Hercules Capital(HTGC) - 2020 Q4 - Annual Report

Part I Business Hercules Capital, Inc. is an internally managed BDC and RIC providing senior secured loans to high-growth, venture-backed companies in technology, life sciences, and sustainable technology sectors - The company is a specialty finance firm providing senior secured loans to high-growth, venture capital-backed companies in technology, life sciences, and sustainable/renewable technology industries[22][23] - The primary investment strategy involves structured debt with warrants, designed to generate current income and potential capital appreciation[24][25] - Operates two wholly-owned SBIC subsidiaries, HT III and HC IV, with HT III holding approximately $201.2 million in assets (7.7% of total assets) and HC IV providing access to an additional $175.0 million in SBA debentures[26][27] - The company is an internally managed BDC and has elected to be treated as a RIC for tax purposes, requiring distribution of at least 90% of its taxable income[32][34] - The investment portfolio is monitored using a 5-point grading system (1=highest quality, 5=workout), with a weighted average investment grade of 2.16 as of December 31, 2020[91] - As of December 31, 2020, the company employed 82 professionals, with over 40% being women and over 35% from diverse ethnic backgrounds[101] Risk Factors The company faces significant risks from its BDC structure, substantial indebtedness, concentrated portfolio in volatile sectors, and the ongoing impact of the COVID-19 pandemic - As an internally managed BDC, the company is dependent on key management personnel and may face limitations in compensation flexibility compared to externally managed peers[187][188] - The company operates with substantial indebtedness and an asset coverage ratio of 150%, which increases leverage and magnifies potential gains and losses[200][201] - The investment portfolio is highly concentrated in specific technology-related industries, with 87.2% of the portfolio's fair value in the Software, Drug Discovery & Development, and Internet Consumer & Business Services industries as of year-end 2020[273][274] - The COVID-19 pandemic has negatively impacted the global economy and may disrupt operations, impair portfolio companies' ability to repay loans, and increase credit risk[388][389] - The discontinuation of LIBOR presents a risk, as it may affect the value of financial obligations and require renegotiation of credit agreements for both assets and liabilities[256][258] - The company's common stock may trade below its NAV per share, which could limit its ability to raise additional equity capital without stockholder approval and cause dilution[347][350] Unresolved SEC Staff Comments The company reports no unresolved comments from the SEC staff - There are no unresolved staff comments as of the report date[430] Properties The company leases all its office spaces, including its principal executive offices, and does not own any real estate - The company leases all its office spaces, including its principal executive offices in Palo Alto, CA, and does not own any real estate[431] Legal Proceedings The company does not expect any current legal proceedings to materially impact its financial condition or operations - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its financial condition[432] Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable[433] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with a variable distribution policy and no share repurchases in 2020 Quarterly Stock Price and Distribution Data (2020) | Quarter | NAV per Share ($) | High Price ($) | Low Price ($) | High as % of NAV | Low as % of NAV | Distribution per Share ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 2020 | 9.92 | 15.99 | 6.81 | 61.2% | -31.4% | 0.320 | | Q2 2020 | 10.19 | 11.83 | 6.64 | 16.1% | -34.8% | 0.320 | | Q3 2020 | 10.26 | 11.97 | 10.02 | 16.7% | -2.3% | 0.340 | | Q4 2020 | 11.26 | 14.42 | 11.13 | 28.1% | -1.2% | 0.370 | - The company's Board of Directors maintains a variable distribution policy with the objective of distributing 90-100% of its taxable quarterly or annual income[452] - A stock repurchase plan for up to $25.0 million expired on June 18, 2019, with no shares repurchased during 2020 or 2019[447] - On February 17, 2021, the Board declared a Q1 2021 cash distribution of $0.32 per share plus a supplemental cash distribution of $0.05 per share[451] Selected Consolidated Financial Data This section summarizes key financial data from 2016 to 2020, showing growth in total assets and net assets, and detailing 2020 investment income and net asset increase Selected Financial Data (in thousands, except per share) | (in thousands, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Balance Sheet Data: | | | | | Total Assets | $2,623,997 | $2,461,968 | $1,945,191 | | Total Net Assets | $1,291,704 | $1,133,049 | $955,444 | | NAV per Share | $11.26 | $10.55 | $9.90 | | Operations Data: | | | | | Total Investment Income | $287,258 | $267,874 | $207,753 | | Net Investment Income | $157,140 | $143,272 | $108,729 | | Net Increase in Net Assets | $227,261 | $173,598 | $76,496 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses 2020 financial performance, highlighting portfolio growth, increased investment income, net unrealized appreciation, strong liquidity, and regulatory asset coverage, while noting COVID-19 impacts Portfolio Activity (Year Ended Dec 31, in millions) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | New Debt Commitments | $1,173.1 | $1,457.1 | | Total Funded Investments | $761.3 | $1,025.7 | | Early Principal Repayments | $709.0 | $526.8 | Portfolio Yields | Yield Type | 2020 | 2019 | | :--- | :--- | :--- | | Weighted Average Core Yield | 11.6% | 12.5% | | Weighted Average Effective Yield | 12.9% | 13.4% | - Net realized losses were $(56.1) million in 2020, compared to net realized gains of $16.5 million in 2019, primarily from write-offs of several debt and equity investments[529][530] - Net unrealized appreciation was $126.2 million in 2020, a significant increase from $13.8 million in 2019, driven by $109.7 million in net unrealized appreciation from the equity and warrant portfolios[531][533] - As of December 31, 2020, the company had $673.3 million in available liquidity, including $198.3 million in cash and cash equivalents and available credit facilities[571] - The company's regulatory asset coverage ratio was 207.5% (excluding SBA debentures), comfortably above the required minimum of 150%[581] Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is interest rate volatility, with most loans having floating rates and floors, and a sensitivity analysis showing the impact of rate changes on net income - The company's main market risk is from changes in interest rates, with 96.9% of the loan portfolio having variable interest rates, primarily based on Prime or LIBOR with floors as of December 31, 2020[614] Interest Rate Sensitivity Analysis (Annualized) | Basis Point Change | Net Income Impact (in thousands) | EPS Impact | | :--- | :--- | :--- | | +100 | $8,797 | $0.08 | | +50 | $4,462 | $0.04 | | -25 | $19 | $0.00 | | -75 | $74 | $0.00 | - The company did not engage in any interest rate or foreign currency hedging activities during the year ended December 31, 2020[617] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including the unqualified auditor's report, and detailed notes on accounting policies, fair value measurement, borrowings, and commitments - The Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) provides an unqualified opinion on the financial statements and effectiveness of internal controls, identifying the valuation of Level 3 investments as a critical audit matter due to significant management judgment[626][634] Consolidated Balance Sheet Highlights (as of Dec 31, 2020, in thousands) | (in thousands) | Amount | | :--- | :--- | | Total Investments, at fair value | $2,354,078 | | Total Assets | $2,623,997 | | Total Liabilities | $1,332,293 | | Total Net Assets | $1,291,704 | Consolidated Operations Highlights (Year Ended Dec 31, 2020, in thousands) | (in thousands) | Amount | | :--- | :--- | | Total Investment Income | $287,258 | | Net Investment Income | $157,140 | | Net Realized (Loss) on Investments | $(56,105) | | Net Change in Unrealized Appreciation | $126,226 | | Net Increase in Net Assets | $227,261 | - Note 3 (Fair Value) shows that of the $2.35 billion in investments, $2.20 billion are classified as Level 3, indicating reliance on significant unobservable inputs for valuation[788][791] - Note 5 (Borrowings) details approximately $1.3 billion in outstanding principal from various sources, including SBA Debentures, multiple series of notes, and convertible notes[826] - Note 11 (Commitments and Contingencies) discloses approximately $179.8 million in unfunded commitments to portfolio companies and investment funds as of December 31, 2020[946] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable as there were no changes in or disagreements with accountants on accounting and financial disclosure - Not Applicable[964] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes reported - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[965] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[969] - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, such controls[971] Other Information This section provides updated tables for fees, expenses, and senior securities, detailing annual expenses and regulatory asset coverage ratios Annual Expenses (as a percentage of net assets) | Expense Category | Percentage | | :--- | :--- | | Operating expenses | 5.49% | | Interest and fees paid on borrowed funds | 5.81% | | Total annual expenses | 11.30% | - The Senior Securities table shows total outstanding senior securities of $1.3 billion as of December 31, 2020[984] - As of December 31, 2020, the company's regulatory asset coverage ratio was 207.5% (excluding SBA debentures) and 199.3% (including SBA debentures)[987] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - This information is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[989] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - This information is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[990] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement - This information is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[991] Certain Relationships and Related Transactions and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - This information is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[992] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - This information is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[993] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides an index of all financial statements, schedules, and exhibits filed with the annual report[996][1014] Form 10-K Summary This item is not applicable to the company - Not applicable[997]