Hercules Capital Reports Second Quarter 2019 Financial Results

Surpassed $9.0 Billion in Cumulative Debt Commitments Since Inception

Achieved Record Quarter for New Debt and Equity Commitments and Total Fundings of $534.8 Million and $368.1 Million, Respectively

Achieved Debt Investment Portfolio Growth of $163.8 Million, Leading to Record Total Debt Investments of $2.08 Billion, at Cost

Set Record Total Portfolio Investments of $2.32 Billion, at Cost

Increased NAV per Share to $10.59, up 3.2% from $10.26 in Q1 2019

Q2 2019 Financial Achievements and Highlights

  • Record Net Investment Income “NII” of $35.3 million, or $0.36 per share, an increase of 54.9% year-over-year

    • Record Total Investment Income of $69.3 million, an increase of 39.8% year-over-year
  • Distributable Net Operating Income(1) “DNOI,” a non-GAAP measure, of $39.1 million, or $0.40 per share
  • Record new debt and equity commitments of $534.8 million, an increase of 15.6% year-over-year

    • Record total fundings of $368.1 million, an increase of 12.4% year-over-year
  • Unscheduled early principal repayments or “early loan repayments” of $178.3 million
  • 13.6% Return on Average Equity “ROAE” (NII/Average Equity)
  • 6.9% Return on Average Assets “ROAA” (NII/Average Assets)
  • GAAP leverage of 107.5% and regulatory leverage of 94.0%(2)
  • 14.3% GAAP Effective Yields and 12.7% Core Yields(3), a non-GAAP measure

Year-to-date ending June 30, 2019 Financial Highlights

  • NII of $64.3 million for six months ending June 30, 2019, or $0.66 per share, an increase of 31.7%, as compared to $48.8 million for the six months ending June 30, 2018

    • Total investment income of $128.1 million, an increase of 30.3%, as compared to $98.3 million for the six months ending June 30, 2018
  • New equity and debt commitments of $949.7 million, an increase of 30.3%, as compared to $728.7 million for the six months ending June 30, 2018

    • Total fundings of $607.8 million, an increase of 7.8%, as compared to $563.7 million for the six months ending June 30, 2018
  • Record net debt investment portfolio growth of $324.3 million for the six months ending June 30, 2019
  • Unscheduled early loan repayments of $225.8 million

Footnotes:

(1) 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.

(2) Regulatory leverage represents debt-to-equity ratio, excluding our Small Business Administration “SBA” debentures

(3) 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 second quarter ended June 30, 2019.

The Company announced that its Board of Directors has declared a second quarter base and supplemental cash distribution of $0.32 and $0.02 per share, respectively, that will be payable on August 19, 2019, to shareholders of record as of August 12, 2019.

“Our record-breaking performance in Q2 truly underscores the capabilities and depth of our team and investment platform and the role we play being able to finance growth companies across multiple value inflection points,” stated Scott Bluestein, chief executive officer and chief investment officer of Hercules. “The combination of our scale, our industry-leading originations team and our proven ability to access the capital markets puts us in a unique competitive position that makes Hercules the go-to venture debt and growth stage lender of choice. Now more than ever, it is essential for growth stage companies and their financial sponsors to partner with an established market leader with a strong and diversified balance sheet when it comes to financing.”

Bluestein continued, “For the first half of 2019, our debt investment portfolio grew by more than $324 million. The team was able to close $950 million of new commitments which, more importantly, were all done with the same strict underwriting discipline and credit focus that has enabled Hercules to consistently deliver strong shareholder returns over the last 10 years. These efforts have driven Hercules’ total cumulative commitments to over $9 billion since the Company’s inception in 2003.”

Bluestein concluded, “Having put ourselves in an enviable position with strong dividend coverage, combined with our ample earnings spillover, we will focus on making key investments in both human capital and infrastructure in the second half of 2019 to not only position us for continued growth, but more importantly, to continue to enhance our capital markets, credit and monitoring framework and product capabilities as we prudently scale the business to the next level.”

Q2 2019 Review and Operating Results

Debt Investment Portfolio

Hercules delivered a strong second quarter with new debt and equity commitments totaling $534.8 million and fundings totaling $368.1 million.

During the second quarter, Hercules realized early loan repayments of $178.3 million, which along with normal scheduled amortization of $23.5 million, resulted in total debt repayments of $201.8 million.

The strong new debt investment origination and funding activities lead to net debt investment portfolio growth of $163.8 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: Q2 2019 to Q1 2019

(in millions) Debt Equity Warrants Total Portfolio
Balances at Cost at 3/31/19

$

1,913.4

 

$

205.6

 

$

34.3

 

$

2,153.3

 

New fundings(a)

 

363.6

 

 

2.9

 

 

1.6

 

 

368.1

 

Warrants not related to Q2 2019 fundings

 

0.3

 

 

0.3

 

Early payoffs(b)

 

(178.3

)

 

(178.3

)

Principal payments received on investments

 

(23.5

)

 

(23.5

)

Net changes attributed to conversions, liquidations, and fees

 

2.0

 

 

(4.9

)

 

(1.3

)

 

(4.2

)

Net activity during Q2 2019

 

163.8

 

 

(2.0

)

 

0.6

 

 

162.4

 

Balances at Cost at 6/30/19

$

2,077.2

 

$

203.6

 

$

34.9

 

$

2,315.7

 

 
 
Balances at Value at 3/31/19

$

1,897.1

 

$

157.0

 

$

26.9

 

$

2,081.0

 

Net activity during Q2 2019

 

163.8

 

 

(2.0

)

 

0.6

 

 

162.4

 

Net change in unrealized appreciation (depreciation)

 

0.7

 

 

9.9

 

 

(2.0

)

 

8.6

 

Total net activity during Q2 2019

 

164.5

 

 

7.9

 

 

(1.4

)

 

171.0

 

Balances at Value at 6/30/19

$

2,061.6

 

$

164.9

 

$

25.5

 

$

2,252.0

 

 
(a)New fundings amount includes $660k fundings associated with revolver loans during Q2 2019.
(b)Early payoffs include $1.77M in unscheduled paydowns on revolvers during Q2 2019.

Debt Investment Portfolio Balances by Quarter

(in millions) Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018
 
Ending Balance at Cost

$2,077.2

$1,913.4

$1,752.9

$1,608.0

$1,554.2

 
Weighted Average Balance

$1,939.0

$1,806.0

$1,685.0

$1,555.0

$1,470.0

 

As of June 30, 2019, 81.8% 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 14.3% during Q2 2019, as compared to 13.0% for Q1 2019. The Company realized $178.3 million of early loan repayments in Q2 2019 compared to $47.5 million in Q1 2019, or an increase of 275.4%. Effective 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 Q2 2019, within the Company’s 2019 expected range of 12.0% to 13.0%, and equal to the 12.7% level achieved in Q1 2019. 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 $69.3 million for Q2 2019, compared to $49.6 million in Q2 2018, an increase of 39.8% year-over-year. The increase is primarily attributable to a higher average debt investment balance between periods and increased income from acceleration from early loan repayments.

Non-interest and fee expenses increased to $18.8 million in Q2 2019 versus $13.5 million for Q2 2018. The increase was primarily due to an increase in both compensation expenses due to year-over-year growth in the business and legal expenses.

Interest expense and fees were $15.2 million in Q2 2019, compared to $13.2 million in Q2 2018. The increase was due to 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 5.2% in Q2 2019, as compared to 6.4% for Q2 2018.

NII – Net Investment Income

NII for Q2 2019 was $35.3 million, or $0.36 per share, based on 98.2 million basic weighted average shares outstanding, compared to $22.8 million, or $0.26 per share, based on 87.1 million basic weighted average shares outstanding in Q2 2018, an increase of 54.9% year-over-year. The increase is primarily attributable to a higher average debt investment balance between periods and increased income from acceleration from early loan repayments.

DNOI – Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q2 2019 was $39.1 million, or $0.40 per share, compared to $25.6 million, or $0.29 per share, in Q2 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 June 30, 2019, (including net loan, warrant and equity activity) on investments, totaled ($31.3) million, on a GAAP basis, spanning 15 years of investment activities.

When compared to total new debt investment commitments during the same period of over $9.4 billion, the total realized gain/(loss) since inception of ($31.3) million represents approximately 33 basis points “bps,” or 0.33%, of cumulative debt commitments, or an effective annualized loss rate of 2 bps, or 0.02%.

Realized Gains/(Losses)

During Q2 2019, Hercules had net realized gains/(losses) of $4.3 million primarily from gross realized gains of $6.1 million from the sale of our public equity holdings, partially offset by the gross realized losses of ($1.8) million primarily from the liquidation or write-off of certain of our debt, equity and warrant positions during the quarter.

Unrealized Appreciation/(Depreciation)

During Q2 2019, Hercules recorded $8.6 million of net unrealized appreciation primarily related to the positive impact of our public equity and warrant investments, as well as our private investments.

Portfolio Asset Quality

As of June 30, 2019, the weighted average grade of the debt investment portfolio remained level at 2.18, on a cost basis, compared to 2.19 as of March 31, 2019, 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 June 30, 2019, grading of the debt investment portfolio at fair value, excluding warrants and equity investments, was as follows:

Credit Grading at Fair Value, Q2 2019 – Q2 2018 ($ in millions)

Q2 2019

Q1 2019

Q4 2018

Q3 2018

Q2 2018

Grade 1 – High

$

256.2

12.4

%

$

299.2

15.8

%

$

311.6

18.0

%

$

150.2

9.4

%

$

247.5

16.0

%

Grade 2

$

1,317.7

63.9

%

$

1,056.4

55.7

%

$

885.1

51.1

%

$

987.5

61.6

%

$

791.9

51.2

%

Grade 3

$

413.0

20.1

%

$

469.7

24.7

%

$

474.9

27.3

%

$

420.2

26.2

%

$

463.7

30.0

%

Grade 4

$

67.8

3.3

%

$

66.5

3.5

%

$

60.3

3.5

%

$

44.5

2.7

%

$

42.0

2.7

%

Grade 5 – Low

$

6.9

0.3

%

$

5.3

0.3

%

$

1.6

0.1

%

$

0.9

0.1

%

$

0.9

0.1

%

 

 
Weighted Avg.

 

2.18

 

2.19

 

2.18

 

2.23

 

2.21

Non-Accruals

Non-accruals slightly increased as a percentage of the overall investment portfolio in the second quarter of 2019. As of June 30, 2019, the Company had four (4) debt investments on non-accrual with an investment cost and fair value of approximately $8.8 million and $4.8 million, respectively, or 0.4% and 0.2% as a percentage of the Company’s total investment portfolio at cost and value, respectively.

Compared to 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 total investment portfolio at cost and value, respectively.

Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018
 
Total Investments at Cost

$2,315.7

$2,153.3

$1,980.5

$1,813.1

$1,757.6

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

0.2%

0.02%

0.0%

0.0%

0.0%

 
Loans on non-accrual as a % of Total

0.4%

0.1%

0.1%

0.2%

0.2%

Investments at Cost

Liquidity and Capital Resources

The Company ended Q2 2019 with $194.9 million in available liquidity, including $13.3 million in unrestricted cash and cash equivalents, and $181.6 million in available credit facilities, subject to existing terms and advance rates and regulatory and covenant requirements.

On June 17, 2019, the Company completed a public offering of common stock, including the over-allotment option, totaling 5,750,000 of common stock for net proceeds, before expenses, of $70.5 million, including the underwriting discount and commissions of $2.2 million.

During both the three and six month periods ending June 30, 2019, the Company sold approximately 2.0 million shares of common stock, which were issued under the equity ATM program, for total accumulated net proceeds of approximately $25.1 million, including $311,000 of offering expenses. As of July 29, 2019, approximately 10.7 million shares remain available for issuance and sale under the Equity Distribution Agreement.

Bank Facilities

As of June 30, 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 June 30, 2019 under the Wells Fargo Facility and Union Bank Facility were LIBOR+3.00% and LIBOR+2.70%, respectively. There were $82.3 million in outstanding borrowings under the Union Bank Facility and $11.1 million in outstanding borrowings under the Wells Fargo Facility, for a total of $93.4 million at June 30, 2019.

Leverage

As of June 30, 2019, Hercules’ GAAP leverage ratio, including its Small Business Administration “SBA” debentures, was 107.5%. Hercules’ regulatory leverage, or debt to equity ratio, excluding our SBA debentures, was 94.0% and net regulatory leverage, a non-GAAP measure (excluding cash of approximately $13.3 million), was 92.8%. Hercules’ net leverage ratio, including its SBA debentures, was 106.3%.

Available Unfunded Commitments – Representing 7.7% 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 June 30, 2019, the Company had $177.2 million of available unfunded commitments at the request of the portfolio company and unencumbered by any milestones, including undrawn revolving facilities, representing 7.7% of Hercules’ total assets. This increased from the previous quarter of $154.2 million of available unfunded commitments at the request of the portfolio company or 7.2% of Hercules’ total assets.

Existing Pipeline and Signed Term Sheets

After closing $534.8 million in new debt and equity commitments in Q2 2019, Hercules has pending commitments of $160.0 million in signed non-binding term sheets outstanding as of July 29, 2019. Since the close of Q2 2019 and as of July 29, 2019, Hercules has funded $10.7 million of existing commitments.

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, 2019, the Company’s net assets were $1.10 billion, compared to $990.3 million at the end of Q1 2019. NAV per share increased 3.2% to $10.59 on 104.3 million outstanding shares of common stock as of June 30, 2019, compared to $10.26 on 96.5 million outstanding shares of common stock as of March 31, 2019. The increase in NAV per share was primarily attributed to the $95.4 million equity raised at a premium to NAV, the net change in unrealized and realized gains and the excess earnings above the paid distribution in the quarter.

Interest Rate Sensitivity

Hercules has an asset sensitive debt investment portfolio with 97.7% of our debt investment portfolio being priced at floating interest rates as of June 30, 2019, with a Prime or LIBOR-based interest rate floor, combined with 92.0% of our of our outstanding debt borrowings bearing fixed interest rates, leading to higher net investment income sensitivity.

Based on Hercules’ Consolidated Statement of Assets and Liabilities as of June 30, 2019, the following table shows the approximate annualized increase/(decrease) 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 and any future equity offerings.

(in thousands) Interest Interest Net EPS(2)
Basis Point Change Income(1) Expense Income

(75)

$

(10,473

)

$

(161

)

$

(10,312

)

$

(0.10

)

(50)

$

(7,460

)

$

(107

)

$

(7,353

)

$

(0.07

)

(25)

$

(3,784

)

$

(54

)

$

(3,730

)

$

(0.04

)

25

$

4,569

 

$

54

 

$

4,515

 

$

0.05

 

50

$

9,362

 

$

107

 

$

9,255

 

$

0.09

 

75

$

14,306

 

$

161

 

$

14,145

 

$

0.14

 

100

$

19,774

 

$

214

 

$

19,560

 

$

0.20

 

200

$

39,249

 

$

429

 

$

38,820

 

$

0.40

 

(1)

Source: Hercules Capital Form 10-Q for Q2 2019

(2)

 

EPS calculated on basic weighted shares outstanding of 98,233. 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 55 portfolio companies with a fair value of $164.9 million and a cost basis of $203.6 million as of June 30, 2019. On a fair value basis, 35.0% or $58.2 million is related to existing public equity positions, at June 30, 2019.

Warrant Portfolio

Hercules held warrant positions in 125 portfolio companies with a fair value of $25.5 million and a cost basis of $34.9 million as of June 30, 2019. On a fair value basis, 38.0% or $9.6 million is related to existing public warrant positions, at June 30, 2019.

Portfolio Company IPO and M&A Activity in Q2 2019

IPO Activity

As of July 29, 2019, Hercules held warrant and equity positions in eight (8) portfolio companies that had either completed their IPOs or filed Registration Statements in contemplation of a potential IPO, including:

  • In April 2019, Hercules’ portfolio company Pinterest, Inc. (NYSE: PINS), a provider of a content sharing platform designed for collecting, organizing and sharing items from the web, completed its IPO offering of 75.0 million shares of Class A common stock at an initial public offering price of $19.00 per share on the New York Stock Exchange. Hercules currently holds 206,666 shares of Preferred Series Seed stock, as of June 30, 2019.
  • In April 2019, Hercules portfolio company TransMedics Group, Inc. (NASDAQ: TMDX), a medical device company that provides a proprietary system to enable the transplantation of functioning organs, completed its IPO offering of 6.5 million shares of common stock at an initial public offering price of $16.00 per share on the Nasdaq Global Market. Hercules initially committed $10.0 million in venture debt financing in May 2008, and currently holds 162,617 shares of common stock as of June 30, 2019.
  • In May 2019, Hercules’ portfolio company Fastly, Inc. (NYSE: FSLY), a technology provider of a leading-edge cloud platform intended to accelerate the pace of technical innovation, mitigate evolving threats and scale on demand, completed its IPO offering of 11.25 million shares of common stock at an initial public offering price of $16.00 per share on the New York Stock Exchange. Hercules initially committed $10.0 million in venture debt financing in December 2018, and currently holds warrants for 76,098 shares of common stock, as of June 30, 2019.
  • In May 2019, Hercules’ portfolio company Dermavant Sciences, Inc., a wholly-owned subsidiary of Roivant Sciences, and a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative therapeutics in medical dermatology, publicly filed its S-1 registration statement with the SEC in contemplation of an initial public offering.

Contacts

Michael Hara

Investor Relations and Corporate Communications

Hercules Capital, Inc.

650-433-5578

mhara@htgc.com

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