio, including its SBA debentures, was 113.3%, as of
March 31, 2019.

Available Unfunded Commitments – Representing 7.2% of Total Assets

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

As of March 31, 2019, the Company had $154.2 million of available
unfunded commitments at the request of the portfolio company and
unencumbered by any milestones, including undrawn revolving facilities,
representing 7.2% of Hercules’ total assets. This increased from the
previous quarter of $139.0 million of available unfunded commitments at
the request of the portfolio company or 7.1% of Hercules’ total assets.

Existing Pipeline and Signed Term Sheets

After closing $414.8 million in new debt and equity commitments in Q1
2019, Hercules has pending commitments of $150.7 million in signed
non-binding term sheets outstanding as of April 30, 2019. Since the
close of Q1 2019 and as of April 30, 2019, Hercules closed new debt and
equity commitments of $153.5 million to new and existing portfolio
companies and funded $76.9 million.

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

Net Asset Value

As of March 31, 2019, the Company’s net assets were $990.3 million,
compared to $955.4 million at the end of Q4 2018. NAV per share
increased 3.6% to $10.26 on 96.5 million outstanding shares of common
stock as of March 31, 2019, compared to $9.90 on 96.5 million
outstanding shares of common stock as of December 31, 2018. The increase
in NAV per share was primarily attributed to net realized gains on
investments and a net change in unrealized appreciation during the
quarter.

On December 17, 2018, the Board of Directors authorized a stock
repurchase plan to acquire up to $25.0 million in the aggregate of
Hercules’ common stock at prices that may be above or below net asset
value, in accordance with the guidelines specified in Rule 10b-18 and
Rule 10b5-1 of the Securities Exchange Act of 1934. The Company may
repurchase shares of its common stock in the open market, including
block purchases, at prices that may be above or below NAV as reported in
the most recently published financial statements. Unless extended or
terminated by its Board of Directors, Hercules expects the share
repurchase program to be in effect until June 18, 2019, or until the
approved dollar amount has been used to repurchase shares.

During the three months ended March 31, 2019, the Company did not
repurchase any shares.

High Asset Sensitivity – Potential 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 97.5%
of our debt investment portfolio being priced at floating interest rates
as of March 31, 2019, with a Prime or LIBOR-based interest rate floor,
coupled with 96.1% of our outstanding debt borrowings bearing fixed
interest rates, this leads to higher net investment income to our
shareholders.

Based on Hercules’ Consolidated Statement of Assets and Liabilities as
of March 31, 2019, 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 $4.4 million, or $0.05 per share, of net investment income
annually.

       
(in thousands) Interest Interest Net EPS(2)
Basis Point Change Income(1) Expense Income  
25 $ 4,414 $ 9 $ 4,405 $ 0.05
50 $ 9,053 $ 19 $ 9,034 $ 0.09
75 $ 13,742 $ 28 $ 13,714 $ 0.14
100 $ 18,431 $ 37 $ 18,394 $ 0.19
200 $ 37,225 $ 75 $ 37,150 $ 0.39
300 $ 56,032 $ 112 $ 55,920 $ 0.58

Contacts

Michael Hara
Investor Relations and Corporate Communications
Hercules
Capital, Inc.
650-433-5578
mhara@htgc.com

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