Hercules Capital(US:HTGC)2021-10-28 20:30PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Hercules Capital, Inc. as of September 30, 2021, and for the three and nine-month periods then ended Consolidated Statements of Assets and Liabilities As of September 30, 2021, total assets increased to $2.79 billion from $2.62 billion at year-end 2020, driven by a rise in the fair value of investments Consolidated Balance Sheet Highlights (in thousands, except per share data) | Metric | September 30, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Investments, at fair value | $2,511,854 | $2,354,078 | | Total Assets | $2,791,208 | $2,623,997 | | Total Liabilities | $1,453,676 | $1,332,293 | | Total Net Assets | $1,337,532 | $1,291,704 | | Net Asset Value per share | $11.54 | $11.26 | Consolidated Statements of Operations For the nine months ended September 30, 2021, total investment income was $208.5 million, with a net increase in net assets from operations of $170.4 million Key Operating Results (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $208,511 | $211,926 | | Total Net Operating Expenses | $98,898 | $96,948 | | Net Investment Income | $109,613 | $114,978 | | Net Realized/Unrealized Gain (Loss) | $60,830 | $(38,889) | | Net Increase in Net Assets from Operations | $170,443 | $76,089 | | Basic EPS (from operations) | $1.47 | $0.68 | Consolidated Statements of Changes in Net Assets For the nine months ended September 30, 2021, net assets increased from $1.29 billion to $1.34 billion, primarily driven by a $170.4 million net increase from operations Reconciliation of Net Assets (in thousands) - Nine Months Ended Sep 30, 2021 | Description | Amount | | :--- | :--- | | Balance as of December 31, 2020 | $1,291,704 | | Net increase in net assets from operations | $170,443 | | Distributions | $(133,143) | | Stock-based compensation & other | $7,785 | | Other stock activities (net) | $(9,257) | | Balance as of September 30, 2021 | $1,337,532 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash provided by operating activities was $28.7 million, leading to an overall increase in cash, cash equivalents, and restricted cash of $11.7 million Summary of Cash Flows (in thousands) - Nine Months Ended Sep 30 | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $28,681 | $(24,015) | | Net Cash from Investing Activities | $(12) | $(115) | | Net Cash from Financing Activities | $(16,931) | $(42,805) | | Net Increase (Decrease) in Cash | $11,738 | $(66,935) | Consolidated Schedule of Investments The schedule details the company's investment portfolio, totaling $2.51 billion at fair value as of September 30, 2021, predominantly composed of debt investments Investment Portfolio Summary as of September 30, 2021 (in thousands) | Investment Type | Cost | Fair Value | | :--- | :--- | :--- | | Debt Investments | $2,262,660 | $2,263,542 | | Equity Investments | $135,593 | $204,411 | | Warrant Investments | $25,913 | $42,859 | | Investment Funds & Vehicles | $1,223 | $1,042 | | Total Investments | $2,425,389 | $2,511,854 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and methodologies used in preparing the financial statements, covering business description, significant accounting policies, and breakdowns of investments and debt Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, highlighting portfolio activity, operational results, liquidity, and capital resources Overview Hercules Capital is an internally managed Business Development Company (BDC) specializing in senior secured loans to venture capital-backed companies in technology, life sciences, and renewable technology sectors - The company's primary business is providing structured debt with warrants to high-growth, venture capital-backed companies318319 - Hercules operates as a BDC under the 1940 Act and has elected to be taxed as a RIC, which generally eliminates corporate-level taxes on distributed income325326 - In May 2020, the company formed a wholly-owned subsidiary, Hercules Adviser LLC, to provide investment advisory services to third-party funds327 Portfolio and Investment Activity The total fair value of the investment portfolio grew to $2.5 billion as of September 30, 2021, with $1.47 billion in net new debt commitments originated Portfolio Activity for the Nine Months Ended September 30 (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Debt Commitments | $1,469.2 | $1,035.3 | | Net Debt Fundings | $907.0 | $629.4 | | Unfunded Contractual Commitments | $309.9 | $242.5 | Debt Investment Portfolio Grading (at Fair Value) | Investment Grading | Sep 30, 2021 (% of Portfolio) | Dec 31, 2020 (% of Portfolio) | | :--- | :--- | :--- | | 1 (Highest Quality) | 30.6% | 19.6% | | 2 | 48.8% | 49.1% | | 3 | 20.2% | 29.7% | | 4 | 0.4% | 1.2% | | 5 (Lowest Quality) | 0.0% | 0.4% | - Non-accrual investments decreased to 1.0% of the total portfolio at amortized cost as of September 30, 2021, down from 1.3% at December 31, 2020360 Results of Operations For the nine months ended September 30, 2021, total investment income was $208.5 million, with a significant positive swing in net realized and unrealized gains driving a substantial increase in net assets from operations to $170.4 million Comparison of Operating Results (in thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $208,511 | $211,926 | | Total Net Operating Expenses | $98,898 | $96,948 | | Net Investment Income | $109,613 | $114,978 | | Net Realized/Unrealized Gain (Loss) | $60,830 | $(38,889) | | Net Increase in Net Assets | $170,443 | $76,089 | Financial Condition, Liquidity, and Capital Resources As of September 30, 2021, Hercules had $818.4 million in available liquidity and an asset coverage ratio of 198.3%, well above the regulatory requirement - The company had $818.4 million in available liquidity as of September 30, 2021, consisting of $235.9 million in cash and $582.5 million in available credit413 - The asset coverage ratio was 198.3% (excluding SBA debentures), exceeding the 150% regulatory minimum414 - In October 2021, the company used proceeds from the September 2026 Notes offering to fully redeem its outstanding 2027 and 2028 Asset-Backed Notes totaling $289.2 million310417419 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with 95.9% of its debt investments being floating rate, positioning it to potentially benefit from rising interest rates Interest Rate Sensitivity Analysis (Annualized) | Basis Point Change | Net Income Impact (in thousands) | EPS Impact | | :--- | :--- | :--- | | +200 | $32,646 | $0.28 | | +100 | $15,619 | $0.14 | | +50 | $7,784 | $0.07 | | -25 | $(27) | $(0.00) | - As of September 30, 2021, approximately 95.9% of the company's loan portfolio had variable rates, while its SBA Debentures and various notes are fixed-rate, creating a liability-sensitive balance sheet that could benefit from rising interest rates451 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of the end of the quarter, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021456 - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting457 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company states that it may be involved in litigation in the normal course of business but does not expect any current matters to materially affect its financial condition or results of operations - The company is not currently involved in any legal proceedings that are expected to have a material impact on its financial condition460 Item 1A. Risk Factors This section highlights the concentration risk within the investment portfolio, where seven portfolio companies each represented over 5% of the company's net assets as of September 30, 2021 Portfolio Companies Representing >5% of Net Assets (as of Sep 30, 2021) | Portfolio Company | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | BridgeBio Pharma LLC | $115,523 | 8.6% | | Zepz (p.k.a. Worldremit Group Limited) | $103,068 | 7.7% | | Corium, Inc. | $90,618 | 6.8% | | Rocket Lab Global Services, LLC | $87,722 | 6.6% | | Phathom Pharmaceuticals, Inc. | $85,827 | 6.4% | | EverFi, Inc. | $85,210 | 6.4% | | uniQure B.V. | $72,593 | 5.4% | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the nine months ended September 30, 2021, the company issued 189,356 shares of common stock through its dividend reinvestment plan (DRIP) for approximately $3.1 million - Under its dividend reinvestment plan, the company issued 189,356 shares of common stock for an aggregate value of approximately $3.1 million during the first nine months of 2021464