Hercules Capital(HTGC) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Hercules Capital, Inc. as of June 30, 2021, including balance sheets, statements of operations, changes in net assets, cash flows, and detailed investment schedules, along with explanatory notes Consolidated Statements of Assets and Liabilities As of June 30, 2021, total assets were $2.58 billion, total liabilities decreased to $1.22 billion, and total net assets increased to $1.36 billion, raising the net asset value per share to $11.71 Consolidated Balance Sheet Summary (in thousands) | Metric | June 30, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Investments, at fair value | $2,521,090 | $2,354,078 | | Cash and cash equivalents | $18,447 | $198,282 | | Total Assets | $2,578,572 | $2,623,997 | | Total Debt (net) | $1,177,515 | $1,286,638 | | Total Liabilities | $1,222,214 | $1,332,293 | | Total Net Assets | $1,356,358 | $1,291,704 | | Net Asset Value per share | $11.71 | $11.26 | Consolidated Statements of Operations For Q2 2021, total investment income was $69.6 million, with net investment income at $37.0 million, and a net increase in net assets from operations of $82.7 million, significantly higher than the prior year due to increased unrealized appreciation Q2 2021 vs Q2 2020 Performance (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $69,559 | $67,968 | | Total Net Operating Expenses | $32,595 | $32,284 | | Net Investment Income | $36,964 | $35,684 | | Total net realized/unrealized gain | $45,767 | $26,081 | | Net Increase in Net Assets | $82,731 | $61,765 | | Basic EPS (from operations) | $0.71 | $0.55 | | Diluted EPS (from operations) | $0.65 | $0.55 | Six Months 2021 vs 2020 Performance (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $138,318 | $141,587 | | Total Net Operating Expenses | $66,794 | $65,323 | | Net Investment Income | $71,524 | $76,264 | | Total net realized/unrealized gain (loss) | $75,370 | $(43,222) | | Net Increase in Net Assets | $146,894 | $33,042 | | Basic EPS (from operations) | $1.27 | $0.29 | | Diluted EPS (from operations) | $1.21 | $0.29 | Consolidated Statements of Changes in Net Assets For the six months ended June 30, 2021, net assets increased from $1.29 billion to $1.36 billion, primarily driven by a $146.9 million net increase from operations, partially offset by $88.0 million in distributions Reconciliation of Net Assets (Six Months Ended June 30, 2021, in thousands) | Description | Amount | | :--- | :--- | | Balance as of December 31, 2020 | $1,291,704 | | Net increase from operations | $146,894 | | Issuance of common stock (net) | $2,648 | | Distributions | $(87,953) | | Stock-based compensation | $5,163 | | Balance as of June 30, 2021 | $1,356,358 | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash used in operating activities was $12.2 million, and net cash used in financing activities was $201.2 million, resulting in a total net decrease in cash of $213.4 million Summary of Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(12,185) | $(12,768) | | Net Cash Used in Investing Activities | $(12) | $(67) | | Net Cash Used in Financing Activities | $(201,212) | $(32,678) | | Net Decrease in Cash | $(213,409) | $(45,513) | | Cash at Beginning of Period | $237,622 | $114,996 | | Cash at End of Period | $24,213 | $69,483 | Consolidated Schedule of Investments As of June 30, 2021, the total investment portfolio had a fair value of $2.52 billion, primarily concentrated in senior secured debt (88.0%) and key industry sectors like Drug Discovery & Development, Software, and Internet Consumer & Business Services Portfolio Composition by Asset Class (June 30, 2021) | Asset Class | Fair Value (in thousands) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Senior Secured Debt | $2,217,055 | 88.0% | | Unsecured Debt | $26,321 | 1.0% | | Preferred Stock | $57,966 | 2.3% | | Common Stock | $171,934 | 6.8% | | Warrants | $46,715 | 1.9% | | Investment Funds & Vehicles | $1,099 | 0.0% | | Total | $2,521,090 | 100.0% | Portfolio Composition by Industry Sector (June 30, 2021) | Industry Sector | Fair Value (in thousands) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Drug Discovery & Development | $789,877 | 31.3% | | Software | $675,565 | 26.8% | | Internet Consumer & Business Services | $630,540 | 25.0% | | All Other Industries | $425,108 | 16.9% | | Total | $2,521,090 | 100.0% | Notes to Consolidated Financial Statements This section provides detailed disclosures on the company's business as a BDC and RIC, significant accounting policies including Level 3 fair value measurements, income recognition, debt facilities, equity plans, commitments, and related party transactions - Hercules Capital is an internally managed Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes, focusing on senior secured loans to venture capital-backed companies[104][105] - As of June 30, 2021, approximately 97.8% of the Company's total assets were investments whose fair value is determined in good faith by the Board of Directors, classified as Level 3 assets due to the lack of a readily available market[125] - In March 2021, the company's Adviser Subsidiary entered into an investment management agreement with a private External Fund, with shared services expenses allocated to this subsidiary totaling $2.1 million for the first six months of 2021[294] - On July 1, 2021, subsequent to the reporting period, the company fully redeemed the $75.0 million aggregate principal of its 5.25% April 2025 Notes[298] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance as a specialty finance company, highlighting portfolio growth to $2.5 billion, trends in investment income and expenses, the impact of unrealized appreciation, and its strong liquidity position of $610.0 million as of June 30, 2021 - The company's investment objective is to maximize portfolio total return through current income from debt investments and capital appreciation from warrant and equity investments in technology, life sciences, and sustainable technology sectors[309] Portfolio Activity (Six Months Ended June 30, in millions) | Activity (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net Debt Commitments | $853.6 | $522.0 | | Net Debt Fundings | $539.8 | $364.9 | | Funded Equity Investments | $14.2 | $1.0 | | Unfunded Contractual Commitments | $327.3 | $165.1 | Debt Investment Portfolio Yields | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Weighted average core yield | 11.5% | 11.6% | | Weighted average effective yield | 12.7% | 12.9% | - As of June 30, 2021, the company had $610.0 million in available liquidity, including $18.4 million in cash and significant available capacity under its credit facilities and SBA license[394] - The company's asset coverage ratio was 219.3% (excluding SBA debentures), well above the 150% regulatory minimum, providing investment flexibility[395] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with 96.8% of debt investments having variable rates, positioning it to benefit from potential rate increases, as a hypothetical 100 basis point increase would raise net income by an estimated $13.8 million annually - As of June 30, 2021, approximately 96.8% of the company's loan portfolio had variable interest rates, making its income sensitive to changes in Prime and LIBOR rates[431] Annualized Impact of Hypothetical Interest Rate Changes (in thousands) | Basis Point Change | Net Income Impact | EPS Impact | | :--- | :--- | :--- | | +100 | $13,834 | $0.12 | | +50 | $6,879 | $0.06 | | -25 | $4 | $0.00 | Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[436] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[437] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company does not expect any current legal matters to have a material adverse effect on its financial condition or results of operations - The company does not expect any current legal proceedings to materially affect its financial condition or results of operations[440] Item 1A. Risk Factors This section highlights the risk of portfolio concentration, where the failure of a single significant investment could negatively affect financial results, with six portfolio companies each representing over 5% of net assets as of June 30, 2021 Portfolio Companies Representing >5% of Net Assets (June 30, 2021) | Portfolio Company | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | BridgeBio Pharma LLC | $118,393 | 8.7% | | Worldremit Group Limited | $95,142 | 7.0% | | Rocket Lab Global Services, LLC | $87,182 | 6.4% | | EverFi, Inc. | $84,561 | 6.2% | | Houzz, Inc. | $75,542 | 5.6% | | uniQure B.V. | $71,840 | 5.3% | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the six months ended June 30, 2021, the company issued 133,943 shares of common stock through its dividend reinvestment plan, valued at approximately $2.1 million, which were not registered under the Securities Act - For the six months ended June 30, 2021, 133,943 shares of common stock were issued under the dividend reinvestment plan, with an aggregate value of approximately $2.1 million[445] Item 3. Defaults Upon Senior Securities Not applicable, as there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported for the period[446] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable to the company[446] Item 5. Other Information This item is not applicable as there was no other information to report - No other information was reported for the period[446] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002 - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[449]