UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 814-00702
Hercules Capital, Inc.
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
74-3113410
(I.R.S. Employer
Identification Number)
400 Hamilton Avenue, Suite 310
Palo Alto, California 94301
(Address of principal executive offices)
(650) 289-3060
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, par value $0.001 per share
6.25% Notes due 2024
5.25% Notes due 2025
6.25% Notes due 2033
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days: Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of
the registrant’s most recently completed second fiscal quarter was approximately $1.2 billion based upon a closing price of $12.65 reported for such
date on the New York Stock Exchange. Common shares held by each executive officer and director and by each person who owns 5% or more of the
outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
intended and shall not be deemed to be an admission that, such persons are affiliates of the Registrant.
On February 15, 2019, there were 96,445,700 shares outstanding of the registrant’s common stock, $0.001 par value.
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed
within 120 days after the close of the registrant’s year end are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
HERCULES CAPITAL, INC.
FORM 10-K
ANNUAL REPORT
Part I.
Item 1. Business .....................................................................................................................................................................
Item 1A. Risk Factors ...............................................................................................................................................................
Item 1B. Unresolved SEC Staff Comments ..............................................................................................................................
Item 2. Properties ...................................................................................................................................................................
Item 3. Legal Proceedings ......................................................................................................................................................
Item 4. Mine Safety Disclosures ............................................................................................................................................
Part II.
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..............................................................................................................................................................
Item 6. Selected Consolidated Financial Data .......................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................................
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ....................................................................................
Item 8. Financial Statements and Supplementary Data .........................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................
Item 9A. Controls and Procedures ...........................................................................................................................................
Item 9B. Other Information .....................................................................................................................................................
Item 10.
Directors, Executive Officers and Corporate Governance ........................................................................................
Item 11. Executive Compensation ..........................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................
Item 13. Certain Relationships and Related Transactions and Director Independence ...........................................................
Item 14. Principal Accountant Fees and Services ...................................................................................................................
Part III.
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Part IV.
Exhibits and Financial Statement Schedules ..............................................................................................................
Item 15.
Item 16. Form 10-K Summary .................................................................................................................................................
Signatures
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188
Hercules Capital, Inc., our logo and other trademarks of Hercules Capital, Inc. are the property of Hercules Capital, Inc. All
other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.
[This page intentionally left blank]
In this Annual Report on Form 10-K, or Annual Report, the “Company,” “Hercules,” “HTGC,” “we,” “us” and “our” refer
to Hercules Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts on or after February 25, 2016 and
“Hercules Technology Growth Capital, Inc.” and its wholly owned subsidiaries and its affiliated securitization trusts prior to
February 25, 2016 unless the context otherwise requires.
Item 1.
Business
PART I
GENERAL
We are a specialty finance company focused on providing senior secured loans to high-growth, innovative venture capital-
backed companies in a variety of technology, life sciences and sustainable and renewable technology industries. We source our
investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York,
NY, Washington, DC, Hartford, CT, Westport, CT, Chicago, IL, and San Diego, CA.
Our goal is to be the leading structured debt financing provider for venture capital-backed companies in technology-related
industries requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of
technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and
sustainable and renewable technology and to offer a full suite of growth capital products. We focus our investments in companies
active in the technology industry sub-sectors characterized by products or services that require advanced technologies, including, but
not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information
technology infrastructure or services, internet consumer and business services, telecommunications, telecommunications equipment,
renewable or alternative energy, media and life sciences. Within the life sciences sub-sector, we generally focus on medical devices,
bio-pharmaceutical, drug discovery, drug delivery, health care services and information systems companies. Within the sustainable
and renewable technology sub-sector, we focus on sustainable and renewable energy technologies and energy efficiency and
monitoring technologies. We refer to all of these companies as “technology-related” companies and intend, under normal
circumstances, to invest at least 80% of the value of our total assets in such businesses.
We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We invest
primarily in private companies but also have investments in public companies. We use the term “structured debt with warrants” to
refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including
warrants, options or other rights to purchase common or preferred stock. Our structured debt with warrants investments typically are
secured by some or all of the assets of the portfolio company. We also provide “unitranche” loans, which are loans that combine both
senior and mezzanine debt, generally in a first lien position.
Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and
capital appreciation from our warrant and equity-related investments. Our primary business objectives are to increase our net income,
net operating income and net asset value, or NAV, by investing in structured debt with warrants and equity of venture capital-backed
companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains.
Our equity ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a
controlling interest under the Investment Company Act of 1940, as amended, or the 1940 Act. In some cases, we receive the right to
make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we
provide directly to venture capital-backed companies in technology-related industries is generally used for growth and general
working capital purposes as well as in select cases for acquisitions or recapitalizations.
We also make investments in qualifying small businesses through Hercules Technology III L.P., or HT III, which is our wholly-
owned small business investment company, or SBIC. HT III holds approximately $307.5 million in assets which accounted for
approximately 14.3% of our total assets, prior to consolidation at December 31, 2018. At December 31, 2018, we have issued $149.0
million in Small Business Administration, or SBA, guaranteed debentures in our SBIC subsidiary. See “— Regulation—Small
Business Administration Regulations” for additional information regarding our SBIC subsidiary.
3
We regularly engage in discussions with third parties with respect to various potential transactions to explore all alternatives.
We may acquire an investment or a portfolio of investments or an entire company or sell portions of our portfolio on an opportunistic
basis. We, our subsidiaries or our affiliates, may also agree to manage certain other funds that invest in debt, equity or provide other
financing or services to companies in a variety of industries for which we may earn management or other fees for our services. We
may also invest in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future
incentive allocations. Some of these transactions could be material to our business. Consummation of any such transaction will be
subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final
definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our Board
of Directors and required regulatory or third-party consents and, in certain cases, the approval of our stockholders. Accordingly, there
can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require significant
management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction.
CORPORATE HISTORY AND OFFICES
We are a Maryland corporation formed in December 2003 that began investment operations in September 2004. On February
25, 2016, we changed our name from “Hercules Technology Growth Capital, Inc.” to “Hercules Capital, Inc.” We are an internally
managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under
the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements. For instance, we
generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash,
cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. As a business
development company, we must also meet a coverage ratio of total net assets to total senior securities, which include all of our
borrowings (including accrued interest payable) except for debentures issued by the SBA and any preferred stock we may issue in the
future, of at least 150% subsequent to each borrowing or issuance of senior securities. See “Regulation.”
Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in
technology-related companies at various stages of their development. Consistent with regulatory requirements, we invest primarily in
United States based companies and, to a lesser extent, in foreign companies.
We are internally managed under the supervision of our Board of Directors. We do not pay management or advisory fees, but
instead incur costs customary for an operating company. Some of those costs include recruiting and marketing expenses as well as the
costs associated with employing management, investment and portfolio management professionals, and technology, secretarial and
other support personnel. In connection with our recruiting, branding and marketing efforts, we may, among other things, make
charitable contributions in amounts we believe to be immaterial and that do not exceed $500,000 in the aggregate in any year. We
believe that many of these contributions help us raise our profile in the communities and benefit us in attracting and retaining talent
and investment opportunities.
Effective January 1, 2006, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the
Internal Revenue Code of 1986, as amended, or the Code. Pursuant to this election, we generally will not have to pay corporate-level
taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that
we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified
earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. As an
investment company, we follow accounting and reporting guidance as set forth in Topic 946, Financial Services – Investment
Companies, of the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Codification, as amended, or ASC.
Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, and our telephone
number is (650) 289-3060. We also have offices in Boston, MA, New York, NY, Washington, DC, Hartford, CT, Westport, CT,
Chicago, IL, and San Diego, CA. We maintain a website on the Internet at www.htgc.com. We make available, free of charge, on our
website our proxy statement, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission, or SEC. Information contained on our website is not incorporated by reference into this Annual
Report, and you should not consider that information to be part of this Annual Report.
We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC, under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, the SEC maintains an Internet website, at
www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, who file
documents electronically with the SEC.
4
OUR MARKET OPPORTUNITY
We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S.
economy and that continued growth is supported by ongoing innovation and performance improvements in technology products as
well as the adoption of technology across virtually all industries in response to competitive pressures. We believe that an attractive
market opportunity exists for a specialty finance company focused primarily on investments in structured debt with warrants in
technology-related companies for the following reasons:
technology-related companies have generally been underserved by traditional lending sources;
unfulfilled demand exists for structured debt financing to technology-related companies due to the complexity of
evaluating risk in these investments; and
structured debt with warrants products are less dilutive and complement equity financing from venture capital and private
equity funds.
Technology-Related Companies are Underserved by Traditional Lenders. We believe many viable technology-related
companies backed by financial sponsors have been unable to obtain sufficient growth financing from traditional lenders, including
financial services companies such as commercial banks and finance companies because traditional lenders have continued to
consolidate and have adopted a more risk-averse approach to lending. More importantly, we believe traditional lenders are typically
unable to underwrite the risk associated with these companies effectively.
The unique cash flow characteristics of many technology-related companies typically include significant research and
development expenditures and high projected revenue growth thus often making such companies difficult to evaluate from a credit
perspective. In addition, the balance sheets of these companies often include a disproportionately large amount of intellectual property
assets, which can be difficult to value. Finally, the speed of innovation in technology and rapid shifts in consumer demand and market
share add to the difficulty in evaluating technology-related companies.
Due to the difficulties described above, we believe traditional lenders generally refrain from entering the structured debt
financing marketplace, instead preferring the risk-reward profile of asset-based lending. Traditional lenders generally do not have
flexible product offerings that meet the needs of technology-related companies. The financing products offered by traditional lenders
typically impose on borrowers many restrictive covenants and conditions, including limiting cash outflows and requiring a significant
depository relationship to facilitate rapid liquidation.
Unfulfilled Demand for Structured Debt Financing to Technology-Related Companies. Private debt capital in the form of
structured debt financing from specialty finance companies continues to be an important source of funding for technology-related
companies. We believe that the level of demand for structured debt financing is a function of the level of annual venture equity
investment activity.
We believe that demand for structured debt financing is currently underserved. The venture capital market for the technology-
related companies in which we invest has been active. Therefore, to the extent we have capital available, we believe this is an
opportune time to be active in the structured lending market for technology-related companies.
Structured Debt with Warrants Products Complement Equity Financing From Venture Capital and Private Equity Funds.
We believe that technology-related companies and their financial sponsors will continue to view structured debt securities as an
attractive source of capital because it augments the capital provided by venture capital and private equity funds. We believe that our
structured debt with warrants products provide access to growth capital that otherwise may only be available through incremental
investments by existing equity investors. As such, we provide portfolio companies and their financial sponsors with an opportunity to
diversify their capital sources. Generally, we believe many technology-related companies at all stages of development target a portion
of their capital to be debt in an attempt to achieve a higher valuation through internal growth. In addition, because financial sponsor-
backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the
debt capital needed to grow or recapitalize during the extended period sometimes required prior to liquidity events.
5
Our strategy to achieve our investment objective includes the following key elements:
OUR BUSINESS STRATEGY
Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals. We have
assembled a team of experienced investment professionals with extensive experience as venture capitalists, commercial lenders, and
originators of structured debt and equity investments in technology-related companies. Our investment professionals have, on average,
more than 10 years of experience as equity investors in, and/or lenders to, technology-related companies. In addition, our team
members have originated structured debt, debt with warrants and equity investments in over 450 technology-related companies,
representing almost $8.5 billion in commitments from inception to December 31, 2018, and have developed a network of industry
contacts with investors and other participants within the venture capital and private equity communities. In addition, members of our
management team also have operational, research and development and finance experience with technology-related companies. We
have established contacts with leading venture capital and private equity fund sponsors, public and private companies, research
institutions and other industry participants, which we believe will enable us to identify and attract well-positioned prospective
portfolio companies.
We focus our investing activities generally in industries in which our investment professionals have investment experience. We
believe that our focus on financing technology-related companies will enable us to leverage our expertise in structuring prospective
investments, to assess the value of both tangible and intangible assets, to evaluate the business prospects and operating characteristics
of technology-related companies and to identify and originate potentially attractive investments with these types of companies.
Mitigate Risk of Principal Loss and Build a Portfolio of Equity-Related Securities. We expect that our investments have the
potential to produce attractive risk-adjusted returns through current income, in the form of interest and fee income, as well as capital
appreciation from warrant and equity-related securities. We believe that we can mitigate the risk of loss on our debt investments
through the combination of loan principal amortization, cash interest payments, relatively short maturities (typically between 24-48
months), security interests in the assets of our portfolio companies, and on select investment covenants requiring prospective portfolio
companies to have certain amounts of available cash at the time of our investment and the continued support from a venture capital or
private equity firm at the time we make our investment. Although we do not currently engage in hedging transactions, we may engage
in hedging transactions in the future utilizing instruments such as forward contracts, currency options and interest rate swaps, caps,
collars, and floors.
Historically our structured debt investments to technology-related companies typically include warrants or other equity interests,
giving us the potential to realize equity-like returns on a portion of our investment. In addition, in some cases, we receive the right to
make additional equity investments in our portfolio companies, including the right to convert some portion of our debt into equity, in
connection with future equity financing rounds. We believe these equity interests will create the potential for meaningful long-term
capital gains in connection with the future liquidity events of these technology-related companies.
Provide Customized Financing Complementary to Financial Sponsors’ Capital. We offer a broad range of investment
structures and possess expertise and experience to effectively structure and price investments in technology-related companies. Unlike
many of our competitors that only invest in companies that fit a specific set of investment parameters, we have the flexibility to
structure our investments to suit the particular needs of our portfolio companies. We offer customized financing solutions ranging
from senior debt, including below-investment grade debt instruments, also known as “junk bonds”, to equity capital, with a focus on
structured debt with warrants.
We use our relationships in the financial sponsor community to originate investment opportunities. Because venture capital and
private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our debt investments
will be viewed as an attractive and complimentary source of capital, both by the portfolio company and by the portfolio company’s
financial sponsor. In addition, we believe that many venture capital and private equity fund sponsors encourage their portfolio
companies to use debt financing for a portion of their capital needs as a means of potentially enhancing equity returns, minimizing
equity dilution and increasing valuations prior to a subsequent equity financing round or a liquidity event.
Invest at Various Stages of Development. We provide growth capital to technology-related companies at all stages of
development, including select publicly listed companies and select special opportunity lower middle market companies that require
additional capital to fund acquisitions, recapitalizations and refinancings and established-stage companies. We believe that this
provides us with a broader range of potential investment opportunities than those available to many of our competitors, who generally
focus their investments on a particular stage in a company’s development. Because of the flexible structure of our investments and the
extensive experience of our investment professionals, we believe we are well positioned to take advantage of these investment
opportunities at all stages of prospective portfolio companies’ development.
6
Benefit from Our Efficient Organizational Structure. We believe that the perpetual nature of our corporate structure enables us
to be a long-term partner for our portfolio companies in contrast to traditional investment funds, which typically have a limited life. In
addition, because of our access to the equity markets, we believe that we may benefit from a lower cost of capital than that available to
private investment funds. We are not subject to requirements to return invested capital to investors nor do we have a finite investment
horizon. Capital providers that are subject to such limitations are often required to seek a liquidity event more quickly than they
otherwise might, which can result in a lower overall return on an investment.
Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured query
language-based, or SQL, database system to track various aspects of our investment process including sourcing, originations,
transaction monitoring and post-investment performance. As of December 31, 2018, our proprietary SQL-based database system
included approximately 50,788 technology-related companies and approximately 11,767 venture capital firms, private equity
sponsors/investors, as well as various other industry contacts. This proprietary SQL system allows us to maintain, cultivate and grow
our industry relationships while providing us with comprehensive details on companies in the technology-related industries and their
financial sponsors.
OUR INVESTMENTS AND OPERATIONS
We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on structured debt
with warrants.
We generally seek to invest in companies that have been operating for at least six to 12 months prior to the date of our
investment. We anticipate that such entities may, at the time of investment, be generating revenues or will have a business plan that
anticipates generation of revenues within 24 to 48 months. Further, we anticipate that on the date of our investment we will generally
obtain a lien on available assets, which may or may not include intellectual property, and these companies will have sufficient cash on
their balance sheet to operate as well as potentially amortize their debt for at least three to nine months following our investment. We
generally require that a prospective portfolio company, in addition to having sufficient capital to support leverage, demonstrate an
operating plan capable of generating cash flows or raising the additional capital necessary to cover its operating expenses and service
its debt, for an additional six to 12 months subject to market conditions.
We expect that our investments will generally range from $12.0 million to $40.0 million, although we may make investments in
amounts above or below this range. We typically structure our debt securities to provide for amortization of principal over the life of
the loan, but may include a period of interest-only payments. Our loans will typically be collateralized by a security interest in the
borrower’s assets, although we may not have the first claim on these assets and the assets may not include intellectual property. Our
debt investments carry fixed or variable contractual interest rates which generally ranged from approximately 5.5% to 15.7% as of
December 31, 2018. As of December 31, 2018, approximately 97.3% of our loans were at floating rates or floating rates with a floor
and 2.7% of the loans were at fixed rates.
In addition to the cash yields received on our loans, our loans generally include one or more of the following: exit fees, balloon
payment fees, commitment fees, success fees or prepayment fees. In some cases, our loans also include contractual payment-in-kind,
or PIK, interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for
the period in which such PIK interest was accrued, which is often in advance of receiving cash payment, and are separately identified
on our statements of cash flows. We also may be required to include in income for tax purposes certain other amounts prior to
receiving the related cash.
In addition, the majority of our investments in the structured debt of venture capital-backed companies generally have equity
enhancement features, typically in the form of warrants or other equity-related securities that are considered original issue discounts,
or OID, to our loans and are designed to provide us with an opportunity for potential capital appreciation. The warrants typically will
be immediately exercisable upon issuance and generally will remain exercisable for the lesser of five to ten years or three to five years
after completion of an initial public offering, or IPO. The exercise prices for the warrants varies from nominal exercise prices to
exercise prices that are at or above the current fair market value of the equity for which we receive warrants. We may structure
warrants to provide minority rights provisions or on a very select basis put rights upon the occurrence of certain events. We generally
target a total annualized return (including interest, fees and value of warrants) of 12% to 25% for our debt investments.
7
Typically, our structured debt and equity investments take one of the following forms:
Structured Debt with Warrants. We seek to invest a majority of our assets in structured debt with warrants of prospective
portfolio companies. Our investments in structured debt with warrants may be the only debt capital on the balance sheet of
our portfolio companies, and in many cases we have a first priority security interest in all of our portfolio company’s
assets, or in certain investments we may have a negative pledge on intellectual property. Our structured debt with warrants
typically has a maturity of between two and seven years, and they may provide for full amortization after an interest only
period. Our structured debt with warrants generally carries a contractual interest rate up to 15.7% and may include an
additional exit fee payment or contractual PIK interest arrangements. We may structure our structured debt with warrants
with restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls,
change-in-control provisions or board observation rights.
Senior Debt. We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by accounts
receivable and/or inventory financing of prospective portfolio companies. Senior debt has a senior position with respect to
a borrower’s scheduled interest and principal payments and holds a first priority security interest in the assets pledged as
collateral. Senior debt also may impose covenants on a borrower with regard to cash flows and changes in capital
structure, among other items. We generally collateralize our investments by obtaining security interests in our portfolio
companies’ assets, which may include their intellectual property. In other cases we may obtain a negative pledge covering
a company’s intellectual property. Our senior loans, in certain instances, may be tied to the financing of specific assets. In
connection with a senior debt investment, we may also provide the borrower with a working capital line-of-credit that will
carry an interest rate ranging from Prime or LIBOR plus a spread with a floor, generally maturing in one to three years,
and typically secured by accounts receivable and/or inventory. We also provide “unitranche” loans, which are loans that
combine both senior and mezzanine debt, generally in a first lien position with security interest in all the assets of the
portfolio company. The loans can either be “first out” or “last out”, whereby the “last-out” loans will be subordinated to
the “first-out” portion of the unitranche loan in a liquidation, sale or other disposition.
Equipment Loans. We intend to invest a limited portion of our assets in equipment-based loans to early-stage prospective
portfolio companies. Equipment-based loans are secured by a first priority security interest in only the specific assets
financed. These loans are generally for amounts of $1.0 million to $3.0 million but may be up to $15.0 million, carry a
contractual interest rate between Prime and Prime plus 9.0%, and have an average term between three and four years.
Equipment loans may also include exit fee payments.
Equity-Related Securities. The equity-related securities we hold consist primarily of warrants or other equity interests
generally obtained in connection with our structured debt investments. In addition to the warrants received as a part of a
structured debt financing, we typically receive the right to make equity investments in a portfolio company in connection
with that company’s next round of equity financing. We may also hold certain debt investments that have the right to
convert a portion of the debt investment into equity. These rights will provide us with the opportunity to further enhance
our returns over time through opportunistic equity investments in our portfolio companies. These equity-related
investments are typically in the form of preferred or common equity and may be structured with a dividend yield,
providing us with a current return, and with customary anti-dilution protection and preemptive rights. We may achieve
liquidity through a merger or acquisition of a portfolio company, a public offering of a portfolio company’s stock or by
exercising our right, if any, to require a portfolio company to buy back the equity-related securities we hold. We may also
make stand-alone direct equity investments into portfolio companies in which we may not have any debt investment in the
company. As of December 31, 2018, we held warrant and equity-related securities in 158 portfolio companies.
8
A comparison of the typical features of our various investment alternatives is set forth in the chart below.
Structured Debt with
Warrants
Senior Debt
Equipment Loans
Equity-Related Securities
Typical Structure
Term debt with warrants
Term or revolving debt
Term debt with warrants
Preferred stock or
common stock
Investment Horizon
Long-term, ranging from 2 to 7
years, with an average of 3 years
Usually under 3 years
Ranging from 3 to 4 years
Ranging from 3 to 7 years
Ranking/Security
Covenants
Senior secured, either first out
or last out, or second lien
Senior / First lien
Secured only by underlying
equipment
None/unsecured
Risk Tolerance
Medium / High
Low
Less restrictive; mostly
financial
Generally borrowing base and
financial
None
High
None
High
Coupon/Dividend
Cash pay - fixed and floating
rate; PIK in limited cases
Cash pay - fixed or floating
rate
Cash pay - fixed or floating
rate and may include PIK
Generally none
Customization or Flexibility
More flexible
Little to none
Little to none
Flexible
Equity Dilution
Low to medium
None to low
Low
High
Investment Criteria
We have identified several criteria, among others, that we believe are important in achieving our investment objective with respect
to prospective portfolio companies. These criteria, while not inclusive, provide general guidelines for our investment decisions.
Portfolio Composition. While we generally focus our investments in venture capital-backed companies in technology-related
industries, we seek to invest across various financial sponsors as well as across various stages of companies’ development and various
technology industry sub-sectors and geographies. As of December 31, 2018, approximately 87.8% of the fair value of our portfolio
was composed of investments in five industries: 29.2% was composed of investments in the software industry, 28.7% was composed
of investments in the drug discovery and development industry, 17.5% was composed of investments in the internet consumer and
business services industry, 6.5% was composed of investments in the medical devices & equipment industry and 5.9% was composed
of investments in the sustainable and renewable technology industry.
Continuing Support from One or More Financial Sponsors. We generally invest in companies in which one or more
established financial sponsors have previously invested and continue to make a contribution to the management of the business. We
believe that having established financial sponsors with meaningful commitments to the business is a key characteristic of a prospective
portfolio company. In addition, we look for representatives of one or more financial sponsors to maintain seats on the Board of
Directors of a prospective portfolio company as an indication of such commitment.
Company Stage of Development. While we invest in companies at various stages of development, we generally require that
prospective portfolio companies be beyond the seed stage of development and generally have received or anticipate having commitments
for their first institutional round of equity financing for early stage companies. We expect a prospective portfolio company to demonstrate
progress in its product development or demonstrate a path towards revenue generation or increase its revenues and operating cash flow
over time. The anticipated growth rate of a prospective portfolio company is a key factor in determining the value that we ascribe to any
warrants or other equity securities that we may acquire in connection with an investment in debt securities.
Operating Plan. We generally require that a prospective portfolio company, in addition to having potential access to capital to
support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital
necessary to cover its operating expenses and service its debt for a specific period. Specifically, we require that a prospective portfolio
company demonstrate at the time of our proposed investment that in addition to having sufficient capital to support leverage, it has an
operating plan capable of generating cash flows or raising the additional capital necessary to cover its operating expenses and service
its debt for an additional six to 12 months subject to market conditions.
Security Interest. In many instances we seek a first priority security interest in all of the portfolio companies’ tangible and
intangible assets as collateral for our debt investment, subject in some cases to permitted exceptions. In other cases we may obtain a
negative pledge prohibiting a company from pledging or otherwise encumbering their intellectual property. Although we do not intend
to operate as an asset-based lender, the estimated liquidation value of the assets, if any, collateralizing the debt securities that we hold
is an important factor in our credit analysis and subject to assumptions that may change over the life of the investment especially when
attempting to estimate the value of intellectual property. We generally evaluate both tangible assets, such as accounts receivable,
inventory and equipment, and intangible assets, such as intellectual property, customer lists, networks and databases.
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Covenants. Our investments may include one or more of the following covenants: cross-default; material adverse change
provisions; requirements that the portfolio company provide periodic financial reports and operating metrics; and limitations on the
portfolio company’s ability to incur additional debt, sell assets, dividend recapture, engage in transactions with affiliates and
consummate an extraordinary transaction, such as a merger or recapitalization without our consent. In addition, we may require other
performance or financial based covenants, as we deem appropriate.
Exit Strategy. Prior to making a debt investment that is accompanied by an equity-related security in a prospective portfolio
company, we analyze the potential for that company to increase the liquidity of its equity through a future event that would enable us
to realize appreciation in the value of our equity interest. Liquidity events may include an IPO, a private sale of our equity interest to a
third party, a merger or an acquisition of the company or a purchase of our equity position by the company or one of its stockholders.
Investment Process
We have organized our management team around the four key elements of our investment process:
Origination;
Underwriting;
Documentation; and
Loan and Compliance Administration.
Our investment process is summarized in the following chart:
Origination
Deal Sourcing and Screening and Preliminary Due Diligence.
Term Sheet Structuring, Negotiation and Execution.
Underwriting
Formal Due Diligence to Create Investment Memorandum.
Transaction Reviewed By Investment Committee.
Approval
Rejection
Documentation
Loan Documents Drafted and Negotiated.
Due Diligence Finalized.
Loan Documents Executed
Loan and Compliance Administration
Loan Funded and Recorded.
Ongoing Invoicing and Collection.
Tracking, Monitoring, Reviewing, Reporting, Plotting,
Analyzing, Valuing, Restructuring, Credit Scoring, etc.
Origination
The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring and
negotiation, all leading to an executed non-binding term sheet. As of December 31, 2018, our investment origination team, which
consists of approximately 36 investment professionals, is headed by our Chief Investment Officer and our Chief Executive Officer.
The origination team is responsible for sourcing potential investment opportunities and members of the investment origination team
use their extensive relationships with various leading financial sponsors, management contacts within technology-related companies,
trade sources, technology conferences and various publications to source prospective portfolio companies. Our investment origination
team is divided into life sciences, technology, sustainable and renewable technology, and special situation sub-teams to better source
potential portfolio companies.
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In addition, we have developed a proprietary and comprehensive SQL-based database system to track various aspects of our
investment process including sourcing, originations, transaction monitoring and post-investment performance. This proprietary SQL
system allows our origination team to maintain, cultivate and grow our industry relationships while providing our origination team
with comprehensive details on companies in the technology-related industries and their financial sponsors.
If a prospective portfolio company generally meets certain underwriting criteria, we perform preliminary due diligence, which
may include high level company and technology assessments, evaluation of its financial sponsors’ support, market analysis,
competitive analysis, identifying key management, risk analysis and transaction size, pricing, return analysis and structure analysis. If
the preliminary due diligence is satisfactory, and the origination team recommends moving forward, we then structure, negotiate and
execute a non-binding term sheet with the potential portfolio company. Upon execution of a term sheet, the investment opportunity
moves to the underwriting process to complete formal due diligence review and approval.
Underwriting
The underwriting review includes formal due diligence and approval of the proposed investment in the portfolio company.
Due Diligence. Our due diligence on a prospective investment is typically completed by two or more investment professionals
whom we define as the underwriting team. The underwriting team for a proposed investment consists of the deal sponsor who
typically possesses general industry knowledge and is responsible for originating and managing the transaction, other investment
professional(s) who perform due diligence, credit and corporate financial analyses and, as needed, our legal professionals. To ensure
consistent underwriting, we generally use our standardized due diligence methodologies, which include due diligence on financial
performance and credit risk as well as an analysis of the operations and the legal and applicable regulatory framework of a prospective
portfolio company. The members of the underwriting team work together to conduct due diligence and understand the relationships
among the prospective portfolio company’s business plan, operations and financial performance.
As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for presentation
to the investment committee. In preparing the investment memorandum, the underwriting team typically interviews select key
management of the company and select financial sponsors and assembles information necessary to the investment decision. If and
when appropriate, the investment professionals may also contact industry experts and customers, vendors or, in some cases,
competitors of the company.
Approval Process. The sponsoring managing director or principal presents the investment memorandum to our investment
committee for consideration. The approval of a majority of our investment committee and an affirmative vote by our Chief Executive
Officer is required before we proceed with any investment. The investment committee members include our Chief Executive Officer,
Chief Financial Officer, Chief Investment Officer, and two senior Credit Officers. The investment committee meets on an as-needed
basis.
Documentation
Our legal department administers the documentation process for our investments. This department is responsible for
documenting the transactions approved by our investment committee with a prospective portfolio company. This department
negotiates loan documentation and, subject to appropriate approvals, final documents are prepared for execution by all parties. The
legal department generally uses the services of external law firms to complete the necessary documentation.
Loan and Compliance Administration
Our investment committee, supported by our investment team, credit team, and finance department, administers loans and track
covenant compliance, if applicable, of our investments and oversees periodic reviews of our critical functions to ensure adherence
with our internal policies and procedures. After funding of a loan in accordance with the investment committee’s approval, the loan is
recorded in our loan administration software and our SQL-based database system. The investment team, credit team, and finance
department are responsible for ensuring timely interest and principal payments and collateral management as well as advising the
investment committee on the financial performance and trends of each portfolio company, including any covenant violations that
occur, to aid us in assessing the appropriate course of action for each portfolio company and evaluating overall portfolio quality. In
addition, the investment team and credit team advise the investment committee and the Audit Committee of our Board of Directors,
accordingly, regarding the credit and investment grading for each portfolio company as well as changes in the value of collateral that
may occur.
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The investment team and credit team monitor our portfolio companies in order to determine whether the companies are meeting
our financing criteria and their respective business plans and also monitors the financial trends of each portfolio company from its
monthly or quarterly financial statements to assess the appropriate course of action for each company and to evaluate overall portfolio
quality. In addition, our management team closely monitors the status and performance of each individual company through our SQL-
based database system and periodic contact with our portfolio companies’ management teams and their respective financial sponsors.
Credit and Investment Grading System. Our investment team and credit team use an investment grading system to characterize
and monitor our outstanding loans. Our investment team and credit team monitors and, when appropriate, recommends changes to
investment grading. Our investment committee reviews the recommendations and/or changes to the investment grading, which are
submitted on a quarterly basis to the Audit Committee and our Board of Directors for approval.
From time to time, we will identify investments that require closer monitoring or become workout assets. We develop a workout
strategy for workout assets and our investment committee monitors the progress against the strategy. We may incur losses from our
investing activities, however, we work with our troubled portfolio companies in order to recover as much of our investments as is
practicable, including possibly taking control of the portfolio company. There can be no assurance that principal will be recovered.
We use the following investment grading system approved by our Board of Directors:
Grade 1. Loans involve the least amount of risk in our portfolio. The borrower is performing above expectations, and the
trends and risk profile is generally favorable.
Grade 2. The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially
graded 2.
Grade 3. The borrower may be performing below expectations, and the loan’s risk has increased materially since origination.
We increase procedures to monitor a borrower that may have limited amounts of cash remaining on the balance
sheet, is approaching its next equity capital raise within the next three to six months, or if the estimated fair value of
the enterprise may be lower than when the loan was originated. We will generally lower the loan grade to a grade 3
even if the company is performing in accordance to plan as it approaches the need to raise additional cash to fund its
operations. Once the borrower closes its new equity capital raise, we may increase the loan grade back to grade 2 or
maintain it at a grade 3 as the company continues to pursue its business plan.
Grade 4. The borrower is performing materially below expectations, and the loan risk has substantially increased since
origination. Loans graded 4 may experience some partial loss or full return of principal but are expected to realize
some loss of interest which is not anticipated to be repaid in full, which, to the extent not already reflected, may
require the fair value of the loan to be reduced to the amount we anticipate will be recovered. Grade 4 investments
are closely monitored.
Grade 5. The borrower is in workout, materially performing below expectations and a significant risk of principal loss is
probable. Loans graded 5 will experience some partial principal loss or full loss of remaining principal outstanding
is expected. Grade 5 loans will require the fair value of the loans be reduced to the amount, if any, we anticipate will
be recovered.
At December 31, 2018, our investments had a weighted average investment grading of 2.18.
Managerial Assistance
As a business development company, we are required to offer, and provide upon request, managerial assistance to our portfolio
companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in
board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and
financial guidance. We may, from time to time, receive fees for these services. In the event that such fees are received, they are
incorporated into our operating income and are passed through to our stockholders, given the nature of our structure as an internally
managed business development company. See “—Regulation—Significant Managerial Assistance” for additional information.
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COMPETITION
Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions,
federally or state chartered banks, venture debt funds, financial institutions, venture capital funds, private equity funds, investment
funds and investment banks. Many of these entities have greater financial and managerial resources than we have, and the 1940 Act
imposes certain regulatory restrictions on us as a business development company to which many of our competitors are not subject.
However, we believe that few of our competitors possess the expertise to properly structure and price debt investments to venture
capital-backed companies in technology-related industries. We believe that our specialization in financing technology-related
companies will enable us to determine a range of potential values of intellectual property assets, evaluate the business prospects and
operating characteristics of prospective portfolio companies and, as a result, identify investment opportunities that produce attractive
risk-adjusted returns. For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors—Risks Related
to our Business Structure—We operate in a highly competitive market for investment opportunities, and we may not be able to
compete effectively.”
BROKERAGE ALLOCATIONS AND OTHER PRACTICES
Because we generally acquire and dispose of our investments in privately negotiated transactions, we typically do not use
brokers in the normal course of business. However, from time to time, we may work with brokers to sell positions we have acquired in
the securities of publicly listed companies or to acquire positions (principally equity) in companies where we see a market opportunity
to acquire such securities at attractive valuations. In cases where we do use a broker, we do not execute transactions through any
particular broker or dealer, but will seek to obtain the best net results for the Company, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of
the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably competitive execution
costs, we may not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select
a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission
than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided.
As of December 31, 2018, we had 69 employees, including approximately 36 investment and portfolio management
professionals, all of whom have extensive experience working on financing transactions for technology-related companies.
EMPLOYEES
REGULATION
The following discussion is a general summary of the material prohibitions and descriptions governing business development
companies. It does not purport to be a complete description of all of the laws and regulations affecting business development
companies.
A business development company primarily focuses on investing in or lending to private companies and making managerial
assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly-traded stock. The
1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their directors
and officers and principal underwriters and certain other related persons and requires that a majority of the directors be persons other
than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the
nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a
majority of our outstanding voting securities as defined in the 1940 Act. A majority of the outstanding voting securities of a company
is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the
outstanding shares of such company are present or represented by proxy, or (ii) more than 50% of the outstanding shares of such
company.
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Qualifying Assets
Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets
represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are
the following:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules
as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
(a)
is organized under the laws of, and has its principal place of business in, the United States;
(b)
(c)
is not an investment company (other than a SBIC wholly owned by the business development company) or a
company that would be an investment company but for certain exclusions under the 1940 Act; and
does not have any class of securities listed on a national securities exchange; or if it has securities listed on a
national securities exchange such company has a market capitalization of less than $250 million; is controlled by
the business development company and has an affiliate of a business development company on its Board of
Directors; or meets such other criteria as may be established by the SEC.
(2) Securities of any portfolio company which we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated
person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the
issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without
material assistance other than conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market
for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or
pursuant to the exercise of warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the
time of investment.
Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than
25% of the outstanding voting securities of the portfolio company or has greater than 50% representation on its board.
We do not intend to acquire securities issued by any investment company, including other business development companies,
that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of
any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such
investment company or invest more than 10% of the value of our total assets in the securities of such other investment companies in
the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted
that such investments might subject our stockholders to additional expenses.
Significant Managerial Assistance
Business development companies generally must offer to make available to the issuer of the securities significant managerial
assistance, except in circumstances where either (i) the business development company controls such issuer of securities or (ii) the
business development company purchases such securities in conjunction with one or more other persons acting together and one of the
other persons in the group makes available such managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers
to provide and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board
and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
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Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash
equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which
we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. We may invest in U.S. Treasury
bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S.
government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the
simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase
price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that
may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from
a single counterparty, we generally would not meet the diversification tests imposed on us by the Code in order to qualify as a RIC for
federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this
limit. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Warrants and Options
Under the 1940 Act, a business development company is subject to restrictions on the amount of warrants, options, restricted
stock or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount of capital stock
that would result from the conversion or exercise of all outstanding warrants, options or other rights to purchase capital stock cannot
exceed 25% of the business development company’s total outstanding shares of capital stock. This amount is reduced to 20% of the
business development company’s total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant
to an executive compensation plan would exceed 15% of the business development company’s total outstanding shares of capital
stock. We have received exemptive relief from the SEC permitting us to issue stock options and restricted stock to our employees and
directors subject to the above conditions, among others. For a discussion regarding the conditions of this exemptive relief, see “—
Exemptive Relief” below and Note 7 to our consolidated financial statements.
Reduced Asset Coverage Requirements
The Small Business Credit Availability Act, or the SBCAA, which was signed into law in March 2018, decreased the
minimum asset coverage ratio in Section 61(a) of the 1940 Act for business development companies from 200% to 150% (subject to
either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested
persons). On September 4, 2018 and December 6, 2018, our Board of Directors, including a “required majority” (as such term is
defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved the application to us of the 150% minimum
asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, effective December 7, 2018, the asset coverage ratio
under the 1940 Act applicable to us decreased from 200% to 150%, permitting us to incur additional leverage.
Senior Securities; Coverage Ratio
We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our
common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance. In
addition, we may not be permitted to declare any cash dividend distribution on our outstanding common shares, or purchase any such
shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 150% after deducting the amount of such
distribution or purchase price. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency
purposes. For a discussion of the risks associated with the resulting leverage, see “Item 1A. Risk Factors—Risks Related to Our
Business Structure—Because we have substantial indebtedness, there could be increased risk in investing in our company.”
On April 5, 2007, we received approval from the SEC on our request for exemptive relief that permits us to exclude the
indebtedness of our wholly-owned subsidiaries that are SBICs from the 150% asset coverage requirement applicable to us.
Capital Structure
We are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, sell our
common stock, at a price below the current NAV of the common stock, or sell warrants, options or other rights to acquire such
common stock, at a price below the current NAV of the common stock if our Board of Directors determines that such sale is in the
best interests of us and our stockholders have approved the practice of making such sales.
In connection with the receipt of such stockholder approval, we will limit the number of shares that we issue at a price below
NAV pursuant to this authorization so that the aggregate dilutive effect on our then outstanding shares will not exceed 20%. Our
Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the
discount, and as a result, the discount could be up to 100% of NAV per share.
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Code of Ethics
We have adopted and will maintain a code of ethics that establishes procedures for personal investments and restricts certain
personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts,
including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s
requirements. Our code of ethics will generally not permit investments by our employees in securities that may be purchased or held
by us. We may be prohibited under the 1940 Act from conducting certain transactions with our affiliates without the prior approval of
our directors who are not interested persons and, in some cases, the prior approval of the SEC.
Our current code of ethics is posted on our website at www.htgc.com. In addition, the code of ethics is available on the EDGAR
Database on the SEC’s Internet site at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
Privacy Principles
We are committed to maintaining the privacy of our stockholders and safeguarding their non-public personal information. The
following information is provided to help you understand what personal information we collect, how we protect that information and
why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public
personal information of our stockholders may become available to us. We do not disclose any non-public personal information about
our stockholders or former stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for
example, to a transfer agent).
We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need
for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal
information of our stockholders.
Proxy Voting Policies and Procedures
We vote proxies relating to our portfolio securities in the best interest of our stockholders. Our proxy voting decisions are made
by members of the Investment Team, who review on a case- by-case basis each proposal submitted to a stockholder vote to determine
its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our
portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so. We generally do not
believe it is necessary to engage the services of an independent third party to assist in issue analysis and vote recommendation for
proxy proposals.
To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making
process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has
had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote
administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from
interested parties.
Exemptive Relief
On June 21, 2005, we filed a request with the SEC for exemptive relief to allow us to take certain actions that would otherwise
be prohibited by the 1940 Act, as applicable to business development companies. Specifically, we requested that the SEC permit us to
issue stock options to our non-employee directors as contemplated by Section 61(a)(3)(B)(i)(II) of the 1940 Act. On February 15,
2007, we received approval from the SEC on this exemptive request. In addition, in June 2007, we filed an amendment to the February
2007 order to adjust the number of shares issued to the non-employee directors. On October 10, 2007, we received approval from the
SEC on this amended exemptive request.
On April 5, 2007, we received approval from the SEC on our request for exemptive relief that permits us to exclude the
indebtedness of our wholly-owned subsidiaries that are SBICs from the asset coverage requirement applicable to us under the 1940
Act.
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On May 23, 2007, we received approval from the SEC on our request for exemptive relief that permits us to issue restricted
stock to our employees, officers and directors. On June 21, 2007, our shareholders approved amendments to the 2004 Equity Incentive
Plan, or the 2004 Plan, and 2006 Non-Employee Director Plan, or the 2006 Plan and, together with the 2004 Plan, the Plans,
permitting such restricted grants. On June 21, 2017, the 2006 Plan expired in accordance with its terms and no additional awards may
be granted under the 2006 Plan. On May 13, 2018, the Board of Directors further amended and restated the 2004 Plan and renamed it
the Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan, or the 2018 Equity Incentive Plan. On May 13, 2018,
the Board of Directors adopted the Hercules Capital, Inc. 2018 Non-employee Director Plan, or the Director Plan. The 2018 Equity
Incentive Plan and the Director Plan were each approved by stockholders on June 28, 2018.
On May 29, 2018, we filed an exemptive application with the SEC and an amendment to the exemptive application on
September 27, 2018, with respect to the 2018 Equity Incentive Plan and the Director Plan for an exemptive order from certain
provisions of the 1940 Act. On January 30, 2019, we received approval from the SEC on our request for exemptive relief that permits
us to issue restricted stock to non-employee directors under the Director Plan and restricted stock and restricted stock units to certain
of our employees, officers, and directors (excluding non-employee directors) under the 2018 Equity Incentive Plan. The exemptive
order also (i) allows participants in the Director Plan and the 2018 Equity Incentive Plan to elect to have us withhold shares of our
common stock to pay for the exercise price and applicable taxes with respect to an option exercise, or net issuance exercise, and (ii)
permit the holders of restricted stock to elect to have us withhold shares of our stock to pay the applicable taxes due on restricted stock
at the time of vesting. Each individual would be able to make a cash payment at the time of option exercise or to pay taxes on
restricted stock.
Other
We may be periodically examined by the SEC for compliance with the Exchange Act and the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny
and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer
against any liability to our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person’s office.
We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal
securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation. Our
Chief Compliance Officer is responsible for administering these policies and procedures.
Small Business Administration Regulations
We make investments in qualifying small businesses through our wholly-owned SBIC subsidiary, HT III. With our net
investment of $74.5 million in HT III, we have the capacity to issue $149.0 million of SBA guaranteed debentures, subject to SBA
approval. At December 31, 2018, we have issued $149.0 million in SBA guaranteed debentures in HT III. On July 13, 2018, the
Company completed repayment of the remaining outstanding Hercules Technology II, L.P., or HT II, debentures and subsequently
surrendered the SBA license with respect to HT II.
We intend to seek an additional SBIC license to ensure continued access to the maximum statutory limit of SBA guaranteed
debentures under the SBIC program. We have formed Hercules Technology IV, L.P., or HT IV, for that purpose. On September 6,
2018, we received a “green light” or “go forth” letter approval from the SBA to finalize our application process to obtain our third
license. There can be no assurance of when or if we will receive SBA approval of our HT IV application.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations,
eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully
taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its
investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not
exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years.
SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the
business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs
may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and
advisory services. Through our wholly-owned subsidiary, HT III, we plan to provide long-term loans to qualifying small businesses,
and in connection therewith, make equity investments.
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HT III is periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT III
fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT III’s
use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT III from making new investments. In
addition, HT III may also be limited in its ability to make distributions to us if it does not have sufficient capital in accordance with
SBA regulations. Such actions by the SBA would, in turn, negatively impact us because HT III is our wholly owned subsidiary. HT III
was in compliance with the terms of the SBIC’s leverage as of December 31, 2018 as a result of having sufficient capital as defined
under the SBA regulations.
HT III holds approximately $307.5 million in assets and accounted for approximately 14.3% of our total assets prior to
consolidation at December 31, 2018.
The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change
of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, HT III
may also be limited in its ability to make distributions to us if it does not have sufficient capital and/or distributed earnings, in
accordance with SBA regulations.
Our SBIC subsidiary is subject to regulation and oversight by the SBA, including requirements with respect to maintaining
certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that our SBIC subsidiaries will
receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA
regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in
the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our
SBIC subsidiaries upon an event of default.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our
qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does
not purport to be a complete description of the income tax considerations relating thereto. Except as otherwise noted, this discussion
assumes you are a taxable U.S. person (as defined for U.S. federal income tax purposes) and that you hold your shares of our stock as
capital assets for U.S. federal income tax purposes (generally, assets held for investment). This discussion is based upon current
provisions of the Code, the regulations promulgated thereunder and judicial and administrative authorities, all of which are subject to
change or differing interpretations by the courts or the Internal Revenue Service, or the IRS, possibly with retroactive effect. No
attempt is made to present a detailed explanation of all U.S. federal income tax concerns affecting us and our shareholders (including
shareholders subject to special rules under U.S. federal income tax law).
The discussions set forth herein do not constitute tax advice. We have not sought and will not seek any ruling from the IRS
regarding any matters discussed herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a
position contrary to those set forth below. This summary does not discuss any aspects of foreign, state or local tax. Prospective
investors must consult their own tax advisers as to the U.S. federal income tax consequences (including the alternative minimum tax
consequences) of acquiring, holding and disposing of shares of our stock, as well as the effects of state, local and non-U.S. tax laws.
Election to be Subject to Tax as a RIC
Through December 31, 2005, we were subject to U.S. federal income tax as an ordinary corporation under Subchapter C of the
Code. Effective beginning on January 1, 2006 we met the criteria specified below to qualify as a RIC, and elected to be treated as a
RIC under Subchapter M of the Code with the filing of our U.S. federal income tax return for 2006. To qualify for treatment as a RIC
we must, among other things, meet certain source of income and asset diversification requirements (as described below). In addition,
we must distribute to our stockholders, in respect of each taxable year, dividends for federal income tax purposes of an amount
generally at least equal to 90% of our “investment company taxable income,” which is generally equal to the sum of our net ordinary
income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses, determined without
regard to any deduction for distributions paid, or the “Annual Distribution Requirement.” Upon satisfying these requirements in
respect of a taxable year, we generally will not be subject to corporate taxes on any income we distribute to our stockholders as
dividends for federal income tax purposes, which will allow us to reduce or eliminate our liability for corporate-level income tax.
On December 31, 2005, immediately before the effective date of our RIC election, we held assets with “built-in gains,” which
are assets whose fair market value as of the effective date of the election exceeded their tax basis as of such date. We elected to
recognize all of our net built-in gains on such assets at the time of the conversion and paid tax on the built-in gain with the filing of
our 2005 U.S. federal income tax return. In making this election, we marked our portfolio investments and other assets to market at the
time of our RIC election and paid approximately $294,000 in income tax on the resulting gains.
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Taxation as a Regulated Investment Company
For any taxable year in which we:
qualify as a RIC; and
distribute dividends for federal income tax purposes to our shareholders of an amount at least equal to the Annual
Distribution Requirement;
We generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net
capital gain (i.e., net realized long-term capital gains in excess of net realized short-term capital losses) we distribute (or are deemed to
distribute) as dividends for U.S. federal income tax purposes to stockholders with respect to that taxable year.
As described above, we made the election to recognize built-in gains as of the effective date of our election to be treated as a
RIC and therefore were not subject to built-in gains tax when we sold those assets. However, if we subsequently acquire built-in gain
assets from a C corporation in a carryover basis transaction, then we may be subject to tax on the gains recognized by us on
dispositions of such assets unless we make a special election to pay corporate-level tax on such built-in gain at the time the assets are
acquired. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or
deemed distributed) as dividends for U.S. federal income tax purposes to our stockholders.
In order to qualify as a RIC for federal income tax purposes and obtain the tax benefits of RIC status, in addition to satisfying
the Annual Distribution Requirement, we must, among other things:
have in effect at all times during each taxable year an election to be regulated as a business development company under
the 1940 Act;
derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain
securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of
investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly traded
partnership”, or the 90% Income Test;
diversify our holdings so that at the end of each quarter of the taxable year:
o
o
at the close of each quarter of each taxable year, at least 50% of the value of our assets consists of cash, cash
equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities
of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the
outstanding voting securities of such issuer; and
at the close of each quarter of each taxable year, no more than 25% of the value of our assets is invested in
(i) securities (other than U.S. government securities or securities of other RICs) of one issuer, (ii) securities of
two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in
the same or similar or related trades or businesses or (iii) securities of one or more “qualified publicly traded
partnerships”, or the Diversification Tests.
We may invest in partnerships which may result in our being subject to state, local or foreign income, franchise or other tax
liabilities. In addition, some of the income and fees that we may recognize will not be qualifying income under the 90% Income Test.
In order to mitigate the risk that such income and fees would disqualify us as a RIC as a result of a failure to satisfy the 90% Income
Test, we may be required to recognize such income and fees indirectly through one or more entities classified as corporations for U.S.
federal income tax purposes. Such corporations generally will be subject to corporate income taxes on their earnings, which
ultimately will reduce our return on such income and fees.
As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income and gains unless we
make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in respect of each
calendar year of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and
elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the 1-year period
ending October 31 of each such calendar year and (3) any ordinary income and capital gain net income realized, but not distributed, in
preceding calendar years, or the Excise Tax Avoidance Requirement. We are not subject to this excise tax on any amount on which we
incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of
current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next
taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may
be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S.
federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we
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choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from
our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the
distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
Under applicable Treasury regulations and other administrative guidance issued by the IRS, we are permitted to treat certain
distributions payable in our stock as taxable distributions that will satisfy the Annual Distribution Requirement as well as the Excise
Tax Avoidance Requirement provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable
stockholders receiving such distributions will be required to include the full amount of the such distributions as ordinary income (or as
long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and
accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be subject to tax
with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in
order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on
the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to
withhold U.S. tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in stock.
In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on
distributions, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to make
taxable distributions that are payable in part in our common stock.
We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash.
For example, if we hold debt obligations that are treated under applicable tax rules as having OID (such as debt instruments with PIK
interest provisions or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in
income each taxable year a portion of the OID that accrues over the life of the obligation, regardless of whether cash representing such
income is received by us in the same taxable year. Because any OID accrued is generally required to be included in our investment
company taxable income for the taxable year of accrual, we may be required to make a distribution to our stockholders in order to
satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any
corresponding cash amount.
Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of
such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending
on how long we held a particular warrant.
We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax
Avoidance Requirement, or collectively, the Distribution Requirements. However, under the 1940 Act, we are not permitted to make
distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage”
tests are met. See “Regulation—Senior Securities; Coverage Ratio.” We may be restricted from making distributions under the terms
of our debt obligations themselves unless certain conditions are satisfied. Moreover, our ability to dispose of assets to meet the
Distribution Requirements may be limited by (1) the illiquid nature of our portfolio, or (2) other requirements relating to our status as
a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirements, we may make such
dispositions at times that, from an investment standpoint, are not advantageous. If we are prohibited from making distributions or are
unable to obtain cash from other sources to make the distributions, we may fail to be subject to tax as a RIC, which would result in us
becoming subject to corporate-level income taxes.
In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC
Distribution Requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, as amended, and
SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We
may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC
status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance
with the SBA regulations may cause us to fail to be subject to tax as a RIC, which would result in us becoming subject to corporate-
level income taxes.
Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other
things, (i) convert distributions that would otherwise constitute qualified dividend income into ordinary income, (ii) treat distributions
that would otherwise be eligible for deductions available to certain U.S. corporations under the Code as ineligible for such treatment,
(iii) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gains into short-
term capital gains or ordinary income, (v) convert short-term capital losses into long-term capital losses, (vi) convert an ordinary loss
or deduction into a capital loss (the deductibility of which is more limited), (vii) cause us to recognize income or gain without a
corresponding receipt of cash, (viii) adversely alter the characterization of certain complex financial transactions, and (ix) produce
gross income that will not constitute qualifying gross income for purposes of the 90% Income Test. These rules also could affect the
amount, timing and character of distributions to stockholders.
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A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income.” If our otherwise
deductible expenses in a given taxable year exceed our ordinary taxable gross income (e.g., as the result of large amounts of equity-
based compensation), we would incur a net operating loss for that taxable year. However, a RIC is not permitted to carry back or carry
forward net operating losses, respectively, to prior and subsequent taxable years, and such net operating losses do not pass through to
the RIC’s stockholders. In addition, deductible expenses can be used only to offset investment company taxable income, not net
capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the
RIC’s investment company taxable income, but may carry forward such net capital losses, and generally use them to offset capital
gains indefinitely. Due to these limits on the deductibility of expenses and net capital losses, we may for tax purposes have aggregate taxable
income for several taxable years that we are required to distribute and that is taxable to our stockholders even if such taxable income is
greater than the aggregate net income we actually earned during those taxable years. Such required distributions may be made from our cash
assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital
gains from such transactions, you may receive a larger capital gain distribution than you would have received in the absence of such
transactions.
Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers,
may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States
does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties with many foreign countries that
may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be
determined at this time since the amount of our assets to be invested within various countries is not now known. We do not anticipate being
eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as having been paid by its shareholders.
If we acquire the equity securities of certain foreign corporations that earn at least 75% of their annual gross income from
passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments
producing such passive income, or PFICs, we could be subject to federal income tax and additional interest charges on “excess
distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually
received by us is timely distributed to our shareholders to the extent that such income or gain is attributable to our ownership of PFIC
stock in a prior taxable year. We would not be able to pass through to our shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any such election could require us to recognize taxable
income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in PFICs to minimize our
liability for any such taxes and related interest charges.
If we hold greater than 10% of the interests treated as equity for U.S. federal income tax purposes in a foreign corporation that is
treated as a controlled foreign corporation, or CFC, we may be treated as receiving a deemed distribution (taxable as ordinary income)
each taxable year from such foreign corporation in an amount equal to our pro rata share of the corporation’s income for such taxable
year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such
taxable year. We would be required to include the amount of a deemed distribution from a CFC when computing our investment
company taxable income as well as in determining whether we satisfy the distribution requirements applicable to RICs, even to the
extent the amount of our income deemed recognized from the CFC exceeds the amount of any actual distributions from the CFC and
our proceeds from any sales or other dispositions of CFC stock during a taxable year. In general, a foreign corporation will be
considered a CFC if greater than 50% of the shares of the corporation, measured by reference to combined voting power or value, is
owned (directly, indirectly or by attribution) by U.S. Shareholders. A “U.S. Shareholder,” for this purpose, is any U.S. person that
possesses (actually or constructively) 10% or more of the combined voting power or value of all classes of shares of a foreign
corporation. Furthermore, under recently proposed Treasury Regulations, certain income derived by us from a CFC would generally
constitute qualifying income for purposes of determining our ability to be subject to tax as a RIC only to the extent the CFC makes
distributions of that income to us in the same year of the CFC in which we are treated as having received a deemed distribution of
such income. As such, we may limit and/or manage our holdings in issuers that could be treated as CFCs in order to limit our tax
liability or maximize our after-tax return from these investments.
Our functional currency, for U.S. federal income tax purposes, is the U.S. dollar. Under the Code, foreign exchange gains and
losses realized by us in connection with certain transactions involving foreign currencies, or payables or receivables denominated in a
foreign currency, as well as certain non-U.S. dollar denominated debt securities, certain foreign currency futures contracts, foreign
currency option contracts, foreign currency forward contracts, and similar financial instruments are subject to Code provisions that
generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to
our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative
currency positions or currency derivatives not used for hedging purposes) also could, under future Treasury regulations, produce
income not among the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income.
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Failure to Qualify as a Regulated Investment Company
If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to
qualify as a RIC for such taxable year if certain relief provisions are applicable (which may, among other things, require us to pay
certain corporate-level federal taxes or to dispose of certain assets).
If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject
to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would
they be required to be made. Such distributions would be taxable to our stockholders and provided certain holding period and other
requirements were met, could qualify for treatment as “qualified dividend income” eligible for the 20% maximum U.S. federal income
tax rate if earned by certain U.S. resident non-corporate stockholders to the extent of our current and accumulated earnings and profits.
Subject to certain limitations under the Code, corporate distributions generally would be eligible for the dividends-received deduction
with respect to distributions current and accumulated earnings and profits if earned by certain U.S. resident corporate stockholders.
Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of
the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent
taxable year, we would be required to satisfy the RIC qualification requirements for that taxable year and dispose of any earnings and
profits from any taxable year in which we failed to qualify as a RIC. Subject to a limited exception applicable to a corporation that
qualified as a RIC under Subchapter M of the Code for at least one taxable year prior to disqualification and that requalify as a RIC no
later than the second taxable year following the nonqualifying taxable year, we also could be subject to tax on any unrealized net built-
in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent five
taxable years, unless we made a special election to incur a corporate-level income tax on such built-in gain at the time of our
requalification as a RIC.
DETERMINATION OF NET ASSET VALUE
We determine the NAV per share of our common stock quarterly. The NAV per share is equal to the value of our total assets
minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. As of the
date of this report, we do not have any preferred stock outstanding.
At December 31, 2018, approximately 96.7% of our total assets represented investments in portfolio companies whose fair value
is determined in good faith by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for
those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined
in good faith by the Board of Directors. Our investments are carried at fair value in accordance with the 1940 Act and ASC Topic 946
and measured in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Our debt securities are primarily
invested in venture capital-backed companies in technology-related industries including technology, drug discovery and development,
biotechnology, life sciences, healthcare, and sustainable and renewable technology at all stages of development. Given the nature of
lending to these types of businesses, substantially all of our investments in these portfolio companies are considered Level 3 assets
under ASC Topic 820 because there is no known or accessible market or market indexes for these investment securities to be traded or
exchanged. As such, we value substantially all of our investments at fair value as determined in good faith pursuant to a consistent
valuation policy by our Board of Directors in accordance with the provisions of ASC Topic 820 and the 1940 Act. Due to the inherent
uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our
investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had
a readily available market existed for such investments, and the differences could be material.
We may from time to time engage one or more independent valuation firms to provide us with valuation assistance with respect
to certain of our portfolio investments. We engage independent valuation firms on a discretionary basis. Specifically, on a quarterly
basis, we will identify portfolio investments with respect to which an independent valuation firm will assist in valuing. We select these
portfolio investments based on a number of factors, including, but not limited to, the potential for material fluctuations in valuation
results, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.
We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the
fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services.
The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of
Directors is ultimately, and solely, responsible for determining the fair value of our investments in good faith.
With respect to investments for which market quotations are not readily available or when such market quotations are deemed
not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below:
(1) our quarterly valuation process begins with each portfolio company being initially valued by the investment professionals
responsible for the portfolio investment;
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(2) preliminary valuation conclusions are then documented and business-based assumptions are discussed with our investment
committee;
(3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as
provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate; and
(4) the Board of Directors, upon the recommendation of the Audit Committee, discusses valuations and determines the fair value
of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation
firm and the investment committee.
ASC Topic 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy
which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC Topic 820 also requires
disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC Topic
820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC Topic 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
We have categorized all investments recorded at fair value in accordance with ASC Topic 820 based upon the level of judgment
associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC Topic 820 and directly related to the
amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets
carried at Level 1 fair value generally are equities listed in active markets.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in
connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets
that are generally included in this category are publicly held debt investments and warrants held in a public company.
Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the
measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and
equities held in a private company.
Debt Investments
We follow the guidance set forth in ASC Topic 820 which establishes a framework for measuring the fair value of assets and
liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value
measures on earnings. Our debt securities are primarily invested in venture capital-backed companies in technology-related markets
including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable
technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of our investments
in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or
market indexes for debt instruments for these investment securities to be traded or exchanged. In addition, we may, from time to time,
invest in public debt of companies that meet our investment objectives. These investments are considered Level 2 assets.
In making a good faith determination of the value of our investments, we generally start with the cost basis of the investment,
which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued as earned. We
then apply the valuation methods as set forth below.
We apply a procedure for debt investments that assumes the sale of each investment in a hypothetical market to a hypothetical
market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the
underlying security was simply repaid or extinguished, but includes an exit concept. We determine the yield at inception for each debt
investment.
We then use senior secured, leveraged loan yields provided by third party providers to determine the change in market yields
between inception of the debt investments and the measurement date. Industry specific indices and other relevant market data are used
to benchmark/assess market-based movements.
Under this process, we also evaluate the collateral for recoverability of the debt investments. We consider each portfolio
company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a credit adjusted
hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then
discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.
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Our process includes an analysis of, among other things, the underlying investment performance, the current portfolio
company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yields and
interest rate spreads of similar securities as of the measurement date. We value our syndicated debt investments using broker quotes
and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, we may
consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would
be received in a liquidation analysis.
We record unrealized depreciation on investments when we believe that an investment has decreased in value, including where
collection of a debt investment is doubtful or, if under the in-exchange premise, when the value of a debt investment is less than the
amortized cost of the investment. Conversely, where appropriate, we record unrealized appreciation if we believe that the underlying
portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value or, if under the in-
exchange premise, the value of a debt investment is greater than amortized cost.
When originating a debt investment, we generally receive warrants or other equity-related securities from the borrower. We
determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date
of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting
discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the
life of the loan.
Debt investments that are traded on a public exchange are valued at the prevailing market price as of the valuation date.
Equity-Related Securities and Warrants
Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at
period end. We have a limited amount of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly
traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date.
We estimate the fair value of warrants using a Black Scholes option pricing model, or OPM. At each reporting date, privately
held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio
company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity
ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external
event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is
utilized to corroborate our valuation of the warrant and equity-related securities. We periodically review the valuation of our portfolio
companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may
have increased or decreased since the last valuation measurement date.
Escrow Receivables
Escrow receivables are collected in accordance with the terms and conditions of the escrow agreement. Escrow balances are
typically distributed over a period greater than one year and may accrue interest during the escrow period. Escrow balances are
measured for collectability on at least a quarterly basis and fair value is determined based on the amount of the estimated recoverable
balances and the contractual maturity date. As of December 31, 2018, there were no material past due escrow receivables.
Determinations In Connection With Offerings
In connection with each offering of shares of our common stock, the Board of Directors or a committee thereof is required to
make the determination that we are not selling shares of our common stock at a price below our then current NAV at the time at which
the sale is made, unless it is determined by the Board of Directors that such sale is in the best interests of our stockholders and such
sale is otherwise approved by our stockholders. The Board of Directors considers the following factors, among others, in making such
determination:
the NAV of our common stock disclosed in the most recent periodic report we filed with the SEC;
our management’s assessment of whether any material change in the NAV has occurred (including through the realization
of net gains on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed
NAV to the period ending two days prior to the date of the sale of our common stock; and
the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has
determined reflects the current NAV of our common stock, which is generally based upon the NAV of our common stock
disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s
assessment of any material change in the NAV of our common stock since the date of the most recently disclosed NAV of
our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering.
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Importantly, this determination does not require that we calculate NAV in connection with each offering of shares of our
common stock, but instead it involves the determination by the Board of Directors or a committee thereof that we are not selling
shares of our common stock at a price below the then current NAV at the time at which the sale is made.
Moreover, to the extent that there is a possibility that we may (i) issue shares of our common stock at a price below the then
current NAV of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we will provide to the
SEC in a registration statement to which a prospectus will be a part) to suspend the offering of shares of our common stock pursuant to
a prospectus if the NAV fluctuates by certain amounts in certain circumstances until such prospectus is amended, the Board of
Directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is
no longer the possibility of the occurrence of such, events or to undertake to determine NAV within two days prior to any such sale to
ensure that such sale will not be below our then current NAV, and, in the case of clause (ii) above, to comply with such undertaking or
to undertake to determine NAV to ensure that such undertaking has not been triggered.
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously
with all determinations described in this section and these records will be maintained with other records we are required to maintain
under the 1940 Act.
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Item 1A.
Risk Factors
Investing in our securities may be speculative and involves a high degree of risk. You should consider carefully the risks
described below and all other information contained in this Annual Report, including our financial statements and the related notes
and the schedules and exhibits to this Annual Report. The risks set forth below are not the only risks we face. Additional risks and
uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If
any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In
such case, our NAV and the trading price of our securities could decline, and you may lose all or part of your investment.
Risks Related to our Business Structure
As an internally managed business development company, we are subject to certain restrictions that may adversely affect our
business.
As an internally managed business development company, the size and categories of our assets under management is limited,
and we are unable to offer as wide a variety of financial products to prospective portfolio companies and sponsors (potentially limiting
the size and diversification of our asset base). We therefore may not achieve efficiencies of scale and greater management resources
available to externally managed business development companies.
Additionally, as an internally managed business development company, our ability to offer more competitive and flexible
compensation structures, such as offering both a profit-sharing plan and an equity incentive plan, is subject to the limitations imposed
by the 1940 Act, which limits our ability to attract and retain talented investment management professionals. As such, these limitations
could inhibit our ability to grow, pursue our business plan and attract and retain professional talent, any or all of which may have a
negative impact on our business, financial condition and results of operations.
As an internally managed business development company, we are dependent upon key management personnel for their time
availability and for our future success, particularly Manuel A. Henriquez, and if we are not able to hire and retain qualified
personnel, or if we lose any member of our senior management team, our ability to implement our business strategy could be
significantly harmed.
As an internally managed business development company, our ability to achieve our investment objectives and to make
distributions to our stockholders depends upon the performance of our senior management. We depend upon the members of our
senior management, particularly Mr. Henriquez, as well as other key personnel for the identification, final selection, structuring,
closing and monitoring of our investments. These employees have critical industry experience and relationships on which we rely to
implement our business plan. If we lose the services of Mr. Henriquez or any senior management members, we may not be able to
operate the business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer.
Furthermore, we do not have an employment agreement with Mr. Henriquez or our senior management that restricts them from
creating new investment vehicles subject to compliance with applicable law. We believe our future success will depend, in part, on our
ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and
retaining such personnel, we may not be able to operate our business as we expect. In connection with our recruiting, branding and
marketing efforts, we may, among other things, make charitable contributions in amounts we believe to be immaterial and that do not
exceed $500,000 in the aggregate in any year. We believe that many of these contributions help us raise our profile in the communities
and benefit us in attracting and retaining talent and investment opportunities.
As an internally managed business development company, our compensation structure is determined and set by our Board of
Directors. This structure currently includes salary and bonus and incentive compensation, which is issued through grants and
subsequent vesting of restricted stock. We are not generally permitted by the 1940 Act to employ an incentive compensation structure
that directly ties performance of our investment portfolio and results of operations to compensation owing to our granting of restricted
stock as incentive compensation.
Members of our senior management may receive offers of more flexible and attractive compensation arrangements from other
companies, particularly from investment advisers to externally managed business development companies that are not subject to the
same limitations on incentive-based compensation that we, as an internally managed business development company are subject to.
We do not currently have agreements with certain members of our senior management that prohibit them from leaving and competing
with our business and certain States limit our ability to have such agreements. A departure by one or more members of our senior
management could have a negative impact on our business, financial condition and results of operations.
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Our business model depends to a significant extent upon strong referral relationships with venture capital and private equity
fund sponsors, and our inability to develop or maintain these relationships, or the failure of these relationships to generate
investment opportunities, could adversely affect our business.
We expect that members of our management team will maintain their relationships with venture capital and private equity firms,
and we will rely to a significant extent upon these relationships to provide us with our deal flow. If we fail to maintain our existing
relationships, our relationships become strained as a result of enforcing our rights with respect to non-performing portfolio companies
in protecting our investments or we fail to develop new relationships with other firms or sources of investment opportunities, then we
will not be able to grow our investment portfolio. In addition, persons with whom members of our management team have
relationships are not obligated to provide us with investment opportunities and, therefore, there is no assurance that such relationships
will lead to the origination of debt or other investments.
We may be the target of litigation.
We may be the target of securities litigation in the future, particularly if the trading price of our common stock and our debt
securities fluctuates significantly. We could also generally be subject to litigation, including derivative actions by our stockholders.
Any litigation could result in substantial costs and divert management’s attention and resources from our business and cause a material
adverse effect on our business, financial condition and results of operations.
We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively.
A number of entities compete with us to make the types of investments that we plan to make in prospective portfolio companies.
We compete with a large number of venture capital and private equity firms, as well as with other investment funds, business
development companies, investment banks and other sources of financing, including traditional financial services companies such as
commercial banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial,
technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and/or access to
funding sources that are not available to us. This may enable some competitors to make loans with interest rates that are comparable to
or lower than the rates that we typically offer.
A significant increase in the number and/or the size of our competitors, including traditional commercial lenders and other
financing sources, in technology-related industries could force us to accept less attractive investment terms. We may be unable to
capitalize on certain opportunities if we do not match competitors’ pricing, terms and structure. If we do match competitors’ pricing,
terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of
investments, establish more relationships and build their market shares. An increasing number of competitors may also have the effect
of compressing our margins, which could harm our ability to retain employees, increase our operating costs, and decrease the amount
and frequency of future distributions. Furthermore, many potential competitors are not subject to the regulatory restrictions that the
1940 Act imposes on us as a business development company or that the Code imposes on us as a RIC. If we are not able to compete
effectively, our business, financial condition, and results of operations will be adversely affected. As a result of this competition, there
can be no assurance that we will be able to identify and take advantage of attractive investment opportunities, or that we will be able
to fully invest our available capital.
If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which could
adversely affect our financial condition and results of operations and cause the value of your investment to decline.
Our ability to achieve our investment objective will depend on our ability to sustain growth. Sustaining growth will depend, in
turn, on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment
criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the
investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. Organizational
growth and scale-up of our investments could strain our existing managerial, investment, financial and other resources. Management
of our growth could divert financial resources from other projects. Failure to manage our future growth effectively could lead to a
decrease in our future distributions and have a material adverse effect on our business, financial condition and results of operations.
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Because we intend to distribute substantially all of our income to our stockholders in order to qualify as a RIC, we will continue
to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our
ability to grow will be impaired.
In order to satisfy the tax requirements applicable to a RIC and to minimize or avoid being subject to income and excise taxes,
we intend to make distributions to our stockholders treated as dividends for U.S. federal income tax purposes generally of an amount
at least equal to substantially all of our net ordinary income and realized net capital gains except for certain realized net capital gains,
which we may retain, pay applicable income taxes with respect thereto and elect to treat as deemed distributions to our stockholders.
As a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other
senior securities, which includes all of our borrowings and any preferred stock that we may issue in the future, of at least 150%,
subject to certain disclosure requirements. This requirement limits the amount that we may borrow. This limitation may prevent us
from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you
that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms
of any of our outstanding borrowings. If we are unable to incur additional debt, we may be required to raise additional equity at a time
when it may be disadvantageous to do so. In addition, shares of closed-end investment companies have recently traded at discounts to
their NAV.
This characteristic of closed-end investment companies is separate and distinct from the risk that our NAV per share may
decline. We cannot predict whether shares of our common stock will trade above, at or below our NAV. If our common stock trades
below its NAV, we generally will not be able to issue additional shares of our common stock at its market price without first obtaining
the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we
could be forced to curtail or cease new lending and investment activities, and our NAV could decline. In addition, our results of
operations and financial condition could be adversely affected.
Because most of our investments typically are not in publicly-traded securities, there is uncertainty regarding the value of our
investments, which could adversely affect the determination of our NAV.
At December 31, 2018, portfolio investments, whose fair value is determined in good faith by the Board of Directors, were
approximately 96.7% of our total assets. We expect our investments to continue to consist primarily of securities issued by privately-
held companies, the fair value of which is not readily determinable. In addition, we are not permitted to maintain a general reserve for
anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or
loss for any asset that we believe has increased or decreased in value.
There is no single standard for determining fair value in good faith. We value these securities at fair value as determined in good
faith by our Board of Directors, based on the recommendations of our Audit Committee. In making a good faith determination of the
value of these securities, we generally start with the cost basis of each security, which includes the amortized OID and PIK interest, if
any. The Audit Committee uses its best judgment in arriving at the fair value of these securities. As a result, determining fair value
requires that judgment be applied to the specific facts and circumstances of each portfolio investment while applying a valuation
process for the types of investments we make, which includes but is not limited to deriving a hypothetical exit price.
However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. Because such
valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the
values that would be assessed if a ready market for these securities existed. We adjust quarterly the valuation of our portfolio to reflect
the Board of Directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in
our statement of operations as net change in unrealized appreciation or depreciation. Our NAV could be adversely affected if our
determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the
disposal of such securities.
Because we have substantial indebtedness, there could be increased risk in investing in our company.
Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in
the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders
would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or
loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered
a speculative investment technique. If the value of our assets increases, then leverage would cause the NAV attributable to our
common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases,
leverage would cause the NAV attributable to our common stock to decline more than it otherwise would have had we not used
leverage. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to
increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it
would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to
service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions
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and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity. If we are not
able to service our substantial indebtedness, our business could be harmed materially.
Our secured credit facilities with Wells Fargo Capital Finance, LLC, or the Wells Facility, and MUFG Union Bank, N.A., or the
Union Bank Facility and, together with the Wells Facility, our Credit Facilities, our 2022 Notes, our 2024 Notes, our 2025 Notes, our
2033 Notes, our 2027 Asset-Backed Notes, and our 2022 Convertible Notes (as each term is defined below) contain financial and
operating covenants that could restrict our business activities, including our ability to declare dividend distributions if we default
under certain provisions.
As of December 31, 2018, we had $13.1 million of borrowings outstanding under the Wells Facility and $39.8 million of
borrowings outstanding on the Union Bank Facility. In addition, as of December 31, 2018, we had approximately $149.0 million of
indebtedness outstanding incurred by our SBIC subsidiary, approximately $150.0 million in aggregate principal amount of 4.625%
notes due 2022, or the 2022 Notes, approximately $83.5 million in aggregate principal amount of 6.25% notes due 2024, or the 2024
Notes, approximately $75.0 million in aggregate principal amount of 5.25% notes due 2025, or the 2025 Notes, approximately $40.0
million in aggregate principal amount of 6.25% notes due 2033, or the 2033 Notes, approximately $200.0 million in aggregate
principal amount of fixed rate asset-backed notes issued in November 2018, or the 2027 Asset-Backed Notes, in connection with our
$284.8 million debt securitization, or the 2018 Debt Securitization, and approximately $230.0 million in aggregate principal amount of
4.375% convertible notes due 2022, or the 2022 Convertible Notes. Additionally, subsequent to December 31, 2018, we had
approximately $250.0 million in aggregate principal amount of fixed rate asset-backed notes issued in January 2019, or the 2028
Asset-Backed Notes and, together with the 2027 Asset-Backed Notes, the Asset-Backed Notes, in connection with our $357.2 million
debt securitization, or the 2019 Debt Securitization and, together with the 2018 Debt Securitization, the Debt Securitizations.
There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all.
If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity
resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new
commitments or fundings to our portfolio companies.
Until December 6, 2018, as a business development company, under the 1940 Act, generally, we were not permitted to incur
indebtedness unless immediately after such borrowing we had an asset coverage for total borrowings of at least 200% (i.e., the amount
of debt may not exceed 50% of the value of our assets). The Small Business Credit Availability Act, or the SBCAA, which was signed
into law in March 2018, modifies this section of the 1940 Act and decreases this percentage from 200% to 150% (subject to either
stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested
persons). On September 4, 2018 and December 6, 2018, our Board of Directors, including a “required majority” (as such term is
defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved the application to us of the 150% minimum
asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, as of December 7, 2018, we are able to incur additional
indebtedness, subject to certain disclosure requirements and, therefore, your risk of an investment in us may increase. Rating agencies
have reviewed, and may continue to review, our credit ratings and those of other business development companies in light of this new
law as well as any corresponding changes to asset coverage ratios and, in certain cases, downgrade such ratings. Such a downgrade in
our credit ratings may adversely affect our securities.
As of December 31, 2018, our asset coverage ratio under our regulatory requirements as a business development company was
214.6% excluding our SBIC debentures as a result of our exemptive order from the SEC that allows us to exclude all SBA leverage
from our asset coverage ratio and was 197.2% when including all SBA leverage.
Based on assumed leverage equal to 102.6% of our net assets as of December 31, 2018, our investment portfolio would have
been required to experience an annual return of at least 2.8% to cover annual interest payments on our additional indebtedness.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming
that we employ (1) our actual asset coverage ratio as of December 31, 2018, (excluding our SBA debentures as permitted by our
exemptive relief), (2) a hypothetical asset coverage ratio of 200% (excluding our SBA debentures as permitted by our exemptive
relief), and (3) a hypothetical asset coverage ratio of 150% (excluding our SBA debentures as permitted by our exemptive relief), each
at various annual returns on our portfolio as of December 31, 2018, net of expenses.
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The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table
below.
Annual Return on Our Portfolio
(Net of Expenses)
-10%
-5%
0%
5%
10%
Corresponding return to common stockholder assuming actual asset coverage
as of December 31, 2018 (214.6%) (1)
(26.15%) (15.97%) (5.79%) 4.38% 14.56%
Corresponding return to common stockholder assuming 200% asset coverage (2) (28.18%) (17.36%) (6.53%) 4.30% 15.13%
Corresponding return to common stockholder assuming 150% asset coverage (3) (43.82%) (28.00%) (12.17%) 3.65% 19.48%
(1)
(2)
(3)
Assumes $1.9 billion in total assets, $980.5 million in debt outstanding, $955.4 million in stockholders’ equity, and an average cost of funds of 5.6%, which is
the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes,
2022 Convertible Notes, and Credit Facilities for the period ended December 31, 2018. Actual interest payments may be different.
Assumes $2.1 billion in total assets including debt issuance costs on a pro forma basis, $1.1 billion in debt outstanding, $955.4 million in stockholders’ equity,
and an average cost of funds of 5.6%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025
Notes, 2033 Notes, 2027 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended December 31, 2018, along with the
hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 200% asset coverage. Actual
interest payments may be different.
Assumes $3.0 billion in total assets including debt issuance costs on a pro forma basis, $2.1 billion in debt outstanding, $955.4 million in stockholders’ equity,
and an average cost of funds of 5.6%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025
Notes, 2033 Notes, 2027 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended December 31, 2018, along with the
hypothetical estimated incremental cost of debt that would be incurred on offering the maximum permissible debt under the 150% asset coverage. Actual
interest payments may be different.
It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the
future could constrain our ability to grow our business.
Under our borrowings and our Credit Facilities, current lenders have, and any future lender or lenders may have, fixed dollar
claims on our assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with
respect to our assets pledged as collateral under the Credit Facilities. Our Credit Facilities and borrowings also subject us to various
financial and operating covenants, including, but not limited to, maintaining certain financial ratios and minimum tangible net worth
amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we may grant a
security interest in our assets in connection with any such credit facilities and borrowings.
Our Credit Facilities generally contain customary default provisions such as a minimum net worth amount, a profitability test,
and a restriction on changing our business and loan quality standards. In addition, our Credit Facilities require or are expected to
require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially the business of our
portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other
things, in termination of the availability of further funds under the facilities and accelerated maturity dates for all amounts outstanding
under the facilities, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we
finance through the facilities. This could reduce our revenues and, by delaying any cash payment allowed to us under our facilities
until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and our ability to
make distributions sufficient to maintain our ability to be subject to tax as a RIC.
The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain
sufficient capital in the future, we may be forced to reduce or discontinue our operations, not be able to make new investments, or
otherwise respond to changing business conditions or competitive pressures.
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In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 Notes, 2033
Notes, 2022 Convertible Notes, and Credit Facilities contain various covenants which, if not complied with, could require
accelerated repayment under the facility or require us to repurchase the 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, or
2022 Convertible Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and
ability to pay distributions.
The credit agreements governing our 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, and Credit
Facilities require us to comply with certain financial and operational covenants. These covenants require us to, among other things,
maintain certain financial ratios, including asset coverage, debt to equity and interest coverage. Our ability to continue to comply with
these covenants in the future depends on many factors, some of which are beyond our control. There are no assurances that we will be
able to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to
obtain a waiver from the lenders under our Credit Facilities and could accelerate repayment under the facilities or the 2022 Notes,
2024 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes and thereby have a material adverse impact on our liquidity, financial
condition, results of operations and ability to pay a sufficient amount of distributions and maintain our ability to be subject to tax as a
RIC. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases. See
“Note 4 – Borrowings”.
Acquisitions or investments that we may pursue could be unsuccessful, consume significant resources and require the
incurrence of additional indebtedness.
We regularly consider acquisitions and investments that complement our existing business. These possible acquisitions and
investments involve or may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a
material effect on our financial condition and operating results.
In particular, if we incur additional debt, our liquidity and financial stability could be impaired as a result of using a significant
portion of available cash or borrowing capacity to finance an acquisition. Moreover, we may face an increase in interest expense or
financial leverage if additional debt is incurred to finance an acquisition, which may, among other things, adversely affect our various
financial ratios and our compliance with the conditions of our existing indebtedness. In addition, such additional indebtedness may be
secured by liens on our assets.
Acquisitions involve numerous other risks, including:
diversion of management time and attention;
failures to identify material problems and liabilities of acquisition targets or to obtain sufficient indemnification rights to
fully offset possible liabilities related to the acquired businesses;
difficulties integrating the operations, technologies and personnel of the acquired businesses;
inefficiencies and complexities that may arise due to unfamiliarity with new assets, businesses or markets;
disruptions to our ongoing business;
inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets
which would reduce future reported earnings;
the inability to obtain required financing for the new acquisition or investment opportunities and our existing business;
the need or obligation to divest portions of an acquired business;
challenges associated with operating in new geographic regions;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;
potential loss of our or the acquired business’ key employees, contractual relationships, suppliers or customers; and
inability to obtain required regulatory approvals.
To the extent we pursue an acquisition that causes us to incur unexpected costs or that fails to generate expected returns, our
financial position, results of operations and cash flows may be adversely affected, and our ability to service indebtedness, including
our outstanding notes, may be negatively impacted.
In addition, we may fail in our pursuit of an acquisition and, instead, one of our competitors may successfully obtain the target
and deprive us of an important opportunity and allow them to grow larger giving them the ability to have a lower cost of capital and
competitive advantage in the market (including by being able to offer better pricing and larger loans) and, as a larger company,
potentially giving them more valuable equity currency to do other transactions.
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We may be unable to obtain debt capital on favorable terms or at all, in which case we would not be able to use leverage to
increase the return on our investments.
If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on
equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make
new commitments or fundings to our portfolio companies. An inability to obtain debt capital may also limit our ability to refinance
existing indebtedness, particularly during periods of adverse credit market conditions when refinancing indebtedness may not be
available under interest rates and other terms acceptable to us or at all.
The Wells Facility and the Union Bank Facility mature in January 2023 and February 2023, respectively, and any inability to
renew, extend or replace our Credit Facilities could adversely impact our liquidity and ability to find new investments or
maintain distributions to our stockholders.
As of December 31, 2018, we had two available secured credit facilities, the Wells Facility and the Union Bank Facility, which
mature in January 2023 and February 2023, respectively. There can be no assurance that we will be able to renew, extend or replace
our Credit Facilities upon maturity on terms that are favorable to us, if at all. Our ability to renew, extend or replace the Credit Facility
will be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to renew, extend
or replace either Credit Facility at the time of its maturity, this could have a material adverse effect on our liquidity and ability to fund
new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC.
We are subject to certain risks as a result of our interests in connection with the Debt Securitizations and our equity interest in
the Securitization Issuers.
On November 1, 2018, in connection with the 2018 Debt Securitization and the offering of the 2027 Asset-Backed Notes by
Hercules Capital Funding Trust 2018-1, or the 2018 Securitization Issuer, we sold and/or contributed to Hercules Capital Funding
2018-1 LLC, as trust depositor, or the 2018 Trust Depositor, certain senior loans made to certain of our portfolio companies, or the
2018 Loans, which the 2018 Trust Depositor in turn sold and/or contributed to the 2018 Securitization Issuer in exchange for 100% of
the equity interest in the 2018 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2018
Securitization Issuer, and not the 2018 Trust Depositor or us, held all of the ownership interest in the 2018 Loans.
On January 22, 2019, in connection with the 2019 Debt Securitization and the offering of the 2028 Asset-Backed Notes by
Hercules Capital Funding Trust 2019-1, or the 2019 Securitization Issuer and, together with the 2018 Securitization Issuer, the
Securitization Issuers, we sold and/or contributed to Hercules Capital Funding 2019-1 LLC, as trust depositor, or the 2019 Trust
Depositor and, together with the 2018 Trust Depositor, the Trust Depositors, certain senior loans made to certain of our portfolio
companies, or the 2019 Loans and, together with the 2018 Loans, the Securitization Loans, which the 2019 Trust Depositor in turn
sold and/or contributed to the 2019 Securitization Issuer in exchange for 100% of the equity interest in the 2019 Securitization Issuer,
cash proceeds and other consideration. Following these transfers, the 2019 Securitization Issuer, and not the 2019 Trust Depositor or
us, held all of the ownership interest in the 2019 Loans.
As a result of the Debt Securitizations, we hold, indirectly through the Trust Depositors, 100% of the equity interests in the
Securitization Issuers. As a result, we consolidate the financial statements of the Trust Depositors and the Securitization Issuers, as
well as our other subsidiaries, in our consolidated financial statements. Because each of the Trust Depositors and the Securitization
Issuers is disregarded as an entity separate from its owners for U.S. federal income tax purposes, the sale or contribution by us to the
Trust Depositors, and by the Trust Depositors to the Securitization Issuers, as applicable, did not constitute a taxable event for U.S.
federal income tax purposes. If the IRS were to take a contrary position, there could be a material adverse effect on our business,
financial condition, results of operations or cash flows.
Further, a failure of either of the Securitization Issuers to be treated as a disregarded entity for U.S. federal income tax purposes
would constitute an event of default pursuant to the applicable indenture under the Debt Securitizations, upon which the trustee under
the 2018 Debt Securitization, or the 2018 Trustee, or the 2019 Debt Securitization, or the 2019 Trustee and, together with the 2018
Trustee, the Securitization Trustees, as applicable, may and will at the direction of a supermajority of the holders of the 2027 Asset-
Backed Notes, or the 2027 Noteholders, or the holders of the 2028 Asset-Back Notes, or the 2028 Noteholders and, together with the
2027 Noteholders, the Securitization Noteholders, as the case may be, declare the applicable Asset-Backed Notes, to be immediately
due and payable and exercise remedies under the applicable indenture, including (i) to institute proceedings for the collection of all
amounts then payable on the applicable Asset-Backed Notes, or under the applicable indenture, enforce any judgment obtained, and
collect from the applicable Securitization Issuer and any other obligor upon the applicable Asset-Backed Notes monies adjudged due;
(ii) institute proceedings from time to time for the complete or partial foreclosure of the applicable indenture with respect to the
property of the applicable Securitization Issuer; (iii) exercise any remedies as a secured party under the relevant Uniform Commercial
Code and take other appropriate action under applicable law to protect and enforce the rights and remedies of the applicable
Securitization Trustee and the applicable Securitization Noteholders; or (iv) sell the property of the applicable Securitization Issuer or
any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any matter permitted by
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law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or
cash flows.
An event of default in connection with the Debt Securitizations could give rise to a cross-default under our other material
indebtedness.
The documents governing our other material indebtedness contain customary cross-default provisions that could be triggered if
an event of default occurs in connection with either of the Debt Securitizations. An event of default with respect to our other
indebtedness could lead to the acceleration of such indebtedness and the exercise of other remedies as provided in the documents
governing such other indebtedness. This could have a material adverse effect on our business, financial condition, results of operations
and cash flows and may result in our inability to make distributions sufficient to maintain our ability to be subject to tax as a RIC.
We may not receive cash distributions in respect of our indirect ownership interests in the Securitization Issuers.
Apart from fees payable to us in connection with our role as servicer of the Securitization Loans and the reimbursement of
related amounts under the documents governing the Debt Securitizations, we receive cash in connection with the Debt Securitizations
only to the extent that the Trust Depositors receive payments in respect of their equity interests in the Securitization Issuers. The
respective holders of the equity interests in the Securitization Issuers are the residual claimants on distributions, if any, made by the
applicable Securitization Issuer after the respective Securitization Noteholders and other claimants have been paid in full on each
payment date or upon maturity of the applicable Asset-Backed Notes, subject to the priority of payments under the documents
governing the Debt Securitizations. To the extent that the value of a Securitization Issuer’s portfolio of loans is reduced as a result of
conditions in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted
loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the loans, or for any other
reason, the ability of either Securitization Issuer to make cash distributions in respect of the applicable Trust Depositor’s equity
interests would be negatively affected and consequently, the value of the equity interests in such Securitization Issuer would also be
reduced. In the event that we fail to receive cash indirectly from the Securitization Issuers, we could be unable to make distributions, if
at all, in amounts sufficient to maintain our ability to be subject to tax as a RIC.
The interests of the Securitization Noteholders may not be aligned with our interests.
The Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holders of the equity
interests in the Securitization Issuers, as residual claimants in respect of distributions, if any, made by the Securitization Issuers. As
such, there are circumstances in which the interests of the Securitization Noteholders may not be aligned with the interests of holders
of the equity interests in the Securitization Issuers. For example, under the terms of the documents governing the Debt Securitizations,
the Securitization Noteholders have the right to receive payments of principal and interest prior to holders of the equity interests.
For as long as the Asset-Backed Notes remain outstanding, the respective Securitization Noteholders have the right to act in
certain circumstances with respect to the applicable Securitization Loans in ways that may benefit their interests but not the interests
of the respective holders of the equity interests in the Securitization Issuers, including by exercising remedies under the documents
governing the Debt Securitizations.
If an event of default occurs, the applicable Securitization Noteholders will be entitled to determine the remedies to be
exercised, subject to the terms of the documents governing the Debt Securitizations. For example, upon the occurrence of an event of
default with respect to the Asset-Backed Notes, the applicable Securitization Trustee may and will at the direction of the holders of a
supermajority of the applicable Asset-Backed Notes declare the principal, together with any accrued interest, of the notes to be
immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation
on the part of the applicable Securitization Issuer. The applicable Asset-Backed Notes then outstanding will be paid in full before any
further payment or distribution on the equity interest is made. There can be no assurance that there will be sufficient funds through
collections on the Securitization Loans or through the proceeds of the sale of the Securitization Loans in the event of a bankruptcy or
insolvency to repay in full the obligations under the Asset-Backed Notes, or to make any distribution to holders of the equity interests
in the Securitization Issuers.
Remedies pursued by the Securitization Noteholders could be adverse to our interests as the indirect holder of the equity
interests in the Securitization Issuers. The Securitization Noteholders have no obligation to consider any possible adverse effect on
such other interests. Thus, there can be no assurance that any remedies pursued by the Securitization Noteholders will be consistent
with the best interests of the Trust Depositors or that we will receive, indirectly through the Trust Depositors, any payments or
distributions upon an acceleration of the Asset-Backed Notes. Any failure of the Securitization Issuers to make distributions in respect
of the equity interests that we indirectly hold, whether as a result of an event of default and the acceleration of payments on the Asset-
Backed Notes or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash
flows and may result in our inability to make distributions sufficient to maintain our ability to be subject to tax as a RIC.
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Certain events related to the performance of Securitization Loans could lead to the acceleration of principal payments on the
Asset-Backed Notes.
The following constitute rapid amortization events, or Rapid Amortization Events, under the documents governing the Debt
Securitizations: (i) the aggregate outstanding principal balance of delinquent Securitization Loans, and restructured Securitization
Loans that would have been delinquent Securitization Loans had such loans not become restructured loans, in the portfolio of
Securitization Loans held by the applicable Securitization Issuer exceeds 10% of the current aggregate outstanding principal balance
of the Securitization Loans held by such Securitization Issuer for a period of three consecutive months; (ii) the aggregate outstanding
principal balance of defaulted Securitization Loans in the portfolio of Securitization Loans held by the applicable Securitization Issuer
exceeds 5% of the initial outstanding principal balance of the Securitization Loans held by such Securitization Issuer determined as of
November 1, 2018 (in the case of the 2027 Loans) or January 22, 2019 (in the case of the 2028 Loans) for a period of three
consecutive months; (iii) the aggregate outstanding principal balance of the 2027 Asset-Backed Notes or the 2028 Asset-Backed
Notes, as applicable, exceeds the applicable borrowing base for a period of three consecutive months; (iv) either Securitization
Issuer’s pool of Securitization Loans contains Securitization Loans to ten or fewer obligors, as applicable; and (v) the occurrence of an
event of default under the applicable documents governing the Debt Securitizations. After a Rapid Amortization Event has occurred,
subject to the priority of payments under the documents governing the Debt Securitizations, principal collections on the applicable
Securitization Loans will be used to make accelerated payments of principal on the applicable Asset-Backed Notes until the principal
balance of such Asset-Back Notes is reduced to zero. Such an event could delay, reduce or eliminate the ability of the applicable
Securitization Issuer to make distributions in respect of the equity interests that we indirectly hold, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make
distributions sufficient to maintain our ability to be subject to tax as a RIC.
We have certain repurchase obligations with respect to the Securitization Loans transferred in connection with the Debt
Securitizations.
As part of each Debt Securitization, we entered into a sale and contribution agreement and a sale and servicing agreement under
which we would be required to repurchase any Securitization Loan (or participation interest therein) which was sold to the applicable
Securitization Issuer in breach of certain customary representations and warranties made by us or by the applicable Trust Depositor
with respect to such Securitization Loan or the legal structure of the applicable Debt Securitization. To the extent that there is a breach
of such representations and warranties and we fail to satisfy any such repurchase obligation, the applicable Securitization Trustee may,
on behalf of the applicable Securitization Issuer, bring an action against us to enforce these repurchase obligations.
Our investments in a portfolio company, whether debt, equity, or a combination thereof, may lead to our receiving material non-
public information, or MNPI, or obtaining ‘control’ of the target company. Our ability to exit an investment where we have
MNPI or control could be limited and could result in a realized loss on the investment.
If we receive MNPI, or a controlling interest in a portfolio company, our ability to divest ourselves from a debt or equity
investment could be restricted. Causes of such restriction could include market factors, such as liquidity in a private stock, or limited
trading volume in a public company’s securities, or regulatory factors, such as the receipt of MNPI or insider blackout periods, where
we are under legal obligation not to sell. Additionally, we may choose not to take certain actions to protect a debt investment in a
control investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and
potentially incur a realized loss on the investment.
Regulations governing our operations as a business development company may affect our ability to, and the manner in which,
we raise additional capital, which may expose us to risks.
Our business will require a substantial amount of capital. We may acquire additional capital from the issuance of senior
securities, including borrowings, securitization transactions or other indebtedness, or the issuance of additional shares of our common
stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities,
other evidences of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we
refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Until December 6, 2018, as a
business development company, under the 1940 Act, we were not permitted to incur indebtedness unless immediately after such
borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value
of our assets). The SBCAA, which was signed into law in March 2018, modifies this section of the 1940 Act and decreases this
percentage from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a
majority of directors who are not interested persons). On September 4, 2018 and December 6, 2018, our Board of Directors, including
a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved the
application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, as of December
7, 2018, we are able to incur additional indebtedness, subject to certain disclosure requirements and, therefore, your risk of an
investment in us may increase. Rating agencies may also decide to review our credit ratings and those of other business development
companies in light of this new law as well as any corresponding changes to asset coverage ratios and consider downgrading such
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ratings, including a downgrade from an investment grade rating to a non-investment grade rating. Such a downgrade in our credit
ratings may adversely affect our securities. See “—A downgrade, suspension or withdrawal of the credit rating assigned by a rating
agency to us or our debt securities, if any, or change in the debt markets could cause the liquidity or market value of our debt
securities to decline significantly.”
If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a
portion of our investments and repay a portion of our indebtedness at a time when such transaction may be disadvantageous. As a
result of issuing senior securities, we would also be exposed to risks associated with leverage, including an increased risk of loss. If
we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders
would have separate voting rights and might have rights, preferences, or privileges more favorable than those of our common
stockholders and the issuance of preferred stock could have the effect of delaying, deferring, or preventing a transaction or a change of
control that might involve a premium price for holders of our common stock or otherwise be in your best interest. It is likely that any
senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting
our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in obtaining
a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further
restrict operating and financial flexibility.
To the extent that we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of
common stock to finance operations. Other than in certain limited situations such as rights offerings, as a business development
company, we are generally not able to issue our common stock at a price below NAV without first obtaining required approvals from
our stockholders and our independent directors. If we raise additional funds by issuing more common stock or senior securities
convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease,
and you might experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity
securities in the future, on favorable terms or at all.
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and
management of the company may make decisions that could decrease the value of our portfolio holdings.
We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make
business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in
ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our
portfolio holdings.
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development
company or be precluded from investing according to our current business strategy.
As a business development company, we may not acquire any assets other than “qualifying assets” as defined under the 1940
Act, unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Item 1.
Business –Regulation.”
We believe that most of the senior loans we make will constitute qualifying assets. However, we may be precluded from
investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If
we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company,
which would have a material adverse effect on our business, financial condition and results of operations. In addition, a rise in the
equity markets may result in increased market valuations of certain of our existing and prospective portfolio companies, which may
lead to new investments with such companies being qualified as non-eligible portfolio company assets and would require we invest in
qualified assets or risk losing our status as a business development company. Similarly, these rules could prevent us from making
follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to
dispose of investments at inopportune times in order to comply with the 1940 Act. If we need to dispose of such investments quickly,
it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and,
even if we do find a buyer, we may have to sell the investments at a substantial loss.
A failure on our part to maintain our qualification as a business development company would significantly reduce our
operating flexibility.
If we fail to continuously qualify as a business development company, we might be subject to regulation as a registered closed-
end investment company under the 1940 Act, which would significantly decrease our operating flexibility, and lead to situations
where we might have to restrict our borrowings, reduce our leverage, sell securities and pursue other activities that we are allowed to
engage in as a business development company. In addition, failure to comply with the requirements imposed on business development
companies by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional information on the
qualification requirements of a business development company, see “Item 1. Business – Regulation.”
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To the extent OID and PIK interest constitute a portion of our income, we will be exposed to risks associated with such income
being required to be included in taxable and accounting income prior to receipt of cash representing such income.
Our investments may include OID instruments and contractual PIK interest arrangements, which represents contractual interest
added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income,
we are exposed to risks associated with such income being required to be included in taxable and accounting income prior to receipt of
cash, including the following:
The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with
these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.
Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is
supposed to occur at the maturity of the obligation, which could lead to future losses.
OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments
about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also
create uncertainty about the source of our cash distributions.
For accounting purposes, any cash distributions to stockholders representing OID and PIK income are not treated as
coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. As a result, despite the
fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the
1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.
The deferral of PIK interest may have a negative impact on our liquidity as it represents non-cash income that may require
cash distributions to our stockholders in order to maintain our ability to be subject to tax as a RIC.
Recent tax legislation requires that income be recognized for tax purposes no later than when recognized for financial
reporting purposes.
If we are unable to satisfy Code requirements for qualification as a RIC, then we will be subject to corporate-level income tax,
which would adversely affect our results of operations and financial condition.
We elected to be treated as a RIC for U.S. federal income tax purposes with the filing of our federal corporate income tax return
for 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of income, asset
diversification and distribution requirements contained in Subchapter M of the Code, or if we fail to maintain our election to be
regulated as a business development company under the 1940 Act. If we fail to qualify as a RIC for any reason and become subject to
a corporate-level income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for
distribution to our stockholders and the actual amount of our distributions. Such a failure would have a material adverse effect on us,
the NAV of our common stock and the total return, if any, earned from your investment in our common stock.
We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without
receiving cash representing such income.
In accordance with U.S. federal tax requirements, we are required to include in income for tax purposes certain amounts that we
have not yet received in cash, such as OID and contractual PIK interest arrangements, which represent contractual interest added to a
loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances, our loans
generally include one or more of the following: exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In
some cases our loans also include contractual PIK interest arrangements. The increases in loan balances as a result of contractual PIK
arrangements are included in income for the period in which such PIK interest was accrued, which is often in advance of receiving
cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income for tax
purposes certain other amounts prior to receiving the related cash. Also, recent tax legislation requires that income be recognized for
tax purposes no later than when recognized for financial reporting purposes.
Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process
with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will
be allocated to the warrants that we receive. This will generally result in OID for tax purposes, which we must recognize as ordinary
income, increasing the amount that we are required to distribute in order to be subject to tax as a RIC. Because these warrants
generally will not produce distributable cash for us at the same time as we are required to make distributions in respect of the related
OID, if ever, we would need to obtain cash from other sources or to pay a portion of our distributions using shares of newly issued
common stock, consistent with IRS guidelines and the Code, to satisfy such distribution requirements.
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Other features of the debt instruments that we hold may also cause such instruments to generate OID in excess of current cash
interest received. Since in certain cases we may recognize income before or without receiving cash representing such income, we may
have difficulty meeting the RIC tax requirement to make distributions each taxable year to our stockholders treated as dividends for
U.S. federal income tax purposes generally of an amount equal to at least 90% of our investment company taxable income, determined
without regard to any deduction for dividends paid. Under such circumstances, we may have to sell some of our assets, raise additional
debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash
from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify to be subject to tax as a
RIC and, thus, become subject to a corporate-level income tax on all our taxable income (including any net realized securities gains).
Furthermore, we may invest in the equity securities of non-U.S. corporations (or other non-U.S. entities classified as
corporations for U.S. federal income tax purposes) that could be treated under the Code and U.S. Treasury regulations as PFICs and/or
CFCs. The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in
effect, taxed currently (or on an accelerated basis with respect to corporate level events) or taxed at increased tax rates at distribution
or disposition. In certain circumstances, these rules also could require us to recognize taxable income or gains where we do not receive
a corresponding payment in cash. Furthermore, under recently proposed Treasury Regulations, certain income derived by us either
from a PFIC with respect to which we have made a certain U.S. tax election or from a CFC would generally constitute qualifying
income for purposes of determining our ability to be subject to tax as a RIC only to the extent the PFIC or CFC respectively makes
distributions of that income to us. As such, we may be restricted in our ability to make QEF elections with respect to our holdings in
issuers that could either be treated as PFICs or CFCs in order to limit our tax liability or maximize our after-tax return from these
investments.
Our portfolio investments may present special tax issues.
Investments in below-investment grade debt instruments and certain equity securities may present special tax issues for us. U.S.
federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, OID or market discount,
when and to what extent deductions may be taken for bad debts or worthless debt in equity securities, how payments received on
obligations in default should be allocated between principal and interest income, as well as whether exchanges of debt instruments in a
bankruptcy or workout context are taxable. Such matters could cause us to recognize taxable income for U.S. federal income tax
purposes, even in the absence of cash or economic gain, and require us to make taxable distributions to our stockholders to maintain
our RIC status or preclude the imposition of either U.S. federal corporate income or excise taxation. Additionally, because such
taxable income may not be matched by corresponding cash received by us, we may be required to borrow money or dispose of other
investments to be able to make distributions to our stockholders. These and other issues will be considered by us, to the extent
determined necessary, in order that we minimize the level of any U.S. federal income or excise tax that we would otherwise incur. See
“Certain United States Federal Income Tax Considerations—Taxation as a Regulated Investment Company.”
FATCA withholding may apply to payments made to certain foreign entities.
The Foreign Account Tax Compliance Act provisions of the Code and the related Treasury Regulations and other administrative
guidance promulgated thereunder, or collectively, FATCA, generally requires us to withhold U.S. tax (at a 30% rate) on payments of
interest and taxable dividends made to a foreign financial institution or non-financial foreign entity (including such an institution or
entity acting as an intermediary) unless the foreign financial institution or non-financial foreign entity complies with certain
information reporting, withholding, identification, certification and related requirements imposed by FATCA. Persons located in
jurisdictions that have entered into an intergovernmental agreement with the United States to implement FATCA may be subject to
different rules. Stockholders may be requested to provide additional information to enable us to determine whether such withholding
is required.
Legislative or regulatory tax changes could adversely affect you.
At any time, the U.S. federal income tax laws governing RICs or the administrative interpretations of those laws or regulations
may be amended. Any of those new laws, regulations or interpretations may take effect retroactively and could adversely affect the
taxation of us or of you as a stockholder. Therefore, changes in tax laws, regulations or administrative interpretations or any
amendments thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.
There is a risk that you may not receive distributions or that our distributions may not grow over time.
We intend to make distributions on a quarterly basis to our stockholders. We cannot assure you that we will achieve investment
results, or our business may not perform in a manner that will allow us to make a specified level of distributions or year-to-year
increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may
be limited in our ability to make distributions. Also, our Credit Facilities limit our ability to declare distributions to our stockholders if
we default under certain provisions of our Credit Facilities. Furthermore, while we may have undistributed earnings, those earnings
may not yield distributions because we may incur unrealized losses or otherwise be unable to distribute such earnings.
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We have and may in the future choose to pay distributions in our own stock, in which case you may be required to pay tax in
excess of the cash you receive.
Under applicable Treasury regulations and other general guidelines issued by the IRS, RICs are permitted to treat certain
distributions payable in their stock, as taxable dividends that will satisfy their annual distribution obligations for U.S. federal income
tax and excise tax purposes provided that stockholders have the opportunity to elect to receive all or a portion of such distribution in
cash. Taxable stockholders receiving distributions will be required to include the full amount of such distributions as ordinary income
(or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current
and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax
with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in
order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on
the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to
withhold U.S. federal income tax with respect to such distributions, including in respect of all or a portion of such distribution that is
payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes
owed on such distributions, then such sales may put downward pressure on the trading price of our stock. We may in the future
determine to distribute taxable distributions that are partially payable in our common stock.
We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely
affect our profitability or the value of our portfolio
General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and,
accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our
income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which
we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our
net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on
such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our
interest-earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will
generally accrue interest at fixed rates.
A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans
and investments. In addition to potentially increasing the cost of our debt, increasing interest rates may also have a negative impact on
our portfolio companies’ ability to repay or service their loans, which could enhance the risk of loan defaults. We expect that most of
our current initial investments in debt securities will be at floating rate with a floor. However, in the event that we make investments
in debt securities at variable rates, a significant increase in market interest rates could also result in an increase in our non-performing
assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher
payment obligations. As of December 31, 2018, approximately 97.3% of our loans were at floating rates or floating rates with a floor
and 2.7% of the loans were at fixed rates.
In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In
addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the
increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against
the risk of adverse movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we
engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged
portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect
on our business, financial condition, and results of operations.
Additionally, in July 2017, the head of the United Kingdom Financial Conduct Authority announced that it will no longer
persuade or compel banks to submit rates for the calculation of LIBOR after 2021. At this time, it is not possible to predict the effect
of this announcement as there is no definitive information regarding the future utilization of LIBOR or of any particular replacement
rate. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged
increase or decrease in reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked
securities, loans, and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect
on our business, financial condition and results of operations.
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We may expose ourselves to risks if we engage in hedging transactions.
If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize
instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against
fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates.
Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such
positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to
gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions
may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible to
hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging
transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such
hedging instruments and there can be no assurance that any such hedging arrangements will achieve the desired effect. During the year
ended December 31, 2018, we did not engage in any hedging activities.
Recently passed legislation allows us to incur additional leverage.
Until December 6, 2018, as a business development company, under the 1940 Act, generally we were not permitted to incur
indebtedness unless immediately after such borrowing we had an asset coverage for total borrowings of at least 200% (i.e., the amount
of debt may not exceed 50% of the value of our assets). The SBCAA, which was signed into law in March 2018, modifies this section
of the 1940 Act and decreases this percentage from 200% to 150% (subject to either stockholder approval or approval of both a
majority of the board of directors and a majority of directors who are not interested persons). On September 4, 2018 and December 6,
2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our
stockholders, respectively, approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of
the 1940 Act. As a result, as of December 7, 2018, we are able to incur additional indebtedness, subject to certain disclosure
requirements and, therefore, your risk of an investment in us may increase. Rating agencies may also decide to review our credit
ratings and those of other business development companies in light of this new law as well as any corresponding changes to asset
coverage ratios and consider downgrading such ratings, including a downgrade from an investment grade rating to a non-investment
grade rating. Such a downgrade in our credit ratings may adversely affect our securities. See “—A downgrade, suspension or
withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or change in the debt markets could
cause the liquidity or market value of our debt securities to decline significantly.”
One of our wholly-owned subsidiaries is licensed by the U.S. SBA, and as a result, we will be subject to SBA regulations, which
could limit our capital or investment decisions.
Our wholly-owned subsidiary HT III is licensed to act as SBIC and is regulated by the SBA. HT III holds approximately $307.5
million in assets and it accounted for approximately 14.3% of the Company’s total assets, prior to consolidation at December 31,
2018. The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance
of a capital commitment by the SBA and other customary procedures. On July 13, 2018, we completed repayment of the remaining
outstanding HT II debentures and subsequently surrendered the SBA license with respect to our wholly-owned subsidiary HT II.
The SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance
with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that
would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of capital stock of a licensed
SBIC. If HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or
prohibit HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT III from making
new investments. Such actions by the SBA would, in turn, negatively affect us because HT III is our wholly owned subsidiaries.
HT III was in compliance with the terms of the SBIC’s leverage as of December 31, 2018 as a result of having sufficient capital
as defined under the SBA regulations. Compliance with SBA requirements may cause HT III to forego attractive investment
opportunities that are not permitted under SBA regulations. See “Item 1. Business — Regulation—Small Business Administration
Regulations.”
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SBA regulations limit the outstanding dollar amount of SBA guaranteed debentures that may be issued by an SBIC or group of
SBICs under common control.
The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to
$175.0 million or to a group of SBICs under common control to $350.0 million. An SBIC may not borrow an amount in excess of two
times (and in certain cases, up to three times) its regulatory capital. As of December 31, 2018, we have issued $149.0 million in SBA-
guaranteed debentures in our SBIC subsidiary, which is the maximum capacity for our SBIC subsidiary under our existing license.
During times that we reach the maximum dollar amount of SBA-guaranteed debentures permitted, and if we require additional capital,
our cost of capital is likely to increase, and there is no assurance that we will be able to obtain additional financing on acceptable
terms.
Moreover, the current status of our SBIC subsidiary as a SBIC does not automatically assure that our SBIC subsidiary will
continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon our SBIC subsidiary
continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding
available to a SBIC is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional
appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by our SBIC
subsidiary.
The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. HT III has
debentures outstanding that become due starting in September 2020. Our SBIC subsidiary will need to generate sufficient cash flow to
make required interest payments on the debentures. If our SBIC subsidiary is unable to meet its financial obligations under the
debentures, the SBA, as a creditor, will have a superior claim to our SBIC subsidiary’s assets over our stockholders in the event we
liquidate our SBIC subsidiary or the SBA exercises its remedies under such debentures as the result of a default by us.
Our wholly-owned SBIC subsidiary may be unable to make distributions to us that will enable us to maintain RIC status, which
could result in the imposition of an entity-level tax.
In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to
distribute substantially all of our investment company taxable income, determined without regard to any deduction for dividends paid,
and net capital gains, including income from certain of our subsidiaries, which includes the income from our SBIC subsidiary. We will
be partially dependent on our SBIC subsidiary for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC
subsidiary may be limited by the Small Business Investment Act of 1958, as amended, and SBA regulations governing SBICs, from
making certain distributions to us that may be necessary to maintain our ability to be subject to tax as a RIC. We may have to request a
waiver of the SBA’s restrictions for our SBIC subsidiary to make certain distributions to maintain our ability to be subject to tax as a
RIC. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiary is unable to obtain a waiver, compliance with
the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public
reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with
adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any
testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, or
the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective
or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior
internal controls could also cause investors and lenders to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our common stock.
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or
stockholder approval, the effects of which may be adverse.
Our Board of Directors has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our
operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we
may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company. We
cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and
the market price of our common stock. Nevertheless, any such changes could materially and adversely affect our business and impair
our ability to make distributions to our stockholders.
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Significant U.S. federal tax legislation was recently enacted and the impact of this new legislation on us and on entities in
which we may invest is uncertain.
Significant U.S. federal tax reform legislation was enacted in 2017 that, among many other changes, permanently reduces the
maximum federal corporate income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018
through 2025), restricts the deductibility of business interest expense, changes the rules regarding the calculation of net operating loss
deductions that may be used to offset taxable income, and, under certain circumstances, requires accrual method taxpayers to
recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable
financial statement. The legislation also makes extensive changes to the U.S. international tax system. The impact of this legislation
on us and on entities in which we may invest is uncertain. Prospective investors are urged to consult their tax advisors regarding the
effects of the legislation on an investment in us.
Changes in laws or regulations governing our business could negatively affect the profitability of our operations.
Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern business development
companies, SBICs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing
business. We are subject to federal, state and local laws and regulations, in addition to applicable foreign and international laws and
regulations, and are subject to judicial and administrative decisions that affect our operations, including our loan originations
maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and
foreclosure procedures, and other trade practices. If these laws, regulations or decisions change, or if we expand our business into
jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, then we may have to
incur significant expenses in order to comply or we may have to restrict our operations. In addition, if we do not comply with
applicable laws, regulations and decisions, then we may lose licenses needed for the conduct of our business and be subject to civil
fines and criminal penalties, any of which could have a material adverse effect upon our business results of operations or financial
condition.
Uncertainty about presidential administration initiatives could negatively impact our business, financial condition and results
of operations.
The Trump administration has called for significant changes to U.S. trade, healthcare, immigration, foreign and government
regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the
federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new
and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding
meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and
monetary policy. To the extent the U.S. Congress or the Trump administration implements changes to U.S. policy, those changes may
impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate
taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these
changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know
what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we
will not know if, overall, we will benefit from them or be negatively affected by them.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that
could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our
common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the New York Stock
Exchange, or NYSE, have issued a significant number of new and increasingly complex requirements and regulations over the course
of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. The
Dodd-Frank Wall Street Reform and Protection Act, as amended, or the Dodd-Frank Act, contains significant corporate governance
and executive compensation-related provisions, and the SEC has adopted, and will continue to adopt, additional rules and regulations
that may impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase
in expenses and a diversion of management’s time from other business activities.
In addition, our failure to maintain compliance with such rules, or for our management to appropriately address issues relating to
our compliance with such rules fully and in a timely manner, exposes us to an increasing risk of inadvertent non-compliance. While
our management team takes reasonable efforts to ensure that we are in full compliance with all laws applicable to its operations, the
increasing rate and extent of regulatory change increases the risk of a failure to comply, which may result in our ability to operate our
business in the ordinary course or may subject us to potential fines, regulatory findings or other matters that may materially impact our
business.
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Many of the requirements called for in the Dodd-Frank Act are expected to be implemented over time, most of which will likely
be subject to implementing regulations over the course of several years. However, the new presidential administration has announced
its intention to repeal, amend, or replace certain portions of the Dodd-Frank Act and the regulations implemented thereunder. Given
the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed,
amended or replaced, the full impact such requirements will have on our business, results of operations or financial condition is
unclear. The changes resulting from the Dodd-Frank Act or any changes to the regulations already implemented thereunder may
require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with
new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may
negatively impact our business, results of operations and financial condition. While we cannot predict what effect any changes in the
laws or regulations or their interpretations would have on our business as a result of recent financial reform legislation, these changes
could be materially adverse to us and our stockholders.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic
reporting requirements applicable to a company whose securities are registered under the Exchange Act as well as additional corporate
governance requirements, including requirements under the Sarbanes-Oxley Act and other rules implemented by the SEC.
Results may fluctuate and may not be indicative of future performance.
Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of
our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to,
variations in the investment origination volume and fee income earned, changes in the accrual status of our debt investments,
variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in
unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and
general economic conditions.
We face cyber-security risks and the failure in cyber security systems, as well as the occurrence of events unanticipated in our
disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.
Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite
careful security and controls design, implementation and updating, our information technology systems could become subject to
cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation,
which could have a material adverse effect on our business, results of operations and financial condition.
The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events
unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability
to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data
processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in
the event of a disaster, our ability to effectively conduct our business could be severely compromised.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of
security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic
break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware
and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could
potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our
computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to
our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
Terrorist attacks, acts of war or natural disasters may affect any market for our securities, impact the businesses in which we
invest and harm our business, operating results and financial condition.
Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we
invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic
instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global
economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly
and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist
attacks and natural disasters are generally uninsurable.
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We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our ability to pay distributions.
Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of
those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or
other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail
to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially
beyond our control and adversely affect our business. There could be:
sudden electrical or telecommunication outages;
natural disasters such as earthquakes, tornadoes and hurricanes;
disease pandemics;
events arising from local or larger scale political or social matters, including terrorist acts; and
cyber-attacks.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our
common stock and our ability to pay distributions to our stockholders.
We may be subject to restrictions on our ability to make distributions to our stockholders.
Restrictions imposed on the declaration of dividends or other distributions to holders of our common stock, by both the 1940
Act and by requirements imposed by rating agencies, might impair our ability to make the required distributions to our stockholders in
order to be subject to tax as a RIC. While we intend to prepay our Notes and other debt to the extent necessary to enable us to
distribute our income as required to maintain our ability to be subject to tax as a RIC, there can be no assurance that such actions can
be effected in time or in a manner to satisfy the requirements set forth in the Code.
Further downgrades of the U.S. credit rating, automatic spending cuts or another government shutdown could negatively
impact our liquidity, financial condition and earnings.
Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and
economic slowdowns, or a recession in the U.S. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on
multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States.
The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could
adversely affect the U.S. and global financial markets and economic conditions. These developments could cause interest rates and
borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms.
In addition, disagreement over the federal budget has caused the U.S. federal government to shutdown for periods of time
resulting in, among other things, inadequate funding for and/or the shutdown of certain government agencies, including the SEC,
SBA, and U.S. Food and Drug Administration, or the FDA, on which the operation of our business may rely. Inadequate funding for
and/or the shutdown of these government agencies prevents them from performing their normal business functions, which could
impact, among other things, (i) our and our portfolio companies’ ability to access the public markets and obtain necessary capital in
order to, among other things, properly capitalize, continue or expand operations, or, in the case of portfolio investments held by us,
liquidate such investments; (ii) our ability to originate SBA loans; and (iii) the ability of the FDA and other governmental agencies to
timely review and process regulatory submissions of our portfolio companies. Continued adverse political and economic conditions,
including a prolonged U.S. federal government shutdown, could have a material adverse effect on our business, financial condition
and results of operations.
Our business and operations could be negatively affected if we become subject to stockholder activism, which could cause us to
incur significant expense, hinder the execution of our investment strategy or impact our stock price.
Stockholder activism, which could take many forms, including making public demands that we consider certain strategic
alternatives, engaging in public campaigns to attempt to influence our corporate governance and/or our management, and commencing
proxy contests to attempt to elect the activists’ representatives or others to our Board of Directors, or arise in a variety of situations,
has been increasing in the business development company industry recently. While we are currently not subject to any stockholder
activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of
stockholder activism. Stockholder activism could result in substantial costs and divert management’s and our Board of Directors’
attention and resources from our business. Additionally, such stockholder activism could give rise to perceived uncertainties as to our
future and adversely affect our relationships with service providers and our portfolio companies. Also, we may be required to incur
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significant legal and other expenses related to any activist stockholder matters. Further, our stock price could be subject to significant
fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.
Risks Related to Current Economic and Market Conditions
Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur.
Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad,
which could have a negative impact on our business, financial condition and results of operations.
The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital
markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions.
While the capital markets have improved, these conditions could deteriorate again in the future. During such market disruptions, we
may have difficulty raising debt or equity capital, especially as a result of regulatory constraints.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any
failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to
sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our
investments. In addition, significant changes in the capital markets, including the disruption and volatility, have had, and may in the
future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments.
An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on
our business, financial condition and results of operations.
Various social and political tensions in the United States and around the world, including in the Middle East, Eastern Europe
North Korea, and Russia, may continue to contribute to increased market volatility, may have long-term effects on the United States
and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide.
In addition, continuing uncertainty arising from the United Kingdom’s decision to leave the European Union, or Brexit, could lead to
further market disruptions and currency volatility, potentially weakening consumer, corporate and financial confidence and resulting
in lower economic growth for companies that rely significantly on Europe for their business activities and revenues. We may in the
future have difficulty accessing debt and equity capital markets, and a severe disruption in the global financial markets, deterioration
in credit and financing conditions or uncertainty regarding U.S. government spending and deficit levels, Brexit or other global
economic conditions could have a material adverse effect on our business, financial condition and results of operations.
The broader fundamentals of the United States economy remain mixed. In the event that the United States economy contracts, it
is likely that the financial results of small to mid-sized companies, like many of our portfolio companies, could experience
deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements
and an increase in defaults. In addition, declines in oil and natural gas prices could adversely affect the credit quality of our debt
investments and the underlying operating performance of our equity investments in energy-related businesses. In addition, volatility in
the equity markets could impact our portfolio companies’ access to the debt and equity capital markets, which could ultimately limit
their ability to grow, satisfy existing financing and other arrangements and impact their ability to perform. Volatility in the equity
markets could also impact our ability to liquidate or achieve value from warrants and other equity investments we have in our
portfolio companies. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be
negatively impacted by economic cycles, industry cycles or other conditions, which could also have a negative impact on our future
results.
These market and economic disruptions affect, and these and other similar market and economic disruptions may in the future
affect, the U.S. capital markets, which could adversely affect our business and that of our portfolio companies. We cannot predict the
duration of the effects related to these or similar events in the future on the United States economy and securities markets or on our
investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment
objective, but there can be no assurance that we will be successful in doing so.
Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments through
additional borrowings.
As of December 31, 2018, we had approximately $139.0 million of unfunded commitments, including undrawn revolving
facilities, which were available at the request of the portfolio company and unencumbered by milestones.
44
Our unfunded contractual commitments may be significant from time to time. A portion of these unfunded contractual
commitments are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available.
Furthermore, our credit agreements contain customary lending provisions which allow us relief from funding obligations for
previously made commitments in instances where the underlying company experiences materially adverse events that affect the
financial condition or business outlook for the company. These commitments will be subject to the same underwriting and ongoing
portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without
being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Closed commitments
generally fund 70-80% of the committed amount in aggregate over the life of the commitment. We believe that our assets provide
adequate cover to satisfy all of our unfunded comments and we intend to use cash flow from normal and early principal repayments
and proceeds from borrowings and notes to fund these commitments. However, there can be no assurance that we will have sufficient
capital available to fund these commitments as they come due, which could have a material adverse effect on our reputation in the
market and our ability to generate incremental lending activity and subject us to lender liability claims.
Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time
will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions,
including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are
beyond our control. The prolonged continuation or worsening of current economic and capital market conditions could have a material
adverse effect on our ability to secure financing on favorable terms, if at all.
Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed,
floating-rate debt securities.
In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association,
or BBA, in connection with the calculation of the London Interbank Offered Rate, or LIBOR, across a range of maturities and
currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit
on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may
have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks
entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and
investigations by regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the
manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the
market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further
changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported
LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-
indexed, floating-rate debt securities.
Risks Related to Our Investments
Our investments are concentrated in certain industries and in a number of technology-related companies, which subjects us to
the risk of significant loss if any of these companies default on their obligations under any of their debt securities that we hold,
or if any of the technology-related industry sectors experience a downturn.
We have invested and intend to continue investing in a limited number of technology-related companies and, we have recently
seen an increase in the number of investments representing approximately 5% or more of our NAV. A consequence of this limited
number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of
investments perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification
requirements to which we are subject as a business development company and a RIC, we do not have fixed guidelines for
diversification or limitations on the size of our investments in any one portfolio company and our investments could be concentrated
in relatively few issuers. In addition, we have invested in and intend to continue investing, under normal circumstances, at least 80%
of the value of our total assets (including the amount of any borrowings for investment purposes) in technology-related companies.
As of December 31, 2018, approximately 87.8% of the fair value of our portfolio was composed of investments in five
industries: 29.2% was composed of investments in the software industry, 28.7% was composed of investments in the drug discovery
and development industry, 17.5% was composed of investments in the internet consumer and business services industry, 6.5% was
composed of investments in the medical devices & equipment industry and 5.9% was composed of investments in the sustainable and
renewable technology industry.
As a result, a downturn in technology-related industry sectors and particularly those in which we are heavily concentrated could
materially adversely affect our financial condition.
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We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we generally are not limited
with respect to the proportion of our assets that may be invested in securities of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not
limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer, excluding
limitations on investments in other investment companies. To the extent that we assume large positions in the securities of a small
number of issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in
the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory
occurrence than a diversified investment company. Beyond the asset diversification requirements to which we are subject as a
business development company and a RIC, we do not have fixed guidelines for portfolio diversification, and our investments could be
concentrated in relatively few portfolio companies or industries. Although we are classified as a non-diversified investment company
within the meaning of the 1940 Act, we maintain the flexibility to operate as a diversified investment company and have done so for
an extended period of time. To the extent that we operate as a non-diversified investment company in the future, we may be subject to
greater risk.
Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in
one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the
loss could be more significant than if we had made smaller investments in more companies.
The following table shows the fair value of the totals of investments held in portfolio companies at December 31, 2018 that
represent greater than 5% of our net assets:
(in thousands)
Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals,
Inc.)
EverFi, Inc.
BridgeBio Pharma LLC
Businessolver.com, Inc.
Lithium Technologies, Inc.
Fuze, Inc.
Axovant Sciences Ltd.
$
December 31, 2018
Fair Value
Percentage of
Net Assets
70,960
60,408
56,986
53,967
53,706
51,943
49,415
7.4 %
6.3 %
6.0 %
5.6 %
5.6 %
5.4 %
5.2 %
Paratek Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of
innovative therapies based upon its expertise in novel tetracycline chemistry.
EverFi, Inc. is a technology company that offers a web-based media platform to teach and certify students in the core
concepts of financial literacy, from student loan defaults and sub-prime mortgages to credit card debt and rising bankruptcy
rates.
BridgeBio Pharma LLC is a clinical-stage biopharmaceutical company that discovers and develops drugs for patients with
genetic diseases.
Businessolver.com, Inc. is a technology company that provides a cloud-based SaaS platform for employee benefit
administration designed to manage and monitor enrollment and payroll dashboards with real-time data.
Lithium Technologies, Inc. is a technology company that develops a software platform that helps customers to connect,
engage, and understand their total community.
Fuze, Inc. is a technology company that provides a cloud-based unified communications-as-a-service platform to server
message block, mid-market, and small enterprise customers worldwide.
Axovant Sciences Ltd. is a clinical-stage biopharmaceutical company focused on acquiring, developing and
commercializing novel therapeutics for the treatment of dementia.
Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio
companies encounter financial difficulty and fail to repay their obligations or to perform as expected.
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Our investments may be in portfolio companies that have limited operating histories and resources.
We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. These
companies may be particularly vulnerable to U.S. and foreign economic downturns may have more limited access to capital and
higher funding costs, may have a weaker financial position and may need more capital to expand or compete. These businesses also
may experience substantial variations in operating results. They may face intense competition, including from larger, more established
companies with greater financial, technical and marketing resources. Furthermore, some of these companies do business in regulated
industries and could be affected by changes in government regulation applicable to their given industry. Accordingly, these factors
could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to
us, and may adversely affect the return on, or the recovery of, our investment in these companies. We cannot assure you that any of
our investments in our portfolio companies will be successful. We may lose our entire investment in any or all of our portfolio
companies.
Investing in publicly traded companies can involve a high degree of risk and can be speculative.
We have invested, and expect to continue to invest, a portion of our portfolio in publicly traded companies or companies that are
in the process of completing their IPO. As publicly traded companies, the securities of these companies may not trade at high volumes,
and prices can be volatile, particularly during times of general market volatility, which may restrict our ability to sell our positions and
may have a material adverse impact on us.
Our ability to invest in public companies may be limited in certain circumstances.
To maintain our status as a business development company, we are not permitted to acquire any assets other than “qualifying
assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with
certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an
issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer
has a market capitalization that is less than $250.0 million at the time of such investment and meets the other specified requirements.
Our investment strategy focuses on technology-related companies, which are subject to many risks, including volatility, intense
competition, shortened product life cycles, changes in regulatory and governmental programs and periodic downturns, and you
could lose all or part of your investment.
We have invested and will continue investing primarily in technology-related companies, many of which may have narrow
product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as
well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related companies can and
often do fluctuate suddenly and dramatically. In addition, technology-related industries are generally characterized by abrupt business
cycles and intense competition. Overcapacity in technology-related industries, together with cyclical economic downturns, may result
in substantial decreases in the market capitalization of many technology-related companies. Such decreases in market capitalization
may occur again, and any future decreases in technology-related company valuations may be substantial and may not be temporary in
nature. Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors.
Because of rapid technological change, the average selling prices of products and some services provided by technology-related
companies have historically decreased over their productive lives. As a result, the average selling prices of products and services
offered by technology-related companies may decrease over time, which could adversely affect their operating results, their ability to
meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our
business, financial condition and results of operations.
Our investments in sustainable and renewable technology companies are subject to substantial operational risks, such as
underestimated cost projections, unanticipated operation and maintenance expenses, loss of government subsidies, and inability to
deliver cost-effective alternative energy solutions compared to traditional energy products. In addition, sustainable and renewable
technology companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities,
expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy
companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies.
Furthermore, production levels for solar, wind and other renewable energies may be dependent upon adequate sunlight, wind, or
biogas production, which can vary from market to market and period to period, resulting in volatility in production levels and
profitability. Demand for sustainable and renewable technology is also influenced by the available supply and prices for other energy
products, such as coal, oil and natural gases. A change in prices in these energy products could reduce demand for alternative energy.
47
A natural disaster may also impact the operations of our portfolio companies, including our technology-related portfolio
companies. The nature and level of natural disasters cannot be predicted and may be exacerbated by global climate change. A portion
of our technology-related portfolio companies rely on items assembled or produced in areas susceptible to natural disasters, and may
sell finished goods into markets susceptible to natural disasters. A major disaster, such as an earthquake, tsunami, flood or other
catastrophic event could result in disruption to the business and operations of our technology-related portfolio companies.
We will invest in technology-related companies that are reliant on U.S. and foreign regulatory and governmental programs. Any
material changes or discontinuation, due to change in administration or U.S. Congress or otherwise could have a material adverse
effect on the operations of a portfolio company in these industries and, in turn, impair our ability to timely collect principal and
interest payments owed to us to the extent applicable.
We have invested in and may continue investing in technology-related companies that do not have venture capital or private
equity firms as equity investors, and these companies may entail a higher risk of loss than do companies with institutional
equity investors, which could increase the risk of loss of your investment.
Our portfolio companies will often require substantial additional equity financing to satisfy their continuing working capital and
other cash requirements and, in most instances, to service the interest and principal payments on our investment. Portfolio companies
that do not have venture capital or private equity investors may be unable to raise any additional capital to satisfy their obligations or
to raise sufficient additional capital to reach the next stage of development. Portfolio companies that do not have venture capital or
private equity investors may be less financially sophisticated and may not have access to independent members to serve on their
boards, which means that they may be less successful than portfolio companies sponsored by venture capital or private equity firms.
Accordingly, financing these types of companies may entail a higher risk of loss than would financing companies that are sponsored
by venture capital or private equity firms.
Sustainable and renewable technology companies are subject to extensive government regulation and certain other risks
particular to the sectors in which they operate and our business and growth strategy could be adversely affected if government
regulations, priorities and resources impacting such sectors change or if our portfolio companies fail to comply with such
regulations.
As part of our investment strategy, we plan to invest in portfolio companies in sustainable and renewable technology sectors that
may be subject to extensive regulation by foreign, U.S. federal, state and/or local agencies. Changes in existing laws, rules or
regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on the
business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government
resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or
regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns.
Furthermore, if any of our portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties
and claims that could materially and adversely affect their operations, which would also impact our ability to realize value since our
exit from the investment may be subject to the portfolio company obtaining the necessary regulatory approvals. Our portfolio
companies may be subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if
approved, these products may not be accepted in the marketplace.
In addition, there is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or
maintain legislation or regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for sustainable
and renewable technology companies. Without such regulatory policies, investments in sustainable and renewable technology
companies may not be economical and financing for sustainable and renewable technology companies may become unavailable,
which could materially adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any of these factors
could materially and adversely affect the operations and financial condition of a portfolio company and, in turn, the ability of the
portfolio company to repay the debt they owe to us.
Cyclicality within the energy sector may adversely affect some of our portfolio companies.
Industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of
commodities driven by a variety of factors. The highly cyclical nature of the industries within the energy sector may lead to volatile
changes in commodity prices, which may adversely affect the earnings of energy companies in which we may invest and the
performance and valuation of our portfolio.
48
Depressed oil and natural gas prices for a prolonged period of time could have a material adverse effect on us.
Depressed oil and natural gas prices could adversely affect (i) the credit quality of our debt investments in certain of our
portfolio companies and (ii) the underlying operating performance of our portfolio companies’ business that are heavily dependent
upon the prices of, and demand for, oil and natural gas. A decrease in credit quality and the operating performance would, in turn,
negatively affect the fair value of these investments, which would consequently negatively affect our NAV. Declines in oil and natural
gas prices may adversely impact the ability of these portfolio companies to satisfy financial or operating covenants imposed by us or
other lenders, thereby negatively impacting their financial condition and their ability to satisfy their debt service and other obligations
to us. Likewise, declines in oil and natural gas prices may adversely impact our energy-related portfolio companies’ and other affected
companies’ cash flow and their profit generating capacities would also be adversely affected thereby negatively impacting their ability
to pay us dividends or distributions on our equity investments.
Our investments in the life sciences industry are subject to extensive government regulation, litigation risk and certain other
risks particular to that industry.
We have invested and plan to continue investing in companies in the life sciences industry that are subject to extensive
regulation by the FDA and to a lesser extent, other federal, state and other foreign agencies. If any of these portfolio companies fail to
comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect
their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the
regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In
addition, governmental budgetary constraints effecting the regulatory approval process, new laws, regulations or judicial
interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the
life sciences industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for
their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers
when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in
turn, impair our ability to timely collect principal and interest payments owed to us.
Our investments in the drug discovery industry are subject to numerous risks, including competition, extensive government
regulation, product liability and commercial difficulties.
Our investments in the drug discovery industry are subject to numerous risks. The successful and timely implementation of the
business model of our drug discovery portfolio companies depends on their ability to adapt to changing technologies and introduce
new products. As competitors continue to introduce competitive products, the development and acquisition of innovative products and
technologies that improve efficacy, safety, patient’s and clinician’s ease of use and cost-effectiveness are important to the success of
such portfolio companies. The success of new product offerings will depend on many factors, including the ability to properly
anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an
economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate
products from those of competitors. Failure by our portfolio companies to introduce planned products or other new products or to
introduce products on schedule could have a material adverse effect on our business, financial condition and results of operations.
Further, the development of products by drug discovery companies requires significant research and development, clinical trials
and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to
innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the U.S.
and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and foreign agencies
may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents attained by others can
preclude or delay the commercialization of a product. There can be no assurance that any products now in development will achieve
technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development
process, including after significant funds have been invested. Products may fail to reach the market or may have only limited
commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary
regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to
establish or maintain intellectual property rights, or the infringement of intellectual property rights of others.
49
Future legislation, and/or regulations and policies adopted by the FDA or other U.S. or foreign regulatory authorities may
increase the time and cost required by some of our portfolio companies to conduct and complete clinical trials for the product
candidates that they develop, and there is no assurance that these companies will obtain regulatory approval to market and
commercialize their products in the U.S. and in foreign countries.
The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have
foreign regulatory authorities, which affect some of our portfolio companies. Any change in regulatory requirements due to the
adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require some of our
portfolio companies to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such
amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing
and completion of the clinical trials.
In addition, increased scrutiny by the U.S. Congress of the FDA’s and other authorities approval processes may significantly
delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other
requirements. Foreign regulatory authorities may also increase their scrutiny of approval processes resulting in similar delays.
Increased scrutiny and approvals processes may limit the ability of our portfolio companies to market and commercialize their
products in the U.S. and in foreign countries.
Life sciences companies, including drug development companies, device manufacturers, service providers and others, are also
subject to material pressures when there are changes in the outlook for healthcare insurance markets. The ability for individuals, along
with private and public insurers, to account for the costs of paying for healthcare insurance can place strain on the ability of new
technology, devices and services to enter those markets, particularly when they are new or untested. As a result, it is not uncommon
for changes in the insurance market place to lead to a slower rate of adoption, price pressure and other forces that may materially limit
the success of companies bringing such technologies to market. Changes in the health insurance sector might then have an impact on
the value of companies in our portfolio or our ability to invest in the sector generally.
Changes in healthcare laws and other regulations, or the enforcement or interpretation of such laws or regulations, applicable
to some of our portfolio companies’ businesses may constrain their ability to offer their products and services.
Changes in healthcare or other laws and regulations, or the enforcement or interpretation of such laws or regulations, applicable
to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business,
require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a
material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare
laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio
companies.
Additionally, because of the continued uncertainty surrounding the healthcare industry under the Trump Administration,
including the potential for further legal challenges or repeal of existing legislation, we cannot quantify or predict with any certainty the
likely impact on our portfolio companies, our business model, prospects, financial condition or results of operations. We also
anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery
and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional
fundamental changes in the healthcare delivery system. We cannot assure you as to the ultimate content, timing, or effect of changes,
nor is it possible at this time to estimate the impact of any such potential legislation on certain of our portfolio companies, our business
model, prospects, financial condition or results of operations.
Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments,
reducing our NAV through increased net unrealized depreciation.
As a business development company, we are required to carry our investments at market value or, if no market value is
ascertainable, at fair market value as determined in good faith by or under the direction of our Board of Directors. As part of the
valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our
investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and
equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities
to similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price
at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase
transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our
valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our
valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment
through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. Decreases in the
market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our
portfolio can reduce our NAV by increasing net unrealized depreciation in our portfolio.
50
Depending on market conditions, we could incur substantial realized losses and may suffer substantial unrealized depreciation in
future periods, which could have a material adverse impact on our business, financial condition and results of operations.
Economic recessions or slowdowns could impair the ability of our portfolio companies to repay loans, which, in turn, could
increase our non-performing assets, decrease the value of our portfolio, reduce our volume of new loans and have a material
adverse effect on our results of operations.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions in both the U.S. and foreign
countries, and may be unable to repay our loans during such periods. Therefore, during such periods, our non-performing assets are
likely to increase and the value of our portfolio is likely to decrease. Adverse economic conditions also may decrease the value of
collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to
financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could
increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These
events could prevent us from increasing investments and harm our operating results.
In particular, intellectual property owned or controlled by our portfolio companies may constitute an important portion of the
value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our
portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a
foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be impaired
by such events.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults
and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults
under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that we hold.
We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio
company.
Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity, and
rising interests rates may make it more difficult for portfolio companies to make periodic payments on their loans.
Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity. This
risk and the risk of default is increased to the extent that the loan documents do not require the portfolio companies to pay down the
outstanding principal of such debt prior to maturity. In addition, if general interest rates rise, there is a risk that our portfolio
companies will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Any
failure of one or more portfolio companies to repay or refinance its debt at or prior to maturity or the inability of one or more portfolio
companies to make ongoing payments following an increase in contractual interest rates could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
The disposition of our investments may result in contingent liabilities.
We currently expect that a portion of our investments will involve private securities. In connection with the disposition of an
investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio
company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such
investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These
arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of
certain distributions previously made to us.
The health and performance of our portfolio companies could be adversely affected by political and economic conditions in the
countries in which they conduct business.
Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S.
Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety
concerns, among other things, could harm their business, financial condition and results of operations. In addition, if the government
of any country in which their products are developed, manufactured or sold sets technical or regulatory standards for products
developed or manufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend
imports of their products into that country, require manufacturers or developers in that country to manufacture or develop products
with different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in
each case, could harm their businesses.
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Any unrealized depreciation we experience on our investment portfolio may be an indication of future realized losses, which
could reduce our income available for distribution and could impair our ability to service our borrowings.
As a business development company, we are required to carry our investments at market value or, if no market value is
ascertainable, at fair value as determined in good faith by our Board of Directors. Decreases in the market values or fair values of our
investments will be recorded as unrealized depreciation. Any unrealized depreciation in our investment portfolio could be an
indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected investments. This
could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods and
could materially adversely affect our ability to service our outstanding borrowings.
A lack of IPO or merger and acquisition opportunities may cause companies to stay in our portfolio longer, leading to lower
returns, unrealized depreciation, or realized losses.
A lack of IPO or merger and acquisition, or M&A, opportunities for venture capital-backed companies could lead to companies
staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available
funding for early-stage companies in particular as, in general, venture-capital firms are being forced to provide additional financing to
late-stage companies that cannot complete an IPO or M&A transaction. In the best case, such stagnation would dampen returns, and in
the worst case, could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower
valuations in private fundings or are not able to access additional capital at all. A lack of IPO or M&A opportunities for venture
capital-backed companies can also cause some venture capital firms to change their strategies, leading some of them to reduce funding
of their portfolio companies and making it more difficult for such companies to access capital and to fulfill their potential, which can
result in unrealized depreciation and realized losses in such companies by other companies such as ourselves who are co-investors in
such companies.
The majority of our portfolio companies will need multiple rounds of additional financing to repay their debts to us and
continue operations. Our portfolio companies may not be able to raise additional financing, which could harm our investment
returns.
The majority of our portfolio companies will often require substantial additional equity financing to satisfy their continuing
working capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment.
Each round of venture financing is typically intended to provide a company with only enough capital to reach the next stage of
development. We cannot predict the circumstances or market conditions under which our portfolio companies will seek additional
capital. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so
only at a price or on terms unfavorable to us, either of which would negatively impact our investment returns. Some of these
companies may be unable to obtain sufficient financing from private investors, public capital markets or traditional lenders. This may
have a significant impact if the companies are unable to obtain certain federal, state or foreign agency approval for their products or
the marketing thereof, of if regulatory review processes extend longer than anticipated, and the companies need continued funding for
their operations during these times. Accordingly, financing these types of companies may entail a higher risk of loss than would
financing companies that are able to utilize traditional credit sources.
If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses.
To attempt to mitigate credit risks, we will typically take a security interest in the available assets of our portfolio companies.
There is no assurance that we will obtain or properly perfect our liens.
There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner,
may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a
result of the inability of a portfolio company to raise additional capital. In some circumstances, our lien could be subordinated to
claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest
payments according to the loan’s terms, or that we will be able to collect on the loan should we be forced to enforce our remedies.
In addition, because we invest in technology-related companies, a substantial portion of the assets securing our investment may
be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and accounts receivable.
Intellectual property, if any, that is securing our loan could lose value if, among other things, the company’s rights to the intellectual
property are challenged or if the company’s license to the intellectual property is revoked or expires, the technology fails to achieve its
intended results or a new technology makes the intellectual property functionally obsolete. Inventory may not be adequate to secure
our loan if our valuation of the inventory at the time that we made the loan was not accurate or if there is a reduction in the demand for
the inventory.
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Similarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technology
or advances in new equipment that render the particular equipment obsolete or of limited value, or if the company fails to adequately
maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability to recover earned
interest and principal in a foreclosure.
In most cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets,
which may include its intellectual property. In other cases, we may obtain a negative pledge covering a company’s intellectual
property. As of December 31, 2018, approximately 85.3% of our debt investments were in a senior secured first lien position, with
48.5% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 28.8%
secured by a first priority security in all of the assets of the portfolio company and the portfolio company was prohibited from
pledging or encumbering its intellectual property. 1.1% of our debt investments were senior secured by the equipment of the portfolio
company, and 6.9% were in a first lien “last-out” senior secured position with security interest in all of the assets of the portfolio
company, whereby the “last-out” loans will be subordinated to the “first-out” portion of the unitranche loan in a liquidation, sale or
other disposition. Another 13.8% of our debt investments were secured by a second priority security interest in all of the portfolio
company’s assets, and 0.9% were unsecured.
We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.
In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the
loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that
are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the
event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying
assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the
portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or
managers of the assets.
In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our
loan may be subject to “equitable subordination.” This means that depending on the facts and circumstances, including the extent to
which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re-
characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, certain of our loans
are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in
the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior
to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans,
accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings
relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the
time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value,
causing us to suffer losses.
If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company
may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or
increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy
the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we
could suffer a loss which may adversely impact our financial performance.
The inability of our portfolio companies to commercialize their technologies or create or develop commercially viable products
or businesses would have a negative impact on our investment returns.
The possibility that our portfolio companies will not be able to commercialize their technology, products or business concepts
presents significant risks to the value of our investment. Additionally, although some of our portfolio companies may already have a
commercially successful product or product line when we invest, technology-related products and services often have a more limited
market- or life-span than have products in other industries. Thus, the ultimate success of these companies often depends on their
ability to continually innovate, or raise additional capital, in increasingly competitive markets. Their inability to do so could affect our
investment return. In addition, the intellectual property held by our portfolio companies often represents a substantial portion of the
collateral, if any, securing our investments. We cannot assure you that any of our portfolio companies will successfully acquire or
develop any new technologies, or that the intellectual property the companies currently hold will remain viable. Even if our portfolio
companies are able to develop commercially viable products, the market for new products and services is highly competitive and
rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial
success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful.
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An investment strategy focused on privately-held companies presents certain challenges, including the lack of available
information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and
a greater vulnerability to economic downturns.
We invest primarily in privately-held companies. Generally, very little public information exists about these companies, and we
are required to rely on the ability of our management and investment teams to obtain adequate information to evaluate the potential
returns from investing in these companies. Such small, privately held companies as we routinely invest in may also lack quality
infrastructures, thus leading to poor disclosure standards or control environments. If we are unable to uncover all material information
about these companies, then we may not make a fully informed investment decision, and we may not receive the expected return on
our investment or lose some or all of the money invested in these companies.
Also, privately-held companies frequently have less diverse product lines and a smaller market presence than do larger
competitors. Privately-held companies are, thus, generally more vulnerable to economic downturns and may experience more
substantial variations in operating results than do larger competitors. These factors could affect our investment returns and our results
of operations and financial condition.
In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies,
who are responsible for the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any
stage of a company’s development, and high turnover of personnel is common in technology-related companies. The loss of one or
more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our
portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively
impact our investment returns and our results of operations and financial condition.
If our portfolio companies are unable to protect their intellectual property rights, or are required to devote significant resources
to protecting their intellectual property rights, then our investments could be harmed.
Our future success and competitive position depend in part upon the ability of our portfolio companies to obtain and maintain
proprietary technology used in their products and services, which will often represent a significant portion of the collateral, if any,
securing our investment. The portfolio companies will rely, in part, on patent, trade secret and trademark law to protect that
technology, but competitors may misappropriate their intellectual property, and disputes as to ownership of intellectual property may
arise. Portfolio companies may, from time to time, be required to institute litigation in order to enforce their patents, copyrights or
other intellectual property rights, to protect their trade secrets, to determine the validity and scope of the proprietary rights of others or
to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a
portfolio company is found to infringe upon or misappropriate a third party’s patent or other proprietary rights, that portfolio company
could be required to pay damages to such third party, alter its own products or processes, obtain a license from the third party and/or
cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. Any of the
foregoing events could negatively affect both the portfolio company’s ability to service our debt investment and the value of any
related debt and equity securities that we own, as well as any collateral securing our investment.
We generally will not control our portfolio companies.
In some instances, we may control our portfolio companies or provide our portfolio companies with significant managerial
assistance. However, we generally do not, and do not expect to, control the decision making in many of our portfolio companies, even
though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive
covenants. As a result, we are subject to the risk that a portfolio company in which we invest will make business decisions with which
we disagree and the management of such company, as representatives of the holders of their common equity, will take risks or
otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in non-traded
companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate
valuation. As a result, a portfolio company may make decisions that would decrease the value of our portfolio holdings.
Our financial condition, results of operations and cash flows could be negatively affected if we are unable to recover our
principal investment as a result of a negative pledge or lack of a security interest on the intellectual property of our venture
growth stage companies.
In some cases, we collateralize our loans with a secured collateral position in a portfolio company's assets, which may include a
negative pledge or, to a lesser extent, no security on their intellectual property. In the event of a default on a loan, the intellectual
property of the portfolio company will most likely be liquidated to provide proceeds to pay the creditors of the company. There can be
no assurance that our security interest, if any, in the proceeds of the intellectual property will be enforceable in a court of law or
bankruptcy court or that there will not be others with senior or pari passu credit interests.
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Our relationship with certain portfolio companies may expose us to our portfolio companies' trade secrets and confidential
information which may require us to be parties to non-disclosure agreements and restrict us from engaging in certain
transactions.
Our relationship with some of our portfolio companies may expose us to our portfolio companies' trade secrets and confidential
information (including transactional data and personal data about their employees and clients) which may require us to be parties to
non-disclosure agreements and restrict us from engaging in certain transactions. Unauthorized access or disclosure of such information
may occur, resulting in theft, loss or other misappropriation. Any theft, loss, improper use, such as insider trading or other
misappropriation of confidential information could have a material adverse impact on our competitive positions, our relationship with
our portfolio companies and our reputation and could subject us to regulatory inquiries, enforcement and fines, civil litigation (which
may cause us to incur significant expense or expose us to losses) and possible financial liability or costs.
Portfolio company litigation could result in additional costs, the diversion of management time and resources and have an
adverse impact on the fair value of our investment.
To the extent that litigation arises with respect to any of our portfolio companies, we may be named as a defendant, which could
result in additional costs and the diversion of management time and resources. Furthermore, if we are providing managerial assistance
to the portfolio company or have representatives on the portfolio company’s board of directors, our costs and diversion of our
management’s time and resources in assessing the portfolio company could be substantial in light of any such litigation regardless of
whether we are named as a defendant. In addition, litigation involving a portfolio company may be costly and affect the operations of
the portfolio company’s business, which could in turn have an adverse impact on the fair value of our investment in such company.
We may not be able to realize our entire investment on equipment-based loans, if any, in the case of default.
We may from time-to-time provide loans that will be collateralized only by equipment of the portfolio company. If the portfolio
company defaults on the loan we would take possession of the underlying equipment to satisfy the outstanding debt. The residual
value of the equipment at the time we would take possession may not be sufficient to satisfy the outstanding debt and we could
experience a loss on the disposition of the equipment.
Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies. Our total
investments at value in foreign companies were approximately $212.3 million or 11.2% of total investments at December 31, 2018.
Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These
risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less
liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government
supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of
uniform accounting and auditing standards and greater price volatility, among other things.
If our investments do not meet our performance expectations, you may not receive distributions.
We intend to make distributions on a quarterly basis to our stockholders. We may not be able to achieve operating results that
will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition,
due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make
distributions. Also, restrictions and provisions in any future credit facilities may limit our ability to make distributions. As a RIC, if we
do not distribute at least a certain percentage of our income each taxable year as dividends for U.S. federal income tax purposes to our
stockholders, we will suffer adverse tax consequences, including the inability to be subject to tax as a RIC. We cannot assure you that
you will receive distributions at a particular level or at all.
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We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may have a
negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such
company or have the opportunity or need to increase our investment in a successful situation or attempt to preserve or enhance the
value of our initial investment, for example, the exercise of a warrant to purchase common stock, or a negative situation, to protect an
existing investment. We have the discretion to make any follow-on investments, subject to the availability of capital resources and
regulatory considerations. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those
investments. Any decision we make not to make a follow-on investment or any inability on our part to make such an investment may
have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us to increase
our participation in a successful operation and may dilute our equity interest or otherwise reduce the expected yield on our investment.
Moreover, a follow-on investment may limit the number of companies in which we can make initial investments. In determining
whether to make a follow-on investment, our management will exercise its business judgment and apply criteria similar to those used
when making the initial investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on
investments and this could adversely affect our success and result in the loss of a substantial portion or all of our investment in a
portfolio company.
The lack of liquidity in our investments may adversely affect our business and, if we need to sell any of our investments, we may
not be able to do so at a favorable price. As a result, we may suffer losses.
We generally invest in debt securities with terms of up to seven years and hold such investments until maturity, and we do not
expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We invest and expect
to continue investing in companies whose securities have no established trading market and whose securities are and will be subject to
legal and other restrictions on resale or whose securities are and will be less liquid than are publicly-traded securities. The illiquidity
of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all
or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these
investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our
qualification as a business development company and as a RIC, we may have to dispose of investments if we do not satisfy one or
more of the applicable criteria under the respective regulatory frameworks.
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such
companies.
We invest primarily in debt securities issued by our portfolio companies. In some cases, portfolio companies will be permitted
to incur other debt, or issue other equity securities, that rank equally with, or senior to, our investment. Such instruments may provide
that the holders thereof are entitled to receive payment of distributions, interest or principal on or before the dates on which we are
entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies
from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the
event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior
to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in
respect of our investment. After repaying such holders, the portfolio company might not have any remaining assets to use for repaying
its obligation to us. In the case of securities ranking equally with our investments, we would have to share on a pari passu basis any
distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may
also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under
such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the
collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against
the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral
documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have
the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected.
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Our warrant and equity-related investments are highly speculative, and we may not realize gains from these investments. If our
warrant and equity-related investments do not generate gains, then the return on our invested capital will be lower than it would
otherwise be, which could result in a decline in the value of shares of our common stock.
When we invest in debt securities, we generally expect to acquire warrants or other equity-related securities as well. Our goal is
ultimately to dispose of these equity interests and realize gains upon disposition of such interests. Over time, the gains that we realize
on these equity interests may offset, to some extent, losses that we experience on defaults under debt and other securities that we hold.
However, the equity interests that we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not
be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be
sufficient to offset any other losses that we experience. In addition, we anticipate that approximately 50% of our warrants may not
realize and exit or generate any returns. Furthermore, because of the financial reporting requirements under U.S. generally accepted
accounting principles, or U.S. GAAP, of those approximately 50% of warrants that we do not realize and exit, the assigned costs to the
initial warrants may lead to realized write-offs when the warrants either expire or are not exercised.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce
our return on equity.
During the year ended December 31, 2018, we received debt investment early principal repayments and pay down of working
capital debt investments of approximately $576.7 million. We are subject to the risk that the investments we make in our portfolio
companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments,
pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower
yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a
new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be
materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally,
prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to
lose all or part of our investment in these companies.
We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative
and negative obligations on the operation of the company’s business and its financial condition. However, from time to time we may
elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as
acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio
company. These actions may reduce the likelihood of receiving the full amount of future payments of interest or principal and be
accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial
resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay
distributions, could adversely affect our results of operation and financial condition and cause the loss of all or part of your
investment.
We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances
where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a
result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower
outside the ordinary course of business.
Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such
loans or we could be subject to lender liability claims.
Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to
claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or
fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have
exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client or providing of
significant managerial assistance. We have made direct equity investments or received warrants in connection with loans. These
investments represent approximately 7.8% of the outstanding value of our investment portfolio as of December 31, 2018. Payments on
one or more of our loans, particularly certain loans to clients in which we also hold equity interests, may be subject to claims of
equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs
of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence
may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common
equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan
on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on
an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and
preferred securities had been satisfied.
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In addition to these risks, in the event we elect to convert our debt position to equity, or otherwise take control of a portfolio
company (such as through placing a member of our management team on its board of directors), as part of a restructuring, we face
additional risks acting in that capacity. It is not uncommon for unsecured, or otherwise unsatisfied creditors, to sue parties that elect to
use their debt positions to later control a company following a restructuring or bankruptcy. Apart from lawsuits, key customers and
suppliers might act in a fashion contrary to the interests of a portfolio company if they were left unsatisfied in a restructuring or
bankruptcy. Any combination of these factors might lead to the loss in value of a company subject to such activity and may divert the
time and attention of our management team and investment team to help to address such issues in a portfolio company.
The potential inability of our portfolio companies’ in the healthcare industry to charge desired prices with respect to
prescription drugs could impact their revenues and in turn their ability to repay us.
Some of our portfolio companies in the healthcare industry are subject to risks associated with the pricing for prescription drugs.
It is uncertain whether customers of our healthcare industry portfolio companies will continue to utilize established prescription drug
pricing methods, or whether other pricing benchmarks will be adopted for establishing prices within the industry. Legislation may lead
to changes in the pricing for Medicare and Medicaid programs. Regulators have conducted investigations into the use of prescription
drug pricing methods for federal program payment, and whether such methods have inflated drug expenditures by the Medicare and
Medicaid programs. Federal and state proposals have sought to change the basis for calculating payment of certain drugs by the
Medicare and Medicaid programs. Additionally, President Trump has taken actions and made statements that suggest he plans to seek
repeal of all or portions of the Affordable Care Act, or the ACA. There is currently uncertainty with respect to the impact any such
repeal may have and any resulting changes may take time to unfold, which could have an impact on coverage and reimbursement for
healthcare items and services covered by plans that were authorized by the ACA. We cannot predict the ultimate content, timing or
effect of any such legislation or executive action or the impact of potential legislation or executive action on us. Any changes to the
method for calculating prescription drug costs may reduce the revenues of our portfolio companies in the healthcare industry which
could in turn impair their ability to timely make any principal and interest payments owed to us.
Risks Related to Our Securities
Investing in shares of our common stock involves an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of
principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and
therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance.
Our common stock may trade below its NAV per share, which limits our ability to raise additional equity capital.
If our common stock is trading below its NAV per share, we will generally not be able to issue additional shares of our common
stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If
our common stock trades below NAV, the higher cost of equity capital may result in it being unattractive to raise new equity, which
may limit our ability to grow. The risk of trading below NAV is separate and distinct from the risk that our NAV per share may
decline. We cannot predict whether shares of our common stock will trade above, at or below our NAV.
Provisions of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common
stock.
Our charter and bylaws contain provisions that may have the effect of discouraging, delaying, or making difficult a change in
control of our company or the removal of our incumbent directors. Under our charter, our Board of Directors is divided into three
classes serving staggered terms, which will make it more difficult for a hostile bidder to acquire control of us. In addition, our Board
of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including
preferred stock. Subject to compliance with the 1940 Act, our Board of Directors may, without stockholder action, amend our charter
to increase the number of shares of stock of any class or series that we have authority to issue. The existence of these provisions,
among others, may have a negative impact on the price of our common stock and may discourage third party bids for ownership of our
company. These provisions may prevent any premiums being offered to you for shares of our common stock in connection with a
takeover.
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Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our
common stock.
Sales of substantial amounts of our common stock, or the availability of such common stock for sale (including as a result of the
conversion of our 2022 Convertible Notes, issued in January 2017, into common stock), could adversely affect the prevailing market
prices for our common stock, which may also lead to further dilution of our earnings per share. If this occurs and continues, it could
impair our ability to raise additional capital through the sale of securities should we desire to do so.
We may periodically obtain the approval of our stockholders to issue shares of our common stock at prices below the then
current NAV per share of our common stock. If we receive such approval from the stockholders, we may issue shares of our
common stock at a price below the then current NAV per share of common stock. Any such issuance could materially dilute
your interest in our common stock and reduce our NAV per share.
We may periodically obtain the approval of our stockholders to issue shares of our common stock at prices below the then
current NAV per share of our common stock. Such approval has allowed and may again allow us to access the capital markets in a
way that we typically are unable to do as a result of restrictions that, absent stockholder approval, apply to business development
companies under the 1940 Act. Any decision to sell shares of our common stock below the then current NAV per share of our
common stock is subject to the determination by our Board of Directors that such issuance and sale is in our and our stockholders’
best interests.
Any sale or other issuance of shares of our common stock at a price below NAV per share has resulted and will continue to
result in an immediate dilution to your interest in our common stock and a reduction of our NAV per share. This dilution would occur
as a result of a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the
increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below
our NAV per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of
any such issuance. We also cannot determine the resulting reduction in our NAV per share of any such issuance at this time. We
caution you that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offering
that we make at a price below our then current NAV in the future in a prospectus supplement issued in connection with any such
offering. We cannot predict whether shares of our common stock will trade above, at or below our NAV.
If we conduct an offering of our common stock at a price below NAV, investors are likely to incur immediate dilution upon the
closing of the offering.
We are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, sell our
common stock, at a price below the current NAV of the common stock, or sell warrants, options or other rights to acquire such
common stock, at a price below the current NAV of the common stock if our Board of Directors determines that such sale is in our
best interests and the best interests of our stockholders and our stockholders have approved the practice of making such sales.
In connection with the receipt of such stockholder approval, we will limit the number of shares that it issues at a price below
NAV pursuant to this authorization so that the aggregate dilutive effect on our then outstanding shares will not exceed 20%. Our
Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the
discount, and as a result, the discount could be up to 100% of NAV per share. If we were to issue shares at a price below NAV, such
sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the NAV per share
as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholder’s interest in our
earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.
In addition, if we determined to conduct additional offerings in the future there may be even greater dilution if we determine to
conduct such offerings at prices below NAV. As a result, investors will experience further dilution and additional discounts to the
price of our common stock. Because the number of shares of common stock that could be so issued and the timing of any issuance is
not currently known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our securities at a price below
NAV during the year ended December 31, 2018.
We may allocate the net proceeds from an offering in ways with which you may not agree.
We have significant flexibility in investing the net proceeds of an offering and may use the net proceeds from an offering in
ways with which you may not agree or for purposes other than those contemplated at the time of the offering.
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If we issue preferred stock, debt securities or convertible debt securities, the NAV and market value of our common stock may
become more volatile.
We cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the
holders of our common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the NAV and
market value of our common stock to become more volatile. If the distribution rate on the preferred stock, or the interest rate on the
debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our
common stock would be reduced. If the distribution rate on the preferred stock, or the interest rate on the debt securities, were to
exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock
than if we had not issued the preferred stock or debt securities. Any decline in the NAV of our investment would be borne entirely by
the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater
decrease in NAV to the holders of our common stock than if we were not leveraged through the issuance of preferred stock. This
decline in NAV would also tend to cause a greater decline in the market price for our common stock.
There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to
maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or units or of a
downgrade in the ratings of the preferred stock, debt securities, convertible debt or our current investment income might not be
sufficient to meet the distribution requirements on the preferred stock or the interest payments on the debt securities. If we do not
maintain our required asset coverage ratios, we may not be permitted to declare dividend distributions. In order to counteract such an
event, we might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or
convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the
issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities.
Holders of preferred stock, debt securities, convertible debt or any combination of these securities may have different interests than
holders of common stock and may at times have disproportionate influence over our affairs.
Holders of any preferred stock that we may issue will have the right to elect members of the Board of Directors and have class
voting rights on certain matters.
The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and
to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more, until such arrearage is
eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding
preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly,
preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of dividends or other
distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating
agencies, might impair our ability to maintain our ability to be subject to tax as a RIC.
Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.
If you are holding debt securities issued by us and such securities are redeemable at our option, we may choose to redeem your
debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In addition, if you
are holding debt securities issued by us and such securities are subject to mandatory redemption, we may be required to redeem your
debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In this circumstance,
you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt
securities being redeemed.
On October 24, 2017, our Board of Directors approved a redemption of $75.0 million of the outstanding aggregate principal
amount of the 2024 Notes, which were redeemed on November 23, 2017. On February 9, 2018, our Board of Directors approved a
redemption of $100.0 million of the outstanding aggregate principal amount of the 2024 Notes, which were redeemed on April 2,
2018. Further, on December 7, 2018, our 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. We may redeem the 2022 Notes after September 23, 2022, the 2025 Notes after April 30, 2021, and the 2033 Notes after
October 30, 2033 at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest
payments. If we choose to redeem the 2022 Notes, 2025 Notes, or 2033 Notes when the fair market value of the 2022 Notes, 2025
Notes, or 2033 Notes is above par value, you would experience a loss of any potential premium.
Our shares may trade at discounts from NAV or at premiums that are unsustainable over the long term.
Shares of business development companies may trade at a market price that is less than the NAV that is attributable to those
shares. Our shares have historically traded above and below our NAV. The possibility that our shares of common stock will trade at a
discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from the risk that our NAV may
decrease. It is not possible to predict whether our shares will trade at, above or below NAV in the future.
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Our credit ratings may not reflect all risks of an investment in our debt securities.
Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated
changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect
the potential impact of risks related to market conditions generally or other factors discussed herein on the market value of or trading
market for the publicly issued debt securities.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our debt securities, if any, or
change in the debt markets could cause the liquidity or market value of our debt securities to decline significantly.
Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or
anticipated changes in our credit ratings will generally affect the market value of our outstanding debt and equity securities. These
credit ratings may not reflect the potential impact of risks relating to the structure or marketing of such debt and equity securities.
Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing
organization in its sole discretion.
Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of our debt and
equity securities of any changes in our credit ratings. There can be no assurance that a credit rating will remain for any given period of
time or that such credit ratings will not be lowered or withdrawn entirely if future circumstances relating to the basis of the credit
rating, such as adverse changes in our company, so warrant. An increase in the competitive environment, inability to cover
distributions, or increase in leverage could lead to a downgrade in our credit ratings and limit our access to the debt and equity markets
capability impairing our ability to grow the business. The conditions of the financial markets and prevailing interest rates have
fluctuated in the past and are likely to fluctuate in the future.
Investors in offerings of our common stock will likely incur immediate dilution upon the closing of an offering.
We generally expect the public offering price of any offering of shares of our common stock to be higher than the book value
per share of our outstanding common stock (unless we offer shares pursuant to a rights offering or after obtaining prior approval for
such issuance from our stockholders and our independent directors). Accordingly, investors purchasing shares of common stock in
offerings may pay a price per share that exceeds the tangible book value per share after such offering. We currently have an incentive
plan and may in the future implement additional incentive plans or retention plans. To the extent equity is issued under any of these
plans, stockholders’ ownership interest will be diluted.
Our stockholders may experience dilution upon the conversion of our 2022 Convertible Notes.
Our 2022 Convertible Notes, issued in January 2017, are convertible into shares of our common stock beginning on August 1,
2021 or, under certain circumstances, earlier. Upon conversion of the 2022 Convertible Notes, we have the choice to pay or deliver, as
the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The
initial conversion price of the 2022 Convertible Notes is $16.41, subject to adjustment in certain circumstances. If we elect to deliver
shares of common stock upon a conversion at the time our NAV per share exceeds the conversion price in effect at such time, our
stockholders may incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of common stock
upon our issuance of common stock in connection with the conversion of the 2022 Convertible Notes and any distributions paid on
our common stock will also be paid on shares issued in connection with such conversion after such issuance.
Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan.
All distributions in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically
reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience
dilution in their ownership percentage of our common stock over time.
Our distribution proceeds may exceed our earnings. Therefore, portions of the distributions that we make may represent a
return of capital to stockholders, which will lower their tax basis in their shares.
The tax treatment and characterization of our distributions may vary significantly from time to time due to the nature of our
investments. The ultimate tax characterization of our distributions made during a taxable year generally will not finally be determined
until after the end of that taxable year. We may make distributions during a taxable year that exceed our investment company taxable
income, determined without regard to any deduction for dividends paid, and net capital gains for that taxable year. In such a situation,
the amount by which our total distributions exceed investment company taxable income, determined without regard to any deduction
for dividends paid, and net capital gains generally would be treated as a return of capital up to the amount of a stockholder’s tax basis
in the shares, with any amounts exceeding such tax basis generally treated as a gain from the sale or exchange of such shares. A return
of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment
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activities. Moreover, we may pay all or a substantial portion of our distributions from the proceeds of the sale of shares of our
common stock or from borrowings in anticipation of future cash flow, which could constitute a return of stockholders’ capital and will
lower such stockholders’ tax basis in our shares, which may result in increased tax liability to stockholders when they sell such shares.
The tax liability to stockholders upon the sale of shares may increase even if such shares are sold at a loss.
Our common stock price has been and continues to be volatile and may decrease substantially.
As with any company, the price of our common stock will fluctuate with market conditions and other factors, which include, but
are not limited to, the following:
price and volume fluctuations in the overall stock market from time to time;
significant volatility in the market price and trading volume of securities of RICs, business development companies or
other financial services companies;
any inability to deploy or invest our capital;
fluctuations in interest rates;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
the financial performance of specific industries in which we invest in on a recurring basis;
announcement of strategic developments, acquisitions, and other material events by us or our competitors, or operating
performance of companies comparable to us;
changes in regulatory policies or tax guidelines with respect to RICs, SBICs or business development companies;
losing our ability to either qualify or be subject to U.S. federal income tax as a RIC;
actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of
securities analysts;
changes in the value of our portfolio of investments;
realized losses in investments in our portfolio companies;
general economic conditions and trends;
inability to access the capital markets;
loss of a major funded source; or
departure of key personnel.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has
often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation
in the future. Securities litigation could result in substantial costs and could divert management’s attention and resources from our
business.
We may be unable to invest a significant portion of the net proceeds from an offering or from exiting an investment or other
capital on acceptable terms, which could harm our financial condition and operating results.
Delays in investing the net proceeds raised in an offering or from exiting an investment or other capital may cause our
performance to be worse than that of other fully invested business development companies or other lenders or investors pursuing
comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment
objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of any
offering or from exiting an investment or other capital on acceptable terms within the time period that we anticipate or at all, which
could harm our financial condition and operating results.
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We anticipate that, depending on market conditions and the amount of the capital, it may take us a substantial period of time to
invest substantially all the capital in securities meeting our investment objective. During this period, we will invest the capital
primarily in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less or
use the net proceeds from such offerings to reduce then-outstanding debt obligations, which may produce returns that are significantly
lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective.
As a result, any distributions that we pay during such period may be substantially lower than the distributions that we may be able to
pay when our portfolio is fully invested in securities meeting our investment objective. In addition, until such time as the net proceeds
of any offering or from exiting an investment or other capital are invested in new securities meeting our investment objective, the
market price for our securities may decline. Thus, the initial return on your investment may be lower than when, if ever, our portfolio
is fully invested in securities meeting our investment objective.
Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the
subscription price is less than our NAV per share, then you will experience an immediate dilution of the aggregate NAV of your
shares.
In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they
will, at the completion of a rights offering, own a smaller proportional interest in us than would otherwise be the case if they fully
exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this
time what proportion of the shares will be purchased as a result of such rights offering.
In addition, if the subscription price is less than the NAV per share of our common stock, then our stockholders would
experience an immediate dilution of the aggregate NAV of their shares as a result of the offering. The amount of any decrease in NAV
is not predictable because it is not known at this time what the subscription price and NAV per share will be on the expiration date of a
rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.
The trading market or market value of our publicly issued debt securities may fluctuate.
Our publicly issued debt securities may or may not have, and may never develop, an established trading market. In addition to
our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued
debt securities. These factors include, but are not limited to, the following:
the time remaining to the maturity of these debt securities;
the outstanding principal amount of debt securities with terms identical to these debt securities;
the ratings assigned by national statistical ratings agencies;
the general economic environment;
the supply of debt securities trading in the secondary market, if any;
the redemption or repayment features, if any, of these debt securities;
the level, direction and volatility of market interest rates generally; and
market rates of interest higher or lower than rates borne by the debt securities. You should also be aware that there may be
a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the
market value of the debt securities or the trading market for the debt securities.
The 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are unsecured and therefore are effectively subordinated
to any secured indebtedness we have currently incurred or may incur in the future.
The 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are not secured by any of our assets or any of the assets
of our subsidiaries. As a result, while the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes remain senior in priority
to our equity securities, they are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred
and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of
the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders
of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the
assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay
other creditors, including the holders of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.
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The 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are structurally subordinated to the indebtedness and
other liabilities of our subsidiaries.
The 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are obligations exclusively of Hercules Capital, Inc. and
not of any of our subsidiaries. None of our subsidiaries are or act as guarantors of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022
Convertible Notes and the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes are not required to be guaranteed by any
subsidiaries we may acquire or create in the future. Our secured indebtedness with respect to the SBA debentures is held through our
SBIC subsidiary. The assets of any such subsidiary are not directly available to satisfy the claims of our creditors, including holders of
the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including holders
of preferred stock, if any, of our subsidiaries) will have priority over our equity interests in such subsidiaries (and therefore the claims
of our creditors, including holders of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes) with respect to the assets
of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be subordinated
to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to
our claims. As a result of not having a direct claim against any of our subsidiaries, the 2022 Notes, 2025 Notes, 2033 Notes, and 2022
Convertible Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of our subsidiaries
and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. In addition, our subsidiaries may
incur substantial additional indebtedness in the future, all of which would be structurally senior to the 2022 Notes, 2025 Notes, 2033
Notes, and 2022 Convertible Notes.
The respective indentures under which the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes were issued
contain limited protections for the holders of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.
The indenture under which 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes were issued offers limited
protections to the holders of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes. The terms of the respective
indentures and the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes do not restrict our or any of our subsidiaries’
ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse
impact on an investment in the 2022 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes. In particular, the terms of the
respective indentures and the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes do not place any restrictions on our or
our subsidiaries’ ability to:
• issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other
obligations that would be equal in right of payment to the 2022 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes,
(2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to
the 2022 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes to the extent of the values of the assets securing such
debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank
structurally senior to the 2022 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes and (4) securities, indebtedness
or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in
our subsidiaries and therefore would rank structurally senior in right of payment to the 2022 Notes, 2025 Notes, 2033
Notes, or 2022 Convertible Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of
indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the
1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but
giving effect to any exemptive relief granted to us by the SEC (currently, these provisions generally prohibit us from
making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities,
unless our asset coverage, as defined in the 1940 Act, equals at least 150% thereafter after such borrowings);
• pay distributions on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking
junior in right of payment to the 2022 Notes, 2025 Notes, 2033 Notes, or 2022 Convertible Notes, in each case other than
distributions, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) as modified by
Section 61(a)(1) of the 1940 Act or any successor provisions, giving effect to (i) any exemptive relief granted to us by the
SEC and (ii) no-action relief granted by the SEC to another business development company (or to us if we determine to
seek such similar no-action or other relief) permitting the business development company to declare any cash distribution
notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order
to maintain the business development company’s status as a RIC under Subchapter M of the Code (currently, these
provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or
purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 150% at the time of the
declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or
purchase);
• sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our
assets);
• enter into transactions with affiliates;
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• create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
• make investments; or
• create restrictions on the payment of distributions or other amounts to us from our subsidiaries.
In addition, the indenture and the 2025 Notes and 2033 Notes do not require us to purchase the 2025 Notes or 2033 Notes in
connection with a change of control or any other event.
Furthermore, the terms of the respective indentures and the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes
do not protect their respective holders in the event that we experience changes (including significant adverse changes) in our financial
condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios
or specified levels of net worth, revenues, income, cash flow or liquidity, except as required under the 1940 Act.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2022
Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes may have important consequences for their holders, including making it
more difficult for us to satisfy our obligations with respect to the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes or
negatively affecting their trading value.
Certain of our current debt instruments include more protections for their respective holders than the indenture and 2022 Notes,
2025 Notes, 2033 Notes, and 2022 Convertible Notes. See “—In addition to regulatory requirements that restrict our ability to raise
capital, our 2022 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, and Credit Facilities contain various covenants which, if
not complied with, could require accelerated repayment under the facility or require us to repurchase the 2022 Notes, 2025 Notes,
2033 Notes, or 2022 Convertible Notes thereby materially and adversely affecting our liquidity, financial condition, results of
operations and ability to pay distributions.” In addition, other debt we issue or incur in the future could contain more protections for its
holders than the respective indentures and the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes, including additional
covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for
and trading levels and prices of the 2022 Notes, 2025 Notes, 2033 Notes, and 2022 Convertible Notes.
An active trading market for the 2025 Notes or 2033 Notes may not develop or be sustained, which could limit the market price
of the 2025 Notes or 2033 Notes or your ability to sell them.
Although the 2025 Notes and 2033 Notes are listed on the NYSE under the symbols “HCXZ” and “HCXY,” respectively, we
cannot provide any assurances that an active trading market will develop or be sustained for the 2025 Notes or 2033 Notes or that the
2025 Notes or 2033 Notes will be able to be sold. At various times, the 2025 Notes or 2033 Notes may trade at a discount from their
initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic
conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market is not
sustained, the liquidity and trading price for the 2025 Notes or 2033 Notes may be harmed.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2022 Notes, 2025
Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed Notes, or 2028 Asset-Backed Notes.
Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank
Facility, 2022 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes or other
indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the holders
of such indebtedness, could make us unable to pay principal, premium, if any, and interest on any of our indebtedness, including the
2022 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed Notes, or 2028 Asset-Backed Notes and
substantially decrease the market value of the 2022 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed
Notes, and 2028 Asset-Backed Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds
necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply
with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be
in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such
indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest,
the lenders under the Wells Facility and the Union Bank Facility or other debt we may incur in the future could elect to terminate their
commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into
bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the
required lenders under the Wells Facility or Union Bank Facility or the required holders of our 2022 Notes, 2025 Notes, 2033 Notes,
2022 Convertible Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes or other debt that we may incur in the future to avoid
being in default. If we breach our covenants under the Wells Facility, Union Bank Facility, 2022 Notes, 2025 Notes, 2033 Notes, 2022
Convertible Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes or other debt and seek a waiver, we may not be able to obtain
a waiver from the required lenders or holders. If this occurs, we would be in default under the Wells Facility, Union Bank Facility,
2022 Notes, 2025 Notes, 2033 Notes, 2022 Convertible Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes or other debt, the
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lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are
unable to repay debt, lenders having secured obligations, including the lenders under the Wells Facility and the Union Bank Facility,
could proceed against the collateral securing the debt. Because the Wells Facility and the Union Bank Facility have, and any future
credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 2022 Notes, 2025 Notes, 2033
Notes, 2022 Convertible Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes, Wells Facility, Union Bank Facility or under
any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our operation or
any of our subsidiaries. Currently, we lease approximately 14,500 square feet of office space in Palo Alto, CA for our corporate
headquarters. We also lease office space in Boston, MA, New York, NY, Washington, DC, Hartford, CT, Westport, CT, Chicago, IL,
and San Diego, CA.
Item 3.
Legal Proceedings
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise.
Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While
the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will
materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal
proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.
Item 4.
Mine Safety Disclosures
Not applicable.
66
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the NYSE under the symbol “HTGC.” As of February 14, 2018, we had approximately 61,003
stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders.
There are currently approximately 55 additional beneficial holders of our common stock.
Shares of business development companies may trade at a market price that is less than the NAV per share. The possibilities that
our shares of common stock will trade at a discount from NAV or at premiums that are unsustainable over the long term are separate
and distinct from the risk that our NAV will decrease. At times, our shares of common stock have traded at a premium to NAV or at a
significant discount to the NAV per share.
SALES OF UNREGISTERED SECURITIES
During 2018, 2017 and 2016, the Board of Directors elected to receive approximately $500,000, $250,000 and $250,000,
respectively, of their compensation in the form of common stock and we issued 38,245, 19,515 and 18,600 shares, respectively, to the
directors based on the closing prices of the common stock on the specified election dates.
During 2018, 2017 and 2016, we issued 159,560, 163,584, and 144,308 shares, respectively, of common stock to shareholders in
connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act
of 1933, as amended, or the Securities Act. The aggregate value of the shares of our common stock issued under our dividend
reinvestment plan during the years ended December 31, 2018, 2017 and 2016 were approximately $2.0 million, $2.2 million and $1.8
million, respectively.
EQUITY COMPENSATION PLAN INFORMATION
See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
ISSUER PURCHASES OF EQUITY SECURITIES
On December 17, 2018, our Board of Directors authorized a stock repurchase plan permitting us to repurchase up to $25.0
million of our common stock. We may repurchase shares of our common stock in the open market, including block purchases, at
prices that may be above or below the NAV as reported in the most recently published financial statements, in accordance with the
guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act. We expect that the share repurchase program will be in
effect until June 18, 2019, or until the approved dollar amount has been used to repurchase shares.
During the three months ended December 31, 2018, we made the following repurchases pursuant to the repurchase plan:
(in thousands, except share and per share
data)
Period
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
Total Number of
Shares Purchased
Average Price
Paid Per Share
—
—
10.77
10.77
— $
—
376,466
376,466 $
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan(1)
Maximum Remaining
Dollar Value that May
Yet Be Purchased
Under Plan(1)
— $
—
376,466
376,466 $
—
—
20,944
20,944
(1) Note that all repurchase activity per the table above was made pursuant to the stock repurchase plan authorized by our Board of Directors on December 17,
2018. The plan permits us to repurchase up to $25.0 million of our common stock.
In addition, during the three months ended December 31, 2018, 18,956 shares of our common stock were delivered to us at an
average price per share of $12.72 in satisfaction of tax withholding obligations of holders of restricted shares issued under the 2004
Plan and/or the Director Plan that vested during the period.
We anticipate that the manner, timing, and amount of any share purchases will be determined by management based upon the
evaluation of market conditions, stock price, and additional factors in accordance with regulatory requirements. Pursuant to the 1940
67
Act, we are required to notify shareholders when such a program is initiated or implemented. The repurchase program does not require
us to acquire any specific number of shares and may be extended, modified, or discontinued at any time.
DISTRIBUTION POLICY
In order to be subject to tax as a RIC, we must distribute to our stockholders, in respect of each taxable year, dividends for U.S.
federal income tax purposes of an amount generally at least equal to the Annual Distribution Requirement. Upon satisfying this
requirement in respect of a taxable year, we generally will not be subject to corporate taxes on any income we distribute to our
stockholders as dividends for U.S. federal income tax purposes.
However, as a RIC we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income and gains
unless we make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in
respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. We will not be subject to this
excise tax on any amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net
capital gains).
Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of
current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next
taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may
be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S.
federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we
choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from
our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the
distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue
senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios
stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. Our ability to make distributions will
be limited by the asset coverage requirements under the 1940 Act. See “Item 1. Business— Regulation.”
On February 13, 2019, the Board of Directors declared a cash distribution of $0.31 per share to be paid on March 11, 2019 to
shareholders of record as of March 4, 2019. This distribution represents our fifty-fourth consecutive distribution since our IPO,
bringing the total cumulative distribution to date to $15.28 per share.
Our Board of Directors maintains a variable distribution policy with the objective of distributing four quarterly distributions in
an amount that approximates 90 - 100% of our taxable quarterly income or potential annual income for a particular taxable year. In
addition, at the end of our taxable year, our Board of Directors may choose to pay an additional special distribution, or fifth
distribution, so that we may distribute approximately all of our annual taxable income in the taxable year in which it was earned or
may elect to maintain the option to spill over our excess taxable income into the following taxable year as part of any future
distribution payments.
Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital
to the extent of a stockholder’s tax basis in our shares, and any distributions paid in excess of a stockholder’s tax basis in our shares
would generally be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end
of our taxable year and is generally based upon our taxable income for the full taxable year and distributions paid for the full taxable
year. Of the distributions declared during the fiscal years ended December 31, 2018, 2017, and 2016, 100% were distributions derived
from our current and accumulated earnings and profits. There can be no certainty to stockholders that this determination is
representative of the tax attributes of the 2019 distributions that we anticipate would be made to stockholders.
We maintain an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution,
cash distributions will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts
out” of the dividend reinvestment plan and chooses to receive cash distributions. During 2018, 2017, and 2016, we issued 159,560,
163,584 and 144,308 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan.
68
PERFORMANCE GRAPH
The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2013, a
person invested $100 in each of our common stock, the NYSE Composite Index, the NASDAQ Financial 100 Index, and the Wells
Fargo BDC Index. The graph measures total shareholder return, which takes into account both changes in stock price and
distributions. It assumes that distributions paid are reinvested in like securities.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Hercules Capital, Inc., the NYSE Composite Index, the NASDAQ Financial 100 Index,
and Wells Fargo BDC Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/31/13 6/30/14 12/31/14 6/30/15 12/31/15 6/30/16 12/31/16 6/30/17 12/31/17 6/30/18 12/31/18
Hercules Capital, Inc.
NYSE Composite
NASDAQ Financial 100
Wells Fargo BDC Index
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be “soliciting
material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
The stock price performance included in the above graph is not necessarily indicative of future stock price performance.
69
Item 6.
Selected Consolidated Financial Data
Selected Consolidated Financial Data
The following consolidated financial data is derived from our audited consolidated financial statements. The selected
consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and related notes included elsewhere herein. Historical data is not
necessarily indicative of results to be expected for any future period.
(in thousands, except per share amounts)
Balance sheet data:
Investments, at value
Cash and cash equivalents
Total assets
Total liabilities
Total net assets
2018
$ 1,880,373
34,212
1,945,191
989,747
955,444
For the Year Ended December 31,
2015
2016
2017
2014
$ 1,542,214 $ 1,423,942 $ 1,200,638
95,196
1,334,761
617,627
717,134
13,044
1,464,204
676,260
787,944
91,309
1,654,715
813,748
840,967
$ 1,020,737
227,116
1,299,223
640,359
658,864
Other Data:
Total return (3)
Total debt investments, at value
Total warrant investments, at value
Total equity investments, at value
Unfunded Commitments (2)
Net asset value per share (1)
(7.56 %)
1,733,492
26,669
120,212
138,982
9.90
$
1.47 %
1,415,984
36,869
89,361
73,604
9.96 $
26.87 %
1,328,803
27,485
67,654
59,683
9.90 $
$
(9.70 %)
(1.75 %)
1,110,209
22,987
67,442
75,402
9.94
$
923,906
25,098
71,733
147,689
10.18
(1)
(2)
(3)
Based on common shares outstanding at period end.
Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount
excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.
The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period,
divided by the beginning price assuming the distribution is reinvested on the date of the issuance. The total return does not reflect any sales load that must be
paid by investors.
(in thousands, except per share amounts)
Investment income:
2018
For the Year Ended December 31,
2016
2015
2017
2014
$
$
190,636
17,117
207,753
$
172,196
18,684
190,880
$
158,727
16,324
175,051
$
140,266
16,866
157,132
126,618
17,047
143,665
Interest
Fees
Total investment income
Operating expenses:
Interest
Loan fees
General and administrative:
Employee Compensation:
Compensation and benefits
Stock-based compensation
Total employee compensation
Total operating expenses
Other income (loss)
Net investment income
Net realized gain (loss) on investments
Net change in unrealized appreciation (depreciation) on investments
Total net realized and unrealized gain (loss)
Net increase in net assets resulting from operations
$
Change in net assets per common share (basic)
Distributions declared per common share:
$
$
39,435
7,260
15,488
37,857
8,728
16,105
32,016
5,042
16,106
30,834
6,055
16,658
25,062
11,779
36,841
99,024
—
108,729
(11,087 )
(21,146 )
(32,233 )
76,496
0.83
1.26
$
$
$
24,555
7,191
31,746
94,436
—
96,444
(26,711 )
9,265
(17,446 )
78,998
0.95
1.24
$
$
$
22,500
7,043
29,543
82,707
8,000
100,344
4,576
(36,217 )
(31,641 )
68,703
0.91
1.24
$
$
$
20,713
9,370
30,083
83,630
(1 )
73,501
5,147
(35,732 )
(30,585 )
42,916
0.60
1.24
$
$
$
28,041
5,919
10,209
16,604
9,561
26,165
70,334
(1,581 )
71,750
20,112
(20,674 )
(562 )
71,188
1.12
1.24
70
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The matters discussed in this report, as well as in future oral and written statements by management of Hercules Capital, Inc.
that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties
which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements.
Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,”
“contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar
expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of
profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other
uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us
that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:
our current and future management structure;
our future operating results;
our business prospects and the prospects of our prospective portfolio companies;
the impact of investments that we expect to make;
our informal relationships with third parties including in the venture capital industry;
the expected market for venture capital investments and our addressable market;
the dependence of our future success on the general economy and its impact on the industries in which we invest;
our ability to access debt markets and equity markets;
the ability of our portfolio companies to achieve their objectives;
our expected financings and investments;
our regulatory structure and tax status;
our ability to operate as a business development company, a SBIC and a RIC;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the timing, form and amount of any distributions;
the impact of fluctuations in interest rates on our business;
the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and
our ability to recover unrealized losses.
For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this report,
please see the discussion under “Item 1A. Risk Factors.” You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We
undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this
report.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other
financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts
of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from
those anticipated by such forward-looking information due to the factors discussed under “Item 1A—Risk Factors” and “Forward-
Looking Statements” of this Item 7.
71
Overview
We are a specialty finance company focused on providing senior secured loans to high-growth, innovative venture capital-
backed companies in a variety of technology, life sciences and sustainable and renewable technology industries. We source our
investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York,
NY, Washington, DC, Hartford, CT, Westport, CT, Chicago, IL, and San Diego, CA.
Our goal is to be the leading structured debt financing provider for venture capital-backed companies in technology-related
industries requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of
technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and
sustainable and renewable technology and to offer a full suite of growth capital products. We invest primarily in structured debt with
warrants and, to a lesser extent, in senior debt and equity investments. We invest primarily in private companies but also have
investments in public companies.
We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan,
that is coupled with an equity component, including warrants, options or other rights to purchase common or preferred stock. Our
structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. We also provide
“unitranche” loans, which are loans that combine both senior and mezzanine debt, generally in a first lien position.
Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and
capital appreciation from our warrant and equity-related investments. Our primary business objectives are to increase our net income,
net operating income and NAV by investing in structured debt with warrants and equity of venture capital-backed companies in
technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. Our equity
ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a controlling
interest under the 1940 Act. In some cases, we receive the right to make additional equity investments in our portfolio companies in
connection with future equity financing rounds. Capital that we provide directly to venture capital-backed companies in technology-
related industries is generally used for growth and general working capital purposes as well as in select cases for acquisitions or
recapitalizations.
We also make investments in qualifying small businesses through HT III, which is our wholly-owned SBIC. HT III holds
approximately $307.5 million in assets, which accounted for approximately 14.3% of our total assets, prior to consolidation at
December 31, 2018. At December 31, 2018, with our net investment of $74.5 million, HT III has the capacity to issue $149.0 million
of SBA-guaranteed debentures, which is subject to SBA approval. At December 31, 2018, we have issued $149.0 million in SBA-
guaranteed debentures in our SBIC subsidiary.
We have qualified as and have elected to be treated for tax purposes as a RIC under Subchapter M of the Code. Pursuant to this
election, we generally will not be subject to corporate-level taxes on any income and gains that we distribute as dividends for federal
income tax purposes to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with
provisions contained in Subchapter M of the Code. For example, as a RIC we must earn 90% or more of our gross income during each
taxable year from qualified sources, typically referred to as “good income,” as well as satisfy certain quarterly asset diversification and
annual income distribution requirements.
We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business
development company under the 1940 Act. As a business development company, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities
of private U.S. companies, cash, cash equivalents and high-quality debt investments that mature in one year or less.
Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in
technology related companies at various stages of their development. Consistent with requirements under the 1940 Act, we invest
primarily in United-States based companies and to a lesser extent in foreign companies.
We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an
investment or a portfolio of investments or an entire company or sell a portion of our portfolio on an opportunistic basis. We, our
subsidiaries or our affiliates may also agree to manage certain other funds that invest in debt, equity or provide other financing or
services to companies in a variety of industries for which we may earn management or other fees for our services. We may also invest
in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future incentive
allocations. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to
completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive
documentation as well as a number of other factors and conditions including, without limitation, the approval of our board of directors
and required regulatory or third-party consents and, in certain cases, the approval of our stockholders. Accordingly, there can be no
72
assurance that any such transaction would be consummated. Any of these transactions or funds may require significant management
resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction.
Reduced Asset Coverage Requirements
The SBCAA, which was signed into law in March 2018, decreased the minimum asset coverage ratio in Section 61(a) of the
1940 Act for business development companies from 200% to 150% (subject to either stockholder approval or approval of both a
majority of the board of directors and a majority of directors who are not interested persons). On September 4, 2018 and December 6,
2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our
stockholders, respectively, approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of
the 1940 Act. As a result, effective December 7, 2018, the asset coverage ratio under the 1940 Act applicable to us decreased from
200% to 150%, permitting us to incur additional leverage.
Portfolio and Investment Activity
The total fair value of our investment portfolio was approximately $1.9 billion at December 31, 2018 as compared to
approximately $1.5 billion at December 31, 2017. The fair value of our debt investment portfolio at December 31, 2018 was
approximately $1.7 billion, compared to a fair value of approximately $1.4 billion at December 31, 2017. The fair value of the equity
portfolio at December 31, 2018 was approximately $120.2 million, compared to a fair value of approximately $89.4 million at
December 31, 2017. The fair value of the warrant portfolio at December 31, 2018 was approximately $26.7 million, compared to a fair
value of approximately $36.8 million at December 31, 2017.
Portfolio Activity
Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments.
From time to time, unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt
commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments are subject to the same
underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally
fund over the two succeeding quarters from close. Not all debt commitments represent future cash requirements. Similarly, unfunded
contractual commitments may expire without being drawn and thus do not represent future cash requirements.
Prior to entering into a contractual commitment, we generally issue a non-binding term sheet to a prospective portfolio
company. Non-binding term sheets are subject to completion of our due diligence and final investment committee approval process, as
well as the negotiation of definitive documentation with the prospective portfolio companies. These non-binding term sheets
generally convert to contractual commitments in approximately 90 days from signing. Not all non-binding term sheets are expected to
close and do not necessarily represent future cash requirements.
Our portfolio activity for the years ended December 31, 2018 and 2017 was comprised of the following:
(in millions)
Debt Commitments (1)
New portfolio company
Existing portfolio company
Total
Funded and Restructured Debt Investments (2)
New portfolio company
Existing portfolio company
Total
Funded Equity Investments
New portfolio company
Existing portfolio company
Total
Unfunded Contractual Commitments (3)
Total
Non-Binding Term Sheets
New portfolio company
Existing portfolio company
Total
December 31, 2018 December 31, 2017
$
$
$
$
$
$
$
$
969.2
184.0
1,153.2
641.6
258.2
899.8
53.4
7.6
61.0
$
$
$
$
$
$
139.0
$
55.5
—
55.5
$
$
773.2
98.8
872.0
578.9
175.9
754.8
7.1
2.9
10.0
73.6
122.0
—
122.0
(1)
(2)
(3)
Includes restructured loans and renewals in addition to new commitments.
Funded amounts include borrowings on revolving facilities.
Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount
excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.
73
We receive principal payments on our debt investment portfolio based on scheduled amortization of the outstanding balances. In
addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of
these early principal repayments may fluctuate significantly from period to period. During the year ended December 31, 2018, we
received approximately $576.7 million in aggregate principal repayments. Of the approximately $576.7 million of aggregate principal
repayments, approximately $90.1 million were scheduled principal payments, and approximately $486.6 million were early principal
repayments related to 36 portfolio companies. Of the approximately $486.6 million early principal repayments, approximately $69.3
million were early repayments due to M&A transactions for five portfolio companies.
Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable and escrow
receivables) as of and for each of the years ended December 31, 2018 and 2017 was as follows:
(in millions)
Beginning portfolio
New fundings and restructures
Warrants not related to current period fundings
Principal payments received on investments
Early payoffs
Accretion of loan discounts and paid-in-kind principal
Net acceleration of loan discounts and loan fees due to early payoff or restructure
New loan fees
Sale of investments
Loss on investments due to write offs
Net change in unrealized appreciation (depreciation)
Ending portfolio
December 31, 2018
$
$
1,542.2 $
960.7
0.1
(90.1 )
(486.6 )
34.9
(13.5 )
(13.8 )
(5.9 )
(25.1 )
(22.5 )
1,880.4 $
December 31, 2017
1,423.9
764.8
0.6
(119.5 )
(505.6 )
36.5
(8.1 )
(9.8 )
(11.0 )
(39.6 )
10.0
1,542.2
As of December 31, 2018, we held warrants or equity positions in four companies that have filed registration statements on
Form S-1 with the SEC in contemplation of potential IPOs. Three companies filed confidentially under the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. There can be no assurance that companies that have yet to complete their IPO will do so in a
timely manner or at all.
Changes in Portfolio
We generate revenue in the form of interest income, primarily from our investments in debt securities and commitment and
facility fees. Interest income is recognized in accordance with the contractual terms of the loan agreement to the extent that such
amounts are expected to be collected. Fees generated in connection with our debt investments are recognized over the life of the loan
or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other
equity-related securities that we acquire from our portfolio companies. Our investments generally range from $12.0 million to $40.0
million, although we may make investments in amounts above or below that range. As of December 31, 2018, our debt investments
have a term of between two and seven years and typically bear interest at a rate ranging from approximately 5.5% to approximately
15.7%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any
of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be
required to be included in income prior to receipt.
Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the
investment. In addition, our loans may include an interest-only period ranging from three to eighteen months or longer. In limited
instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal
amount of the debt securities and any accrued but unpaid interest become due at the maturity date.
Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as
an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the
remaining term of the loan commencing in the quarter relating to specific loan modifications. We had approximately $36.3 million of
unamortized fees at December 31, 2018, of which approximately $31.1 million was included as an offset to the cost basis of our
current debt investments and approximately $5.2 million was deferred contingent upon the occurrence of a funding or milestone. At
December 31, 2017, we had approximately $33.3 million of unamortized fees, of which approximately $29.3 million was included as
an offset to the cost basis of our current debt investments and approximately $4.0 million was deferred contingent upon the occurrence
of a funding or milestone.
74
Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. At
December 31, 2018, we had approximately $25.6 million in exit fees receivable, of which approximately $23.3 million was included
as a component of the cost basis of our current debt investments and approximately $2.3 million was a deferred receivable related to
expired commitments. At December 31, 2017, we had approximately $27.5 million in exit fees receivable, of which approximately
$23.9 million was included as a component of the cost basis of our current debt investments and approximately $3.6 million was a
deferred receivable related to expired commitments.
We have debt investments in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate
specified in each loan agreement, is recorded as interest income and added to the principal balance of the loan on specified
capitalization dates. To maintain our ability to be subject to tax as a RIC, this non-cash source of income must be distributed to
stockholders with other sources of income in the form of dividend distributions even though we have not yet collected the cash.
Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments. We recorded
approximately $9.4 million and $10.0 million in PIK income in the years ended December 31, 2018 and December 31, 2017,
respectively.
The core yield on our debt investments, which excludes the effects of fee and income accelerations attributed to early payoffs,
restructuring, loan modifications and other one-time events and includes income from expired commitments, was 12.6% and 12.4%
during the years ended December 31, 2018 and 2017, respectively. The effective yield on our debt investments, which includes the
effects of fee and income accelerations attributed to early payoffs, restructuring, loan modifications and other one-time events, was
13.7% and 14.2% for the years ended December 31, 2018 and 2017, respectively. The effective yield is derived by dividing total
investment income by the weighted average earning investment portfolio assets outstanding during the year, excluding non-interest
earning assets such as warrants and equity investments. Both the core yield and effective yield may be higher than what our common
stockholders may realize as the core yield and effective yield do not reflect our expenses and any sales load paid by our common
stockholders. The total yield on our investment portfolio was 12.2% and 12.7% for the years ended December 31, 2018 and 2017,
respectively. The total yield is derived by dividing total investment income by the weighted average investment portfolio assets
outstanding during the year, including non-interest earning assets such as warrants and equity investments at amortized cost.
The total return for our investors was approximately -7.6% and 1.5% during the years ended December 31, 2018 and 2017,
respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus
distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the
distribution. The total return does not reflect any sales load that must be paid by investors. See “Note 9 – Financial Highlights”
included in the notes to our consolidated financial statements appearing elsewhere in this report.
Portfolio Composition
Our portfolio companies are primarily privately held companies and public companies which are active in the drug discovery &
development, software, internet consumer & business services, media/content/info, sustainable and renewable technology, medical
devices & equipment, drug delivery, healthcare services, specialty pharmaceuticals, information services, consumer & business
products, surgical devices, semiconductors, electronics & computer hardware, communications & networking, biotechnology tools,
diagnostic and diversified financial services industry sectors. These sectors are characterized by high margins, high growth rates,
consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets
and intellectual property.
As of December 31, 2018, approximately 87.8% of the fair value of our portfolio was composed of investments in five
industries: 29.2% was composed of investments in the software industry, 28.7% was composed of investments in the drug discovery
and development industry, 17.5% was composed of investments in the internet consumer and business services industry, 6.5% was
composed of investments in the medical devices and equipment industry, and 5.9% was composed of investments in the sustainable
and renewable technology industry.
75
The following table shows the fair value of our portfolio by industry sector at December 31, 2018 and December 31, 2017:
December 31, 2018
December 31, 2017
(in thousands)
Software
Drug Discovery & Development
Internet Consumer & Business Services
Medical Devices & Equipment
Sustainable and Renewable Technology
Healthcare Services, Other
Drug Delivery
Diversified Financial Services
Information Services
Media/Content/Info
Electronics & Computer Hardware
Biotechnology Tools
Consumer & Business Products
Communications & Networking
Surgical Devices
Semiconductors
Diagnostic
Specialty Pharmaceuticals
Total
Investments at
Fair Value
Percentage of
Total Portfolio
Investments at
Fair Value
$
$
548,952
539,977
329,512
121,420
110,303
60,142
40,519
39,491
30,940
21,666
15,763
6,279
6,179
4,871
3,088
899
348
24
1,880,373
29.2 % $
28.7 %
17.5 %
6.5 %
5.9 %
3.2 %
2.2 %
2.1 %
1.6 %
1.2 %
0.8 %
0.3 %
0.3 %
0.3 %
0.2 %
0.0 %
0.0 %
0.0 %
100.0 % $
360,123
369,173
154,909
94,595
118,432
72,337
91,214
—
24,618
152,998
9,982
5,604
19,792
6,649
13,161
10,406
720
37,501
1,542,214
Percentage of
Total Portfolio
23.4 %
23.9 %
10.0 %
6.1 %
7.7 %
4.7 %
5.9 %
0.0 %
1.6 %
9.9 %
0.6 %
0.4 %
1.3 %
0.4 %
0.9 %
0.7 %
0.1 %
2.4 %
100.0 %
Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees,
and recognition of gains on equity and warrants or other equity-related interests, can fluctuate materially when a loan is paid off or a
warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated in several portfolio companies.
For the years ended December 31, 2018 and 2017, our ten largest portfolio companies represented approximately 28.2% and
34.6% of the total fair value of our investments in portfolio companies, respectively. At December 31, 2018 and December 31, 2017,
we had seven investments that represented 5% or more of our net assets. At December 31, 2018 and December 31, 2017, we had five
and nine equity investments representing approximately 53.0% and 67.1%, respectively, of the total fair value of our equity
investments, and each represented 5% or more of the total fair value of our equity investments. No single portfolio investment
represents more than 10% of the fair value of our total investments as of December 31, 2018 and 2017.
As of December 31, 2018, approximately 97.3% of the debt investment portfolio was priced at floating interest rates or floating
interest rates with a Prime or LIBOR-based interest rate floor. As a result, we believe we are well positioned to benefit should market
interest rates continue to rise.
In most cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets,
which may include its intellectual property. In other cases, we may obtain a negative pledge covering a company’s intellectual
property. As of December 31, 2018, approximately 85.3% of our debt investments were in a senior secured first lien position, with
48.5% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 28.8%
secured by a first priority security in all of the assets of the portfolio company and the portfolio company was prohibited from
pledging or encumbering its intellectual property. 1.1% of our debt investments were senior secured by the equipment of the portfolio
company, and 6.9% were in a first lien “last-out” senior secured position with security interest in all of the assets of the portfolio
company, whereby the “last-out” loans will be subordinated to the “first-out” portion of the unitranche loan in a liquidation, sale or
other disposition. Another 13.8% of our debt investments were secured by a second priority security interest in all of the portfolio
company’s assets, and 0.9% were unsecured.
Our investments in senior secured debt with warrants have detachable equity enhancement features, typically in the form of
warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. These features are
treated as OID and are accreted into interest income over the term of the loan as a yield enhancement. Our warrant coverage generally
ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent
equity financing round. As of December 31, 2018, we held warrants in 129 portfolio companies, with a fair value of approximately
$26.7 million. The fair value of our warrant portfolio decreased by approximately $10.1 million, as compared to a fair value of $36.8
million at December 31, 2017, primarily related a slight decrease in portfolio companies and valuation of the portfolio.
Our existing warrant holdings would require us to invest approximately $78.7 million to exercise such warrants as of December
31, 2018. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance
76
and overall market conditions. Of the warrants that we have monetized since inception, we have realized multiples in the range of
approximately 1.02x to 29.06x based on the historical rate of return on our investments. However, our warrants may not appreciate in
value and, in fact, may decline in value. Accordingly, we may experience losses from our warrant portfolio.
Portfolio Grading
We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our
expected level of risk on the debt investments in our portfolio with 1 being the highest quality. See “Item 1. Business—Investment
Process—Loan and Compliance Administration.” The following table shows the distribution of our outstanding debt investments on
the 1 to 5 investment grading scale at fair value as of December 31, 2018 and 2017, respectively:
(in thousands)
Investment Grading
1
2
3
4
5
Number of
Companies
13
43
25
7
2
90
December 31, 2018
Debt Investments
at Fair Value
Percentage of
Total Portfolio
$
$
311,597
885,123
474,926
60,267
1,579
1,733,492
18.0 %
51.1 %
27.3 %
3.5 %
0.1 %
100.0 %
Number of
Companies
12
32
32
4
5
85
December 31, 2017
Debt Investments
at Fair Value
Percentage of
Total Portfolio
$
$
345,191
583,017
443,775
41,744
2,257
1,415,984
24.4 %
41.2 %
31.3 %
2.9 %
0.2 %
100.0 %
As of December 31, 2018, our debt investments had a weighted average investment grading of 2.18 on a cost basis, as compared
to 2.17 at December 31, 2017. Our policy is to lower the grading on our portfolio companies as they approach the point in time when
they will require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our
financing criteria or are underperforming relative to their respective business plans. Various companies in our portfolio will require
additional funding in the near term or have not met their business plans and therefore have been downgraded until their funding is
complete or their operations improve. The slight increase in weighted average investment grading at December 31, 2018 from
December 31, 2017 is primarily due to an overall decrease in positions with a credit rating of 1.
At December 31, 2018, we had two debt investments on non-accrual with a cumulative investment cost of approximately $2.7
million and zero fair value. At December 31, 2017, we had five debt investments on non-accrual with a cumulative investment cost
and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cumulative cost and fair value of debt
investments on non-accrual between December 31, 2018 and December 31, 2017 is the result of the liquidation of two debt
investments that were on non-accrual at December 31, 2017, which resulted in a realized loss of approximately $10.3 million, slightly
offset by a loan repayment in full from one debt investment.
Results of Operations
Comparison of periods ended December 31, 2018 and 2017
Investment Income
Interest Income
Total investment income for the year ended December 31, 2018 was approximately $207.8 million as compared to
approximately $190.9 million for the year ended December 31, 2017.
Interest income for the year ended December 31, 2018 totaled approximately $190.6 million as compared to approximately
$172.2 million for the year ended December 31, 2017. The increase in interest income for the year ended December 31, 2018 as
compared to the year ended December 31, 2017 is primarily attributable to debt investment portfolio growth and an increase in the
weighted average principal outstanding between the periods, the acceleration of income due to early repayments and other one-time
events during the period and changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments
include variable interest rates. As of December 31, 2018, approximately, 97.3% of the loans in our portfolio had variable rates based
on floating Prime or LIBOR rates with a floor, compared to 96.4% as of December 31, 2017.
Of the $190.6 million in interest income for the year ended December 31, 2018, approximately $184.1 million represents
recurring income from the contractual servicing of our loan portfolio and approximately $6.5 million represents income related to the
acceleration of income due to early loan repayments and other one-time events during the period. Income from the contractual
servicing of our loan portfolio and the acceleration of interest income due to early loan repayments and other one-time events
represented $160.3 million and $11.9 million, respectively, of the $172.2 million interest income for the year ended December 31,
2017.
77
The following table shows the PIK-related activity, for the years ended December 31, 2018 and 2017, at cost:
(in thousands)
Beginning PIK interest receivable balance
PIK interest income during the period
PIK accrued (capitalized) to principal
Payments received from PIK loans
Realized loss
Ending PIK interest receivable balance
Year Ended December 31,
2017
2018
$
$
15,487 $
9,406
(1,630 )
(10,546 )
—
12,717 $
9,930
9,960
129
(2,349 )
(2,183 )
15,487
The decrease in PIK interest income during the year ended December 31, 2018 as compared to the year ended December 31,
2017 is due to a lower average principal outstanding for loans which bear PIK interest. PIK receivable for both December 31, 2018
and December 31, 2017 represents approximately 1% of total debt investments.
Fee Income
Fee income from commitment, facility and loan related fees for the year ended December 31, 2018 totaled approximately $17.1
million as compared to approximately $18.7 million for the year ended December 31, 2017. The decrease in fee income is primarily
attributable to a decrease in the acceleration of unamortized fees due to early repayments and one-time fees during the period.
Of the $17.1 million in fee income from commitment, facility and loan related fees for the year ended December 31, 2018,
approximately $7.0 million represents income from recurring fee amortization and approximately $10.1 million represents income
related to the acceleration of unamortized fees during the period. Income from recurring fee amortization and the acceleration of
unamortized fees due to early loan repayments represented $6.4 million and $12.3 million, respectively, of the $18.7 million income
for the year ended December 31, 2017.
In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory
services in the years ended December 31, 2018 and 2017, respectively.
Operating Expenses
Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and
employee compensation and benefits. Operating expenses totaled approximately $99.0 million and $94.4 million during the years
ended December 31, 2018 and 2017, respectively.
Interest and Fees on our Borrowings
Interest and fees on our borrowings totaled approximately $46.7 million and $46.6 million for the years ended December 31,
2018 and 2017, respectively. Interest and fee expense for the year ended December 31, 2018 as compared to December 31, 2017
increased primarily due to the issuance of our 2027 Asset-Backed Notes in November 2018, 2033 Notes in September 2018, and 2025
Notes in April 2018, as well as increased average borrowings under our credit facilities, and acceleration of amortized fees from early
redemption of the 2024 notes, offset by the partial redemptions of our 2024 Notes and amortization of our fixed-rate asset backed
notes due 2021, or the 2021 Asset-Backed Notes.
We had a weighted average cost of debt, comprised of interest and fees, of approximately 5.6% and 5.9% for the years ended
December 31, 2018 and 2017, respectively. The slight decrease between comparative periods was primarily driven by a reduction in
the weighted average principal outstanding on our higher yielding debt instruments compared to the prior period, specifically the
impact of redemptions on our 2024 Notes and amortization of our 2021 Asset-Backed Notes along with lower interest rates due to the
issuance of the 2027 Asset-Backed Notes.
General and Administrative Expenses
General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent,
expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative
expenses were $15.5 million and $16.1 million for the years ended December 31, 2018 and 2017, respectively. This decrease in
general and administrative expenses is primarily due to a decrease in workout related costs and corporate legal fees.
78
Employee Compensation
Employee compensation and benefits totaled approximately $25.1 million for the year ended December 31, 2018 as compared to
approximately $24.6 million for the year ended December 31, 2017. The increase between comparative periods was primarily due to
changes in variable incentive compensation related to the achievement of origination and strategic corporate objectives.
Employee stock-based compensation totaled approximately $11.8 million for the year ended December 31, 2018 as compared to
approximately $7.2 million for the year ended December 31, 2017. The increase between comparative periods was primarily related to
the number and amount of restricted stock awards vesting along with long-term retention performance stock units and separate cash
bonus awards granted to senior personnel on May 2, 2018.
Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis
of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off
during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio
investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation
when gains or losses are realized.
A summary of realized gains and losses for the years ended December 31, 2018 as and 2017 is as follows:
(in thousands)
Realized gains
Realized losses
Net realized gains (losses)
Year Ended December 31,
2018
2017
$
$
14,050 $
(25,137 )
(11,087 ) $
14,163
(40,874 )
(26,711 )
During the year ended December 31, 2018, we recognized net realized losses of approximately $11.1 million on the portfolio.
These net realized losses included gross realized losses of approximately $25.1 million, primarily from the liquidation or write-off of
our debt, equity or warrant investments. These losses were partially offset by gross realized gains of approximately $14.0 million,
primarily from the sale of our investments during the period.
During the year ended December 31, 2017, we recognized net realized losses of approximately $26.7 million on the portfolio.
These net realized losses included gross realized losses of approximately $40.9 million, primarily from the liquidation or write-off of
our debt, equity or warrant investments. These losses were offset by gross realized gains of approximately $14.2 million, primarily
from the sale of our investments during the period.
The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in
good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation or depreciation of
investments for the years ended December 31, 2018, and 2017:
(in thousands)
Gross unrealized appreciation on portfolio investments
Gross unrealized depreciation on portfolio investments
Reversal of prior period net unrealized appreciation (depreciation) upon a realization event
Net unrealized appreciation (depreciation) on debt, equity, and warrant investments
Other net unrealized appreciation (depreciation)
Total net unrealized appreciation (depreciation) on investments
Year Ended December 31,
2018
60,648 $
(110,768 )
27,584
(22,536 )
1,390
(21,146 ) $
2017
130,272
(148,345 )
28,042
9,969
(704 )
9,265
$
$
During the year ended December 31, 2018, we recorded approximately $21.1 million of net unrealized depreciation, of which
$22.5 million is net unrealized depreciation from our debt, equity and warrant investments. We recorded $4.6 million of net unrealized
appreciation on our debt investments, which was primarily related to $25.7 million of unrealized appreciation due to loan repayments
and the reversal of unrealized depreciation upon write-off. This unrealized appreciation was partially offset by $21.1 million of
unrealized depreciation on the debt portfolio, including $17.1 million of unrealized depreciation on collateral-based impairments
during the period.
We recorded $24.8 million of net unrealized depreciation on our equity investments and $2.3 million of net unrealized
depreciation on our warrant investments during the year ended December 31, 2018. This net unrealized depreciation of $27.1 million
was primarily attributable to $29.0 million of unrealized depreciation on the equity and warrant portfolio partially offset by the $1.9
million reversal of unrealized depreciation upon acquisition or liquidation of our equity and warrants investments.
79
During the year ended December 31, 2017, we recorded approximately $9.3 million of net unrealized appreciation, of which
$10.0 million is net unrealized appreciation from our debt, equity and warrant investments. We recorded $32.1 million of net
unrealized appreciation on our debt investments, which primarily relates to the reversal of $53.7 million of prior period collateral-
based impairments and the reversal of $31.0 million of prior period unrealized depreciation upon payoff or liquidation of our debt
investments, offset by $49.6 million of unrealized depreciation for collateral-based impairments during the period.
We recorded $32.8 million of net unrealized depreciation on our equity investments for the year ended December 31, 2017,
which primarily relates to $51.9 million of unrealized depreciation for collateral-based impairments, offset by $9.7 million and $6.6
million of unrealized appreciation on our public and private equity portfolios, respectively, related to portfolio company and industry
performance.
Finally, for the year ended December 31, 2017, we recorded $10.7 million of unrealized appreciation on our warrant
investments, which primarily relates to $9.4 million and $5.2 million of unrealized appreciation on our private and public portfolio
companies, respectively, related to portfolio company and industry performance. This unrealized appreciation was offset by the
reversal of $3.4 million of unrealized appreciation upon being recognized as a gain or loss due to the acquisition or liquidation of our
warrant investments.
Income and Excise Taxes
We account for income taxes in accordance with the provisions of ASC Topic 740, Income Taxes, under which income taxes are
provided for amounts currently payable and for amounts deferred based upon the estimated future tax effects of differences between
the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances may be
used to reduce deferred tax assets to the amount likely to be realized. Based upon our previous election and anticipated continued
qualification to be subject to taxation as a RIC, we are typically not subject to a material level of federal income taxes. We intend to
distribute 100% of our spillover earnings from ordinary income for our taxable year ended December 31, 2018 to our stockholders
during 2019.
Net Change in Net Assets Resulting from Operations and Earnings Per Share
For the years ended December 31, 2018 and 2017, we had a net increase in net assets resulting from operations totaling
approximately $76.5 million and approximately $79.0 million, respectively.
The basic and fully diluted net change in net assets per common share for the year ended December 31, 2018 was $0.83,
whereas the basic and fully diluted net change in net assets per common share for the year ended December 31, 2017 was $0.95.
For the purpose of calculating diluted earnings per share for year ended December 31, 2018, the dilutive effect of the 2022
Convertible Notes, outstanding options and restricted stock units under the treasury stock method was considered. The effect of the
2022 Convertible Notes was excluded from these calculations for the year ended December 31, 2018 as our share price was less than
the conversion price in effect which results in anti-dilution.
Comparison of periods ended December 31, 2017 and 2016
Investment Income
Interest Income
Total investment income for the year ended December 31, 2017 was approximately $190.9 million as compared to
approximately $175.1 million for the year ended December 31, 2016.
Interest income for the year ended December 31, 2017 totaled approximately $172.2 million as compared to approximately
$158.7 million for the year ended December 31, 2016. The increase in interest income for the year ended December 31, 2017 as
compared to the year ended December 31, 2016 is primarily attributable to debt investment portfolio growth and an increase in the
weighted average principal outstanding between the periods, the acceleration of income due to early repayments and other one-time
events during the period and changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments
include variable interest rates. As of December 31, 2017, approximately, 96.4% of the loans in our portfolio had variable rates based
on floating Prime or LIBOR rates with a floor.
80
Of the $172.2 million in interest income for the year ended December 31, 2017, approximately $160.3 million represents
recurring income from the contractual servicing of our loan portfolio and approximately $11.9 million represents income related to the
acceleration of income due to early loan repayments and other onetime events during the period. Income from the contractual
servicing of our loan portfolio and the acceleration of interest income due to early loan repayments and other one-time events
represented $152.1 million and $6.6 million, respectively, of the $158.7 million interest income for the year ended December 31,
2016.
The following table shows the PIK-related activity, for the years ended December 31, 2017 and 2016, at cost:
(in thousands)
Beginning PIK interest receivable balance
PIK interest income during the period
PIK accrued (capitalized) to principal
Payments received from PIK loans
Realized loss
Ending PIK interest receivable balance
Year Ended December 31,
2016
2017
$
$
9,930 $
9,960
129
(2,349 )
(2,183 )
15,487 $
5,149
7,825
(2,146 )
(632 )
(266 )
9,930
The increase in PIK interest income during the year ended December 31, 2017 as compared to the year ended December 31,
2016 is due to overall portfolio growth, or more specifically, an increase in the weighted average principal outstanding for loans which
bear PIK interest. PIK receivable represents approximately 1% of total debt investments as of December 31, 2017 and December 31,
2016, respectively.
Fee Income
Income from commitment, facility and loan related fees for the year ended December 31, 2017 totaled approximately $18.7 million as
compared to approximately $16.3 million for the year ended December 31, 2016. The increase in fee income is primarily attributable
to an increase in the acceleration of unamortized fees due to early repayments and one-time fees during the period.
Of the $18.7 million in income from commitment, facility and loan related fees for the year ended December 31, 2017,
approximately $6.4 million represents income from recurring fee amortization and approximately $12.3 million represents income
related to the acceleration of unamortized fees during the period. Income from recurring fee amortization and the acceleration of
unamortized fees due to early loan repayments represented $9.5 million and $6.8 million, respectively, of the $16.3 million income for
the year ended December 31, 2016.
In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory
services in the years ended December 31, 2017 and 2016, respectively.
Operating Expenses
Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and
employee compensation and benefits. Operating expenses totaled approximately $94.4 million and $82.7 million during the years
ended December 31, 2017 and 2016, respectively.
Interest and Fees on our Borrowings
Interest and fees on our borrowings totaled approximately $46.6 million and $37.1 million for the years ended December 31,
2017 and 2016, respectively. Interest and fee expense for the year ended December 31, 2017 as compared to December 31, 2016
increased primarily due to higher weighted average principal balances outstanding due to the issuance of our 2022 Convertible Notes
and 2022 Notes. The increase in interest and fee expense was partially offset by a reduction in the weighted average principal balance
outstanding on our 2019 Notes, which were fully redeemed in February 2017, and on our 2021 Asset Backed Notes, which are
amortizing. The increase was further offset by a partial redemption of our 2024 Notes in November 2017.
We had a weighted average cost of debt, comprised of interest and fees, of approximately 5.9% and 5.8% for the years ended
December 31, 2017 and 2016, respectively. The slight increase between comparative periods was primarily driven by an increase in
the weighted average principal outstanding compared to the prior period, specifically the issuance of our 2022 Convertible Notes and
2022 Notes, partially offset by the accelerations of unamortized deferred financing costs from the full and partial redemptions on our
2019 Notes, and 2024 Notes, and the principal amortization of our 2021 Asset Backed Notes, respectively, during the period.
81
General and Administrative Expenses
General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent,
expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative
expenses were $16.1 million for both the years ended December 31, 2017 and 2016, respectively.
Employee Compensation
Employee compensation and benefits totaled approximately $24.6 million for the year ended December 31, 2017 as compared to
approximately $22.5 million for the year ended December 31, 2016. The increase between comparative periods was primarily due to
changes in variable incentive compensation related to the achievement of origination and strategic corporate objectives.
Employee stock-based compensation totaled approximately $7.2 million for the year ended December 31, 2017 as compared to
approximately $7.0 million for the year ended December 31, 2016. The increase between comparative periods was primarily related to
the number and amount of restricted stock awards vesting.
Net Investment Realized Gains and Losses and Net Unrealized Appreciation and Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis
of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off
during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio
investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation
when gains or losses are realized.
A summary of realized gains and losses for the years ended December 31, 2017 and 2016 is as follows:
(in thousands)
Realized gains
Realized losses
Net realized gains (losses)
Year Ended December 31,
2017
2016
$
$
14,163 $
(40,874 )
(26,711 ) $
15,202
(10,626 )
4,576
During the year ended December 31, 2017, we recognized net realized losses of approximately $26.7 million on the portfolio.
These net realized losses included gross realized losses of approximately $40.9 million, primarily from the liquidation or write off of
our debt investments in five portfolio companies and our warrant and equity investments in twenty-one portfolio companies. These
losses were offset by gross realized gains of approximately $14.2 million, primarily from the sale of investments in five portfolio
companies.
During the year ended December 31, 2016, we recognized net realized gains of approximately $4.6 million on the portfolio.
These net realized gains included gross realized gains of approximately $15.2 million, primarily from the sale of investments in six
portfolio companies. These gains were partially offset by gross realized losses of approximately $10.6 million, primarily from the
liquidation or write off of our warrant and equity investments in eight portfolio companies and our debt investments in five portfolio
companies, including the settlement of our outstanding debt investment in one portfolio company.
The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in
good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation or depreciation of
investments for the years ended December 31, 2017 and 2016:
(in thousands)
Gross unrealized appreciation on portfolio investments
Gross unrealized depreciation on portfolio investments
Reversal of prior period net unrealized appreciation (depreciation) upon a realization event
Net unrealized appreciation (depreciation) on debt, equity, and warrant investments
Other net unrealized appreciation (depreciation)
Total net unrealized appreciation (depreciation) on investments
Year Ended December 31,
2017
2016
$
$
130,272 $
(148,345 )
28,042
9,969
(704 )
9,265 $
75,264
(115,867 )
4,661
(35,942 )
(275 )
(36,217 )
During the year ended December 31, 2017, we recorded approximately $9.3 million of net unrealized appreciation, of which
$10.0 million is net unrealized appreciation from our debt, equity and warrant investments. We recorded $32.1 million of net
unrealized appreciation on our debt investments, which primarily relates to the reversal of $53.7 million of prior period collateral-
based impairments on four portfolio companies and the reversal of $31.0 million of prior period unrealized depreciation upon payoff
82
or liquidation of our debt investments, offset by $49.6 million of unrealized depreciation for collateral-based impairments on eight
portfolio companies during the period. We recorded $32.8 million of net unrealized depreciation on our equity investments, which
primarily relates to $51.9 million of unrealized depreciation for collateral-based impairments on two portfolio companies, offset by
$9.7 million and $6.6 million of unrealized appreciation on our public and private equity portfolios, respectively, related to portfolio
company and industry performance. Finally, we recorded $10.7 million of unrealized appreciation on our warrant investments, which
primarily relates to $9.4 million and $5.2 million of unrealized appreciation on our private and public portfolio companies,
respectively, related to portfolio company and industry performance. This unrealized appreciation was offset by the reversal of $3.4
million of unrealized appreciation upon being recognized as a gain or loss due to the acquisition or liquidation of our warrant
investments.
During the year ended December 31, 2016, we recorded approximately $36.2 million of net unrealized depreciation, of which
$35.9 million is net unrealized depreciation from our debt, equity and warrant investments. Of the $35.9 million, approximately $14.0
million is attributed to net unrealized depreciation on our debt investments which primarily relates to $50.0 million unrealized
depreciation for collateral-based impairments on eight portfolio companies, offset by the reversal of prior period collateral based
impairments of $17.3 million on six portfolio companies and the reversal of $13.1 million of prior period unrealized depreciation upon
payoff or settling of our debt investments. Approximately $22.2 million is attributed to net unrealized depreciation on our equity
investments which primarily relates to approximately $7.4 million of unrealized depreciation for collateral based impairments on two
portfolio companies, $6.6 million of unrealized depreciation on our public equity portfolio, with the largest concentration in our
investment in Box, Inc. and the reversal of $5.4 million of prior period net unrealized appreciation upon being realized as a gain for
our sale of shares of Box, Inc. This unrealized depreciation was partially offset by approximately $245,000 of unrealized appreciation
on our warrant investments, which primarily related to $4.8 million of unrealized appreciation on our private portfolio companies,
offset by $2.9 million unrealized depreciation on our public portfolio companies related to individual portfolio company performance.
Income and Excise Taxes
We account for income taxes in accordance with the provisions of ASC Topic 740, Income Taxes, under which income taxes are
provided for amounts currently payable and for amounts deferred based upon the estimated future tax effects of differences between
the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances may be
used to reduce deferred tax assets to the amount likely to be realized. Based upon our previous election and anticipated continued
qualification to be subject to taxation as a RIC, we are typically not subject to a material level of federal income taxes. We distributed
100% of our spillover earnings, which consisted of ordinary income and long-term capital gains, from our taxable year ended
December 31, 2017 to our stockholders during 2018.
Net Change in Net Assets Resulting from Operations and Earnings Per Share
For the years ended December 31, 2017 and 2016, we had a net increase in net assets resulting from operations totaling
approximately $79.0 million and approximately $68.7 million, respectively.
The basic and fully diluted net change in net assets per common share for the year ended December 31, 2017 was $0.95,
whereas the basic and fully diluted net change in net assets per common share for the year ended December 31, 2016 was $0.91.
For the purpose of calculating diluted earnings per share for year ended December 31, 2017, the dilutive effect of the 2022
Convertible Notes, outstanding options and restricted stock units under the treasury stock method was considered. The effect of the
2022 Convertible Notes was excluded from these calculations for the year ended December 31, 2017 as our share price was less than
the conversion price in effect which results in anti-dilution.
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are derived from our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes,
2027 Asset-Backed Notes, 2022 Convertible Notes, Credit Facilities and cash flows from operations, including investment sales and
repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments
of fees and other operating expenses we incur. We have used, and expect to continue to use, our borrowings and the proceeds from the
turnover of our portfolio and from public and private offerings of securities to finance our investment objectives. We may also raise
additional equity or debt capital through registered offerings off a shelf registration, At-The-Market, or ATM, and private offerings of
securities, by securitizing a portion of our investments, or by borrowing from the SBA through our SBIC subsidiaries.
On August 16, 2013, we entered into an ATM equity distribution agreement, or the Prior Equity Distribution Agreement, with
JMP Securities LLC, or JMP. On March 7, 2016, we renewed the Prior Equity Distribution Agreement and on December 21, 2016, we
further amended the agreement to increase the total shares available under the program. The Prior Equity Distribution Agreement, as
83
amended, provided that we may offer and sell up to 12.0 million shares of our common stock from time to time through JMP, as our
sales agent.
On September 7, 2017, we terminated the Prior Equity Distribution Agreement and entered into a new ATM equity distribution
agreement, or the Equity Distribution Agreement, with JMP. As a result, the remaining shares that were available under the Prior
Equity Distribution agreement are no longer available for issuance. The Equity Distribution Agreement provides that we may offer
and sell up to 12.0 million shares of its common stock from time to time through JMP, as its sales agent. Sales of our common stock, if
any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the
Securities Act, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker
other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.
During the year ended December 31, 2018, we sold 5.1 million shares of common stock, which were issued under the Equity
Distribution Agreement for a total accumulated net proceeds of approximately $63.3 million, including $1.5 million of offering
expenses. As of December 31, 2018, approximately 5.3 million shares remain available for issuance and sale under the Equity
Distribution Agreement. See “– Subsequent Events.”
Our 2016 Convertible Notes were fully settled on or before their contractual maturity date of April 15, 2016. Throughout the life
of the 2016 Convertible Notes, holders of approximately $74.8 million of our 2016 Convertible Notes exercised their conversion
rights. These 2016 Convertible Notes were settled with a combination of cash equal to the outstanding principal amount of the
converted notes and approximately 1.6 million shares of our common stock, or $24.3 million.
On May 2, 2016, we closed an underwritten public offering of an additional $72.9 million in aggregate principal amount of our
2024 Notes. The $72.9 million in aggregate principal amount includes $65.4 million from the initial offering on April 21, 2016 and
$7.5 million as a result of underwriters exercising a portion of their option to purchase up to an additional $9.8 million in aggregate
principal to cover overallotments on April 29, 2016. On June 27, 2016, we closed an underwritten public offering of an additional
$60.0 million in aggregate principal amount of the 2024 Notes. On June 30, 2016, the underwriters exercised their option to purchase
up to an additional $9.0 million in aggregate principal to cover overallotments, resulting in total aggregate principal of $69.0 million
from the offering. The 2024 Notes rank equally in right of payment and form a single series of notes.
On May 5, 2016, we, through a special purpose wholly-owned subsidiary, Hercules Funding III, as borrower, entered the Union
Bank Facility. The Union Bank Facility replaced our credit facility, or the Prior Union Bank Facility, entered into on August 14, 2014
(as amended and restated from time to time) with MUFG Union Bank, N.A., or Union Bank, as the arranger and administrative agent,
and the lenders party thereto from time to time. Any references to amounts related to the Union Bank Facility prior to May 5, 2016
were incurred and relate to the Prior Union Bank Facility.
On October 11, 2016, we entered into a debt distribution agreement, pursuant to which we may offer for sale, from time to time,
up to $150.0 million in aggregate principal amount of 2024 Notes through FBR Capital Markets & Co. acting as our sales agent. Sales
of the 2024 Notes, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market offerings” as
defined in Rule 415 under the Securities Act, including sales made directly on the NYSE, or similar securities exchange or sales made
through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.
We did not sell any notes under the program during 2018. During the year ended December 31, 2017, we sold 225,457 shares of
our 2024 Notes for approximately $5.6 million in aggregate principal amount. As of December 31, 2018, approximately $136.4
million in aggregate principal amount remains available for issuance and sale under the debt distribution agreement.
On January 25, 2017, we issued $230.0 million in aggregate principal amount of 2022 Convertible Notes, which amount
includes the additional $30.0 million aggregate principal amount issued pursuant to the initial purchaser’s exercise in full of its
overallotment option. The sale generated net proceeds of approximately $225.5 million, including $4.5 million of debt issuance costs.
Aggregate issuances costs include the initial purchaser’s discount of approximately $5.2 million, offset by the reimbursement of $1.2
million by the initial purchaser.
On February 24, 2017, we redeemed the $110.4 million remaining outstanding balance of our 2019 Notes in full.
On October 23, 2017, we issued $150.0 million in aggregate principal amount of the 2022 Notes. The 2022 Notes were issued
pursuant to an Indenture, dated September 7, 2017, or the 2022 Notes Indenture, between us and U.S. Bank, National Association, as
trustee, or the 2022 Trustee. The sale of the 2022 Notes generated net proceeds of approximately $147.4 million, including a public
offering discount of $826,500. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s
discount and commissions of approximately $975,000, were approximately $1.8 million.
84
On November 23, 2017, we redeemed $75.0 million of the $258.5 million issued and outstanding aggregate principal amount of
our 2024 Notes. On April 2, 2018, we redeemed an additional $100.0 million of the remaining outstanding aggregate principal amount
of the 2024 Notes. Further, on December 7, 2018, our 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.
On April 26, 2018, we issued $75.0 million in aggregate principal amount of the 2025 Notes pursuant to the Fifth Supplemental
Indenture to the Base Indenture, dated April 26, 2018, or the 2025 Notes Indenture. The sale of the 2025 Notes generated net proceeds
of approximately $72.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s
discount and commissions were approximately $2.6 million.
On May 25, 2018, the Company entered into an amendment to the Union Bank Facility. The amendment amends certain
provisions of the Union Bank Facility to increase the commitments thereunder from $75.0 million to $100.0 million.
On June 14, 2018, the Company closed its underwritten public offering of 6.9 million shares of common stock, including an
over-allotment option to purchase an additional 900,000 shares of common stock, or the June 2018 Equity Offering. The offering
generated net proceeds, before expenses, of $81.3 million, including the underwriting discount and commissions of $2.6 million.
On July 31, 2018, we entered into a further amendment to the Wells Facility to extend the maturity date and fully repay the pro-
rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc., thereby resigning both as
lenders and terminating their commitments thereunder.
On September 20, 2018, we issued $40.0 million in aggregate principal amount of the 2033 Notes pursuant to the Sixth
Supplemental Indenture to the Base Indenture, dated September 24, 2018, or the 2033 Notes Indenture. The sale of the 2033 Notes
generated net proceeds of approximately $38.8 million. Aggregate estimated offering expenses in connection with the transaction,
including the underwriter’s discount and commissions were approximately $1.2 million.
On November 1, 2018, we issued $200.0 million in aggregate principal amount of the 2027 Asset-Backed Notes. The sale of the
2027 Asset-Backed Notes generated net proceeds of approximately $197.2 million. Aggregate estimated offering expenses in
connection with the transaction, including the underwriter’s discount and commissions were approximately $2.8 million.
On December 17, 2018, our Board of Directors authorized a stock repurchase plan permitting us to repurchase up to $25.0
million of our common stock. We may repurchase shares of our common stock in the open market, including block purchases, at
prices that may be above or below the NAV as reported in the most recently published financial statements, in accordance with the
guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act. We expect that the share repurchase program will be in
effect until June 18, 2019, or until the approved dollar amount has been used to repurchase shares. During the year ended December
31, 2018, we repurchased 376,466 shares of our common stock at an average price per share of $10.77 and a total cost of
approximately $4.1 million. As of December 31, 2018, approximately $20.9 million of common stock remain eligible for repurchase
under the stock repurchase plan. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities” for further information on the repurchases made during the period.
At December 31, 2018, we had $149.0 million of SBA debentures, $150.0 million of 2022 Notes, $83.5 million of 2024 Notes,
$75.0 million of 2025 Notes, $40.0 million of 2033 Notes, $200.0 million of 2027 Asset-Backed Notes, and $230.0 million of 2022
Convertible Notes payable, along with $13.1 million of borrowings outstanding on the Wells Facility and $39.8 million of borrowings
outstanding on the Union Bank Facility.
At December 31, 2018, we had $156.2 million in available liquidity, including $34.2 million in cash and cash equivalents. We
had available borrowing capacity of $61.9 million under the Wells Facility and $60.2 million under the Union Bank Facility, subject
to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit
accounts.
At December 31, 2018, we had $74.5 million of capital outstanding in restricted accounts related to our SBIC that we may use
to fund new investments in the SBIC. With our net investment of $74.5 million in HT III, we have the capacity to issue $149.0 million
in SBA guaranteed debentures, subject to SBA approval. At December 31, 2018, we have issued $149.0 million in SBA guaranteed
debentures in our SBIC subsidiary. On July 13, 2018, we completed repayment of the remaining outstanding HT II debentures and
subsequently surrendered the SBA license with respect to HT II.
85
At December 31, 2018, we had approximately $11.6 million of restricted cash, which consists of collections of interest and
principal payments on assets that are securitized. In accordance with the terms of the related securitized 2027 Asset-Backed Notes,
based on current characteristics of the securitized debt investment portfolio, the restricted funds may be used to pay monthly interest
and principal on the securitized debt and are not distributed to us or available for our general operations.
During the year ended December 31, 2018, we principally funded our operations from (i) cash receipts from interest and fee
income from our investment portfolio (ii) cash proceeds from the realization of portfolio investments through the repayments of debt
investments and the sale of debt and equity investments and (iii) debt and equity offerings along with borrowings on our credit
facilities.
During the year ended December 31, 2018, our operating activities used $249.0 million of cash and cash equivalents, compared to
$18.4 million used during the year ended December 31, 2017. The $230.6 million increase in cash used by operating activities is
primarily due to an increase in investment purchases of $196.0 million, and a decrease in investment repayments of $47.5 million.
During the year ended December 31, 2018, our investing activities used $475,000 of cash, compared to $274,000 used during
the year ended December 31, 2017. The $201,000 increase in cash used by investing activities was due to an increase in purchase of
capital equipment.
During the year ended December 31, 2018, our financing activities provided $200.3 million of cash, compared to $92.3 million
provided during the year ended December 31, 2017. The $108.0 million increase in cash provided by financing activities was primarily
due to the issuance of $75.0 million of our 2025 Notes in April 2018, issuance of $40.0 million of our 2033 Notes in September 2018,
issuance of $200.0 million of our 2027 Asset-Backed Notes in November 2018, increase in credit facilities borrowings of $345.1
million, and issuance of our common stock of $77.5 million, partially offset by the repayment of $100.0 million of our 2024 Notes in
April 2018, increase in repayment of our credit facility borrowings of $287.1 million, and full retirement of our 2021 Asset-Backed
Notes.
As of December 31, 2018, net assets totaled $955.4 million, with a NAV per share of $9.90. We intend to continue to operate in
order to generate cash flows from operations, including income earned from investments in our portfolio companies. Our primary use
of funds will be investments in portfolio companies and cash distributions to holders of our common stock.
The SBCAA, which was signed into law in March 2018, decreased the minimum asset coverage ratio in Section 61(a) of the
1940 Act for business development companies from 200% to 150% (subject to either stockholder approval or approval of both a
majority of the board of directors and a majority of directors who are not interested persons). On September 4, 2018 and December 6,
2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our
stockholders, respectively, approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of
the 1940 Act. As a result, effective December 7, 2018, the asset coverage ratio under the 1940 Act applicable to us decreased from
200% to 150%, permitting us to incur additional leverage. As of December 31, 2018, our asset coverage ratio under our regulatory
requirements as a business development company was 214.6%, excluding our SBA debentures as a result of our exemptive order from
the SEC that allows us to exclude all SBA leverage from our asset coverage ratio. As a result of the SEC exemptive order, our ratio of
total assets on a consolidated basis to outstanding indebtedness may be less than 150%, which while providing increased investment
flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage when including our SBA debentures
was 197.2% at December 31, 2018.
86
Outstanding Borrowings
At December 31, 2018 and December 31, 2017, we had the following available borrowings and outstanding amounts:
December 31, 2018
December 31, 2017
(in thousands)
SBA Debentures (2)
2022 Notes
2024 Notes
2025 Notes
2033 Notes
2021 Asset-Backed Notes (3)
2027 Asset-Backed Notes
2022 Convertible Notes
Wells Facility (4)
Union Bank Facility (4)
Total
Total Available
$
Principal
Carrying Value (1) Total Available
Principal
149,000 $
150,000
83,510
75,000
40,000
—
200,000
230,000
75,000
100,000
1,102,510 $
149,000 $
150,000
83,510
75,000
40,000
—
200,000
230,000
13,107
39,849
980,466 $
147,655 $
147,990
81,852
72,590
38,427
—
197,265
225,051
13,107
39,849
963,786 $
190,200 $
150,000
183,510
—
—
49,153
—
230,000
120,000
75,000
997,863 $
$
Carrying Value (1)
188,141
147,572
179,001
—
—
48,650
—
223,488
—
—
786,852
190,200 $
150,000
183,510
—
—
49,153
—
230,000
—
—
802,863 $
(1)
(2)
(3)
(4)
Except for the Wells Facility and Union Bank Facility, all carrying values represent the principal amount outstanding less the remaining unamortized debt
issuance costs and unaccreted discount, if any, associated with the loan as of the balance sheet date. See below for the amount of debt issuance cost associated
with each borrowing.
At December 31, 2018, the total available borrowings under the SBA debentures were $149.0 million, which were available in HT III. On July 13, 2018, we
completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II. At December 31,
2017, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0 million was
available in HT III.
The 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.
Availability subject to us meeting the borrowing base requirements. On July 31, 2018, the Wells Facility was reduced to $75.0 million as we fully repaid the
pro-rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc. On May 25, 2018, we entered into an
amendment to the Union Bank Facility to increase the commitments thereunder from $75.0 million to $100.0 million. See “Note 4 – Borrowings”.
Debt issuance costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid
expenses and amortized over the life of the related debt instrument using the effective yield method or the straight-line method, which
closely approximates the effective yield method. In accordance with ASC Subtopic 835-30 (“Interest – Imputation of Interest”), debt
issuance costs are presented as a reduction to the associated liability balance on the Consolidated Statement of Assets and Liabilities,
except for debt issuance costs associated with line-of-credit arrangements. Debt issuance costs, net of accumulated amortization, as of
December 31, 2018 and December 31, 2017 were as follows:
(in thousands)
SBA Debentures
2022 Notes
2024 Notes
2025 Notes
2033 Notes
2021 Asset-Backed Notes (1)
2027 Asset-Backed Notes
2022 Convertible Notes
Wells Facility (2)
Union Bank Facility (2)
Total
December 31,
2018
December 31,
2017
$
$
1,345
1,379
1,686
2,410
1,573
—
2,735
2,823
100
165
14,216
$
$
2,059
1,633
4,591
—
—
503
—
3,715
227
379
13,107
The 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.
(1)
(2) As the Wells Facility and Union Bank Facility are line-of-credit arrangements, the debt issuance costs associated with these instruments are presented separately
as an asset on the Consolidated Statement of Assets and Liabilities in accordance with ASC Subtopic 835-30.
Refer to “Note 4 – Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this report
for a discussion of the contract terms, interest expense, and fees associated with each outstanding borrowing as of and for the year
ended December 31, 2018.
87
Commitments
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of
unfunded contractual commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded contractual
commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded contractual commitments
may be significant from time to time. A portion of these unfunded contractual commitments are dependent upon the portfolio
company reaching certain milestones before the debt commitment becomes available. Furthermore, our credit agreements contain
customary lending provisions which allow us relief from funding obligations for previously made commitments in instances where the
underlying company experiences materially adverse events that affect the financial condition or business outlook for the company.
These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial
instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. As such, our disclosure of unfunded contractual commitments includes only those
which are available at the request of the portfolio company and unencumbered by milestones.
At December 31, 2018, we had approximately $139.0 million of unfunded commitments, including undrawn revolving facilities,
which were available at the request of the portfolio company and unencumbered by milestones. We intend to use cash flow from
normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments.
We also had approximately $55.5 million of non-binding term sheets outstanding to four new companies, which generally
convert to contractual commitments within approximately 90 days of signing. Non-binding outstanding term sheets are subject to
completion of our due diligence and final investment committee approval process, as well as the negotiation of definitive
documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily
represent future cash requirements.
The fair value of our unfunded commitments is considered to be immaterial as the yield determined at the time of underwriting
is expected to be materially consistent with the yield upon funding, given that interest rates are generally pegged to market indices and
given the existence of milestones, conditions and/or obligations imbedded in the borrowing agreements.
As of December 31, 2018, our unfunded contractual commitments available at the request of the portfolio company, including
undrawn revolving facilities, and unencumbered by milestones are as follows:
(in thousands)
Portfolio Company
Thumbtack, Inc.
Couchbase, Inc.
Impossible Foods, Inc.
Postmates, Inc.
Businessolver.com, Inc.
DocuTAP, Inc.
Achronix Semiconductor Corporation
Clarabridge, Inc.
Evernote Corporation
PH Group Holdings
Xometry, Inc.
Lithium Technologies, Inc.
Fastly, Inc.
Intent Media, Inc.
Emma, Inc.
Convercent, Inc.
Credible Behavioral Health, Inc.
Greenphire, Inc.
Insurance Technologies Corporation
Salsa Labs, Inc.
$
Unfunded
Commitments (1)
25,000
20,000
20,000
15,000
9,563
6,000
5,000
5,000
5,000
5,000
4,000
3,623
3,333
3,000
2,963
2,500
2,500
500
500
500
Total
$
138,982
(1)
Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount
excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones.
88
Contractual Obligations
The following table shows our contractual obligations as of December 31, 2018:
Contractual Obligations (1)
Borrowings (2)(3)(5)
Operating Lease Obligations (4)
Total
Total
Less than 1 year
Payments due by period (in thousands)
1 - 3 years
3 - 5 years
After 5 years
$
$
980,466 $
15,915
996,381 $
96,617 $
3,217
99,834 $
103,599 $
5,766
109,365 $
465,250 $
5,420
470,670 $
315,000
1,512
316,512
(1)
(2)
(3)
(4)
(5)
Excludes commitments to extend credit to our portfolio companies.
Includes $149.0 million principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $83.5 million of the 2024 Notes, $75.0 million of
the 2025 Notes, $40.0 million of the 2033 Notes, $200.0 million of the 2027 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes, $13.1 million
under the Wells Facility, and $39.8 million under the Union Credit Facility as of December 31, 2018.
Amounts represent future principal repayments and not the carrying value of each liability. See “– Outstanding Borrowings.”
Facility leases and licenses.
Reflects announced redemption of a portion of the 2024 Notes in December 2018. See “ – Subsequent Events.”
Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense
amounted to approximately $2.1 million, $1.8 million and $1.7 million during the years ended December 31, 2018, 2017, and 2016,
respectively.
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements are
intended to provide our directors and executive officers the maximum indemnification permitted under Maryland law and the 1940
Act. Each indemnification agreement provides that we shall indemnify the director or executive officer who is a party to the
agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the
Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the
maximum extent permitted by Maryland law and the 1940 Act.
We and our executives and directors are covered by Directors and Officers Insurance, with the directors and officers being
indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
Distributions
On February 13, 2019, the Board of Directors declared a cash distribution of $0.31 per share to be paid on March 11, 2019 to
shareholders of record as of March 4, 2019. This distribution represents our fifty-fourth consecutive distribution since our IPO,
bringing the total cumulative distribution to date to $15.28 per share.
Our Board of Directors maintains a variable distribution policy with the objective of distributing four quarterly distributions in
an amount that approximates 90 - 100% of our taxable quarterly income or potential annual income for a particular taxable year. In
addition, at the end of our taxable year, our Board of Directors may choose to pay an additional special distribution, or fifth
distribution, so that we may distribute approximately all of our annual taxable income in the taxable year in which it was earned, or
may elect to maintain the option to spill over our excess taxable income into the following taxable year as part of any future
distribution payments.
Distributions from our taxable income (including gains) to a stockholder generally will be treated as a dividend for U.S. federal
income tax purposes to the extent of such stockholder’s allocable share of our current or accumulated earnings and profits.
Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the
extent of a stockholder’s tax basis in our shares, and any remaining distributions would be treated as a capital gain. The determination
of the tax attributes of our distributions is made annually as of the end of our taxable year based upon our taxable income for the full
taxable year and distributions paid for the full taxable year. Of the distributions declared during the fiscal years ended December 31,
2018, 2017, and 2016, 100% were distributions derived from our current and accumulated earnings and profits. There can be no
certainty to stockholders that this determination is representative of what the tax attributes of our 2019 distributions to stockholders
will actually be.
We maintain an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of our
stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare a cash
distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution
automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.
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Shortly after the close of each calendar year information identifying the source of the distribution (i.e., paid from ordinary
income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable
distribution, if any) will be provided to our stockholders subject to information reporting. To the extent our taxable earnings fall below
the total amount of our distributions for any taxable year, a portion of those distributions may be deemed a tax return of capital to our
stockholders.
We expect to qualify to be subject to tax as a RIC under Subchapter M of the Code. In order to be subject to tax as a RIC, we are
required to satisfy certain annual gross income and quarterly asset composition tests, as well as make distributions to our stockholders
each taxable year treated as dividends for federal income tax purposes of an amount at least equal to 90% of the sum of our investment
company taxable income, determined without regard to any deduction for dividends paid, plus our net tax-exempt income, if any.
Upon being eligible to be subject to tax as a RIC, we would be entitled to deduct such distributions we pay to our stockholders in
determining the overall components of our “taxable income.” Components of our taxable income include our taxable interest, dividend
and fee income, reduced by certain deductions, as well as taxable net realized securities gains. Taxable income generally differs from
net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses
and generally excludes net unrealized appreciation or depreciation as such gains or losses are not included in taxable income until they
are realized. In connection with maintaining our ability to be subject to tax as a RIC, among other things, we have made and intend to
continue to make the requisite distributions to our stockholders each taxable year, which generally should relieve us from corporate-
level U.S. federal income taxes.
As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income and gains unless we
make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in respect of each
calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. We will not be subject to this excise tax on any
amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of
current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next
taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may
be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S.
federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we
choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from
our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the
distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue
senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios
stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. Our ability to make distributions will
be limited by the asset coverage requirements under the 1940 Act.
We intend to distribute 100% of our spillover earnings from ordinary income for the year ended December 31, 2018 to our
stockholders during 2019.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management
evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions
could materially impact our results of operations and financial condition.
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Valuation of Investments
The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments
and the related amounts of unrealized appreciation and depreciation of investments recorded.
At December 31, 2018, approximately 96.7% of our total assets represented investments in portfolio companies whose fair value
is determined in good faith by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for
those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined
in good faith by the Board of Directors. Our investments are carried at fair value in accordance with the 1940 Act and ASC Topic 946
and measured in accordance with ASC Topic 820. Our debt securities are primarily invested in venture capital-backed companies in
technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and
sustainable and renewable technology at all stages of development. Given the nature of lending to these types of businesses,
substantially all of our investments in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there is
no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, we value
substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy by our Board of
Directors in accordance with the provisions of ASC Topic 820 and the 1940 Act. Due to the inherent uncertainty in determining the
fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith
by our Board of Directors may differ significantly from the value that would have been used had a readily available market existed for
such investments, and the differences could be material. See “Determination of Net Asset Value” for a discussion of our investment
valuation process.
We intend to continue to engage an independent valuation firm to provide us with valuation assistance regarding our
determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such
valuation services. Specifically, on a quarterly basis, we will identify portfolio investments with respect to which an independent
valuation firm will assist in valuing. We select these portfolio investments based on a number of factors, including, but not limited to,
the potential for material fluctuations in valuation results, credit quality and the time lapse since the last valuation of the portfolio
investment by an independent valuation firm. The scope of the services rendered by an independent valuation firm is at the discretion
of the Board of Directors. Our Board of Directors is ultimately, and solely, responsible for determining the fair value of our
investments in good faith.
Refer to “Note 2 – Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements
appearing elsewhere in this report for a discussion of our valuation policies for the years ended December 31, 2018 and 2017.
Income Recognition
See “— Changes in Portfolio” for a discussion of our income recognition policies and results during the year ended December
31, 2018 and 2017. See “— Results of Operations” for a comparison of investment income for the year ended December 31, 2018 and
2017.
Stock Based Compensation
We have issued and may, from time to time, issue stock options and restricted stock to employees under the 2018 Equity
Incentive Plan and the Director Plan. We follow the guidelines set forth under ASC Topic 718 Compensation – Stock Compensation,
to account for stock options granted. Under ASC Topic 718, compensation expense associated with stock-based compensation is
measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate
fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock
price volatility, forfeiture rate and expected option life.
Income Taxes
We intend to operate so as to qualify to be taxed subject to tax as a RIC under Subchapter M of the Code and, as such, will not
be subject to federal income tax on the portion of taxable income (including gains) distributed as dividends for U.S. federal income tax
purposes to stockholders. Taxable income includes our taxable interest, dividend and fee income, reduced by certain deductions, as
well as taxable net realized securities gains. Taxable income generally differs from net income for financial reporting purposes due to
temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or
depreciation, as such gains or losses are not included in taxable income until they are realized.
As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we make
distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in respect of each
calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. We will not be subject to this excise tax on any
amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains).
91
Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of
current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next
taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may
be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S.
federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we
choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from
taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the
distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.
We intend to distribute 100% of our spillover earnings from ordinary income for the taxable year ended December 31, 2018 to
our stockholders during 2019. We distributed 100% of our spillover earnings from ordinary income for our taxable year ended
December 31, 2017 to our stockholders during 2018.
Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in
accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements
to reflect their appropriate tax character. Permanent differences may also result from the classification of certain items, such as the
treatment of short-term gains as ordinary income for tax purposes. Temporary differences arise when certain items of income,
expense, gain or loss are recognized at some time in the future.
Subsequent Events
Distribution Declaration
On February 13, 2019, our Board of Directors declared a cash distribution of $0.31 per share to be paid on March 11, 2019 to
shareholders of record as of March 4, 2019.This distribution represents our fifty-fourth consecutive distribution since our IPO,
bringing the total cumulative distribution to date to $15.28 per share.
Restricted Stock Unit Grants
On January 31, 2019, we granted 922,494 restricted stock units pursuant to the 2018 Equity Incentive Plan.
ATM Equity Program Issuances
Subsequent to December 31, 2018 and as of February 15, 2019, we did not sell any shares under our Equity Distribution
Agreement with JMP. As of February 15, 2019 approximately 5.3 million shares remain available for issuance and sale under the
equity distribution agreement.
Share Repurchase Program
Subsequent to December 31, 2018 and as of February 15, 2019, we did not repurchase any shares of our common stock. As of
February 15, 2019, approximately $20.9 million of common stock remains eligible for repurchase under the stock repurchase plan.
Redemption of 2024 Notes
On December 7, 2018, our 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.
Wells Facility
On January 11, 2019, we 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.
Union Bank Facility
On February 20, 2019, we, through a special purpose wholly-owned subsidiary, Hercules Funding IV LLC, as borrower,
entered into the Loan and Security Agreement, or the 2019 Union Bank Credit Facility, with Union Bank, as the arranger and
administrative agent, and the lenders party thereto from time to time. Under the 2019 Union Bank Credit Facility, the lenders have
92
made commitments of $200.0 million and the facility contains an uncommitted accordion feature, in which we can increase the credit
line up to an aggregate of $300.0 million. Borrowings under the 2019 Union Bank Credit Facility will generally bear interest at a rate
per annum equal to LIBOR plus 2.70%, and the facility will generally have an advance rate of 55% against eligible debt investments.
The 2019 Union Bank Credit Facility matures on February 20, 2022, plus a 12-month amortization period, unless sooner terminated in
accordance with its terms.
Election of Directors
On January 11, 2019, the Board of Directors elected Carol L. Foster as our director. Ms. Foster will be entitled to the applicable
annual retainer and restricted stock awards pursuant to our director compensation arrangements. Ms. Foster will also be entitled to
enter into an indemnification agreement with us. Ms. Foster will hold office as a Class I director for a term expiring in 2020 and does
not currently serve on any of our committees.
On February 4, 2019, the Board of Directors elected Gayle Crowell as our director. Ms. Crowell will be entitled to the
applicable annual retainer and restricted stock awards pursuant to our director compensation arrangements. Ms. Crowell will also be
entitled to enter into an indemnification agreement with us. Ms. Crowell will hold office as a Class II director for a term expiring in
2021 and does not currently serve on any committees.
2028 Asset-Backed Notes
On January 22, 2019, we completed a term debt securitization in connection with which an affiliate of ours made an offering of
$250,000,000 in aggregate principal amount of the 2028 Asset-Backed Notes, which were rated A(sf) by Kroll Bond Rating Agency,
Inc., or KBRA. The Notes were issued by the 2019 Securitization Issuer pursuant to an indenture, dated as of January 22, 2019, by and
between U.S. Bank National Association, as indenture trustee, and the 2019 Securitization Issuer, were offered pursuant to a note
purchase agreement, dated as of January 14, 2019, by and among us, the 2019 Trust Depositor, the 2019 Securitization Issuer,
Guggenheim Securities, LLC, as Initial Purchaser, MUFG Securities Americas Inc., as a co-manager, and Wells Fargo Securities,
LLC, as a co-manager, and are backed by a pool of senior loans made to certain portfolio companies of ours and secured by certain
assets of those portfolio companies and are to be serviced by us. The outstanding principal balance of the pool of loans as of
December 31, 2018 was approximately $357,179,128. 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.
Portfolio Company Developments
As of February 15, 2019, we held warrants or equity positions in five companies that have filed registration statements on Form
S-1 with the SEC in contemplation of potential IPOs. Four companies filed confidentially under the JOBS Act and one company filed
a preliminary prospectus in connection with a proposed public offering on the Toronto Stock Exchange (TSX). There can be no
assurance that these companies will complete their IPOs in a timely manner or at all. In addition, subsequent to December 31, 2018,
our portfolio companies announced or completed the following liquidity events:
1.
2.
3.
4.
In December 2018, our portfolio company, Art.com, Inc., one of the largest online sellers of art and wall décor globally,
entered into a definitive agreement to be acquired by Walmart (NYSE: WMT), a multinational retail corporation that
operates a chain of hypermarket, discount department stores and grocery stores. The deal was completed in February 2019.
Terms of the acquisition were not disclosed.
In January 2018, our portfolio company, Labcyte, Inc., a global biotechnology tools company developing acoustic liquid
handling, was acquired by Beckman Coulter Life Sciences, a developer and manufacturer of products that simplify,
automate and innovate complex biomedical testing. Labcyte will transition into Beckman Coulter Life Sciences under the
larger Danaher Life Sciences platform of companies. Terms of the acquisition were not disclosed.
In February 2019, our portfolio company Stealth Bio Therapeutics Corp., (NASDAQ: MITO), a clinical-stage
biopharmaceutical company developing therapeutics to treat mitochondrial dysfunction, completed its IPO offering 6.5
million American Depositary Shares, or ADS, at an initial public offering price of $12.00 per ADS.
In February 2019, our portfolio company Avedro, Inc. (NASDAQ: AVDR), a leading commercial-stage ophthalmic
medical technology company focused on treating corneal ectatic disorders and improving vision to reduce dependency on
eyeglasses or contact lenses, completed its IPO offering 5.0 million shares at an initial public offering price of $14.00 per
share.
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Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our
current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between
our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our
cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle fund investments. Our
investment income will be affected by changes in various interest rates, including LIBOR and Prime rates, to the extent our debt
investments include variable interest rates. As of December 31, 2018, approximately 97.3% of the loans in our portfolio had variable
rates based on floating Prime or LIBOR rates with a floor. Our borrowings under the Credit Facilities bear interest at a floating rate
and the borrowings under our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, and
2022 Convertible Notes bear interest at a fixed rate. Changes in interest rates can also affect, among other things, our ability to acquire
and originate loans and securities and the value of our investment portfolio.
Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2018, the following table shows the
approximate annualized increase or decrease in components of net assets resulting from operations of hypothetical base rate changes
in interest rates, assuming no changes in our investments and borrowings.
(in thousands)
Basis Point Change
25
50
75
100
200
300
Interest
Income
Interest
Expense
Net Income
EPS
$
$
$
$
$
$
3,911 $
8,048 $
12,203 $
16,372 $
33,052 $
49,403 $
40
80
119
159
318
477
$
$
$
$
$
$
3,871 $
7,968 $
12,084 $
16,213 $
32,734 $
48,926 $
0.04
0.08
0.13
0.17
0.34
0.51
We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations
(and foreign currency) by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities
may insulate us against changes in interest rates (and foreign currency), they may also limit our ability to participate in the benefits of
lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During
the year ended December 31, 2018, we did not engage in interest rate (or foreign currency) hedging activities.
Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for
potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for
other business developments, including borrowings under our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes,
2027 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, that could affect the net increase in net assets resulting from
operations, or net income. It also does not assume any repayments from borrowers. Accordingly, no assurances can be given that
actual results would not differ materially from the statement above.
Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is
dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed.
Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our
net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment
income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio.
For additional information regarding the interest rate associated with each of our SBA debentures, 2022 Notes, 2024 Notes,
2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, refer to “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—
Outstanding Borrowings” in this report on Form 10-K.
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Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ....................................................................................................
Consolidated Statements of Assets and Liabilities as of December 31, 2018 and 2017 ..........................................................
Consolidated Statements of Operations for the three years ended December 31, 2018 ...........................................................
Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2018 ........................................
Consolidated Statements of Cash Flows for the three years ended December 31, 2018 ..........................................................
Consolidated Schedule of Investments as of December 31, 2018............................................................................................
Consolidated Schedule of Investments as of December 31, 2017............................................................................................
Notes to Consolidated Financial Statements ............................................................................................................................
Consolidated Schedule of Investments in and Advances to Affiliates as of December 31, 2018 ............................................
96
98
100
101
102
104
119
134
178
95
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Hercules Capital, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of
investments, of Hercules Capital, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related
consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended
December 31, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively
referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting
as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations, changes in its net assets and its cash flows for each
of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s
Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the
Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities
owned as of December 31, 2018 and 2017 by correspondence with the custodians and portfolio company investees; when replies were
not received, we performed other auditing procedures. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
96
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 21, 2019
We have served as the Company’s auditor since 2010.
97
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
(in thousands, except per share data)
Assets
Investments:
Non-control/Non-affiliate investments (cost of $1,830,725 and $1,506,454, respectively)
Control investments (cost of $64,799 and $25,419, respectively)
Affiliate investments (cost of $85,000 and $87,956, respectively)
Total investments in securities, at value (cost of $1,980,524 and $1,619,829, respectively)
Cash and cash equivalents
Restricted cash
Interest receivable
Other assets
Total assets
Liabilities
Accounts payable and accrued liabilities
SBA Debentures, net (principal of $149,000 and $190,200, respectively) (1)
2022 Notes, net (principal of $150,000 and $150,000, respectively) (1)
2024 Notes, net (principal of $83,510 and $183,510, respectively) (1)
2025 Notes, net (principal of $75,000 and $0, respectively) (1)
2033 Notes, net (principal of $40,000 and $0, respectively) (1)
2021 Asset-Backed Notes, net (principal of $0 and $49,153, respectively) (1)
2027 Asset-Backed Notes, net (principal of $200,000 and $0, respectively) (1)
2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively) (1)
Credit Facilities
Total liabilities
Commitments and Contingencies (Note 10)
Net assets consist of:
Common stock, par value
Capital in excess of par value
Total distributable earnings (loss) (2)
Treasury Stock, at cost, 376,466 shares as of December 31, 2018 and no shares as of December 31, 2017
Total net assets
Total liabilities and net assets
Shares of common stock outstanding ($0.001 par value, 96,877,352 shares issued, 200,000,000 authorized)
Net asset value per share
December 31, 2018
December 31, 2017
$
$
$
$
$
$
$
1,801,258 $
57,619
21,496
1,880,373
34,212
11,645
16,959
2,002
1,945,191 $
25,961 $
147,655
147,990
81,852
72,590
38,427
—
197,265
225,051
52,956
989,747 $
96
1,052,269
(92,859 )
(4,062 )
955,444 $
1,945,191 $
1,491,458
19,461
31,295
1,542,214
91,309
3,686
12,262
5,244
1,654,715
26,896
188,141
147,572
179,001
—
—
48,650
—
223,488
—
813,748
85
908,501
(67,619 )
—
840,967
1,654,715
96,501
9.90 $
84,424
9.96
(1)
(2)
The Company’s SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 Notes, 2021 Asset-Backed Notes, 2027 Asset-Backed Notes, and 2022
Convertible Notes, as each term is defined herein, are presented net of the associated debt issuance costs for each instrument. See “Note 4 – Borrowings.”
Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See
Note 2.
See notes to consolidated financial statements.
98
The following table presents the assets and liabilities of our consolidated securitization trusts for the 2021 Asset-Backed Notes
and the 2027 Asset-Backed Notes (see Note 4), which are variable interest entities, or VIEs. The assets of our securitization VIEs can
only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated
securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and
liabilities are included in the Consolidated Statement of Assets and Liabilities above.
(Dollars in thousands)
Assets
Restricted Cash
Total investments in securities, at value (cost of $279,373 and $146,208, respectively)
Total assets
Liabilities
2021 Asset-Backed Notes, net (principal of $0 and $49,153, respectively) (1)
2027 Asset-Backed Notes, net (principal of $200,000 and $0, respectively) (1)
Total liabilities
December 31,
2018
December 31,
2017
$
$
$
$
11,645 $
277,781
289,426 $
3,686
144,513
148,199
— $
197,265
197,265 $
48,650
—
48,650
(1)
The Company’s 2021 Asset-Backed Notes and 2027 Asset-Backed Notes are presented net of the associated debt issuance costs. The 2021 Asset-Backed Notes
were fully repaid as of October 16, 2018. See “Note 4 – Borrowings.”
See notes to consolidated financial statements.
99
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
2018
For the Year Ended December 31,
2017
2016
Investment income:
Interest income
Non-control/Non-affiliate investments
Control investments
Affiliate investments
Total interest income
Fee income
Non-control/Non-affiliate investments
Control investments
Affiliate investments
Total fee income
Total investment income
Operating expenses:
Interest
Loan fees
General and administrative
Employee compensation:
Compensation and benefits
Stock-based compensation
Total employee compensation
Total operating expenses
Other income (loss)
Net investment income
Net realized gain (loss) on investments
Non-control/Non-affiliate investments
Control investments
Affiliate investments
Total net realized gain (loss) on investments
Net change in unrealized appreciation (depreciation) on investments
Non-control/Non-affiliate investments
Control investments
Affiliate investments
Total net unrealized appreciation (depreciation) on investments
Total net realized and unrealized gain (loss)
Net increase (decrease) in net assets resulting from operations
Net investment income before investment gains and losses per common share:
Basic
Change in net assets resulting from operations per common share:
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
Distributions declared per common share:
Basic
$
185,187 $
3,391
2,058
190,636
169,424 $
1,971
801
172,196
16,776
5
336
17,117
207,753
39,435
7,260
15,488
25,062
11,779
36,841
99,024
—
108,729
(4,721 )
(4,308 )
(2,058 )
(11,087 )
18,630
11
43
18,684
190,880
37,857
8,728
16,105
24,555
7,191
31,746
94,436
—
96,444
(10,235 )
(16,476 )
—
(26,711 )
$
$
$
$
(13,082 )
(1,222 )
(6,842 )
(21,146 )
(32,233 )
76,496 $
43,796
14,152
(48,683 )
9,265
(17,446 )
78,998 $
1.19 $
1.16 $
0.83 $
0.83 $
90,929
91,057
0.95 $
0.95 $
82,519
82,640
158,489
78
160
158,727
16,318
6
—
16,324
175,051
32,016
5,042
16,106
22,500
7,043
29,543
82,707
8,000
100,344
4,576
—
—
4,576
(29,970 )
(4,025 )
(2,222 )
(36,217 )
(31,641 )
68,703
1.34
0.91
0.91
73,753
73,775
$
1.26 $
1.24 $
1.24
See notes to consolidated financial statements.
100
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(dollars and shares in thousands)
Capital in Distributable
Provision
for Income
Taxes on
Common Stock
excess
Treasury Investment Net
Earnings
(loss)(2)
Stock
Gains
Balance at December 31, 2015
Net increase (decrease) in net assets resulting from operations
Public offering, net of offering expenses
Issuance of common stock due to stock option exercises
Retired shares from net issuance
Issuance of common stock under restricted stock plan
Acquisition of common stock under repurchase plan
Retired shares for restricted stock vesting
Distributions reinvested in common stock
Distributions
Stock-based compensation (1)
Tax reclassification of stockholders' equity in accordance with
generally accepted accounting principles
Balance at December 31, 2016
Net increase (decrease) in net assets resulting from operations
Public offering, net of offering expenses
Issuance of common stock due to stock option exercises
Retired shares from net issuance
Issuance of common stock under restricted stock plan
Retired shares for restricted stock vesting
Distributions reinvested in common stock
Issuance of Convertible Notes
Distributions
Stock-based compensation (1)
Tax reclassification of stockholders' equity in accordance with
generally accepted accounting principles
Balance at December 31, 2017
Net increase (decrease) in net assets resulting from operations
Public offering, net of offering expenses
Issuance of common stock due to stock option exercises
Retired shares from net issuance
Issuance of common stock under restricted stock plan
Acquisition of common stock under repurchase plan
Retired shares for restricted stock vesting
Distributions reinvested in common stock
Distributions
Stock-based compensation (1)
Tax reclassification of stockholders' equity in accordance with
generally accepted accounting principles
Balance at December 31, 2018
Shares Par Value of par value
72,118 $
—
7,428
55
(17 )
556
(450 )
(279 )
144
—
—
752,244 $
—
92,820
654
(235 )
(1 )
(4,789 )
(2,944 )
1,799
—
7,129
73 $
—
7
—
—
1
(1 )
—
—
—
—
(34,841 ) $
68,703
—
—
—
—
—
—
—
(92,333 )
—
—
79,555 $
—
4,919
49
(21 )
10
(252 )
164
—
—
—
—
84,424 $
—
12,047
63
(57 )
336
(376 )
(95 )
159
—
—
—
80 $
(7,020 )
839,657 $
6,678
(51,793 ) $
—
5
—
—
—
—
—
—
—
—
—
66,930
500
(209 )
—
(2,976 )
2,202
3,413
—
7,247
78,998
—
—
—
—
—
—
—
(103,087 )
—
—
85 $
(8,263 )
908,501 $
8,263
(67,619 ) $
—
11
—
—
—
—
—
—
—
—
—
144,680
704
(718 )
—
—
(1,179 )
2,007
—
11,266
76,496
—
—
—
—
—
—
—
(114,728 )
—
— $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
(4,062 )
—
—
—
—
Assets
(342 ) $ 717,134
— 68,703
— 92,827
654
—
(235 )
—
—
—
(4,790 )
—
(2,944 )
—
1,799
—
— (92,333 )
7,129
—
342
—
— $ 787,944
— 78,998
— 66,935
500
—
(209 )
—
—
—
(2,976 )
—
2,202
—
—
3,413
— (103,087 )
7,247
—
—
—
— $ 840,967
— 76,496
— 144,691
704
—
(718 )
—
—
—
(4,062 )
—
(1,179 )
—
—
2,007
— (114,728 )
— 11,266
—
96,501 $
(12,992 )
—
96 $ 1,052,269 $
12,992
(92,859 ) $
—
(4,062 ) $
—
—
— $ 955,444
(1)
(2)
Stock-based compensation includes $41, $57 and $87 of restricted stock and option expense related to director compensation for the years ended December 31,
2018, 2017 and 2016, respectively.
Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See
Note 2.
See notes to consolidated financial statements.
101
HERCULES CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations
$
76,496
$
78,998 $
68,703
For the Year Ended December 31,
2017
2016
2018
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by (used in) operating activities:
Purchase of investments
Principal and fee payments received on investments
Proceeds from the sale of investments
Net unrealized depreciation (appreciation) on investments
Net realized loss (gain) on investments
Accretion of paid-in-kind principal
Accretion of loan discounts
Accretion of loan discount on convertible notes
Accretion of loan exit fees
Change in deferred loan origination revenue
Unearned fees related to unfunded commitments
Amortization of debt fees and issuance costs
Depreciation
Stock-based compensation and amortization of restricted stock grants (1)
Change in operating assets and liabilities:
Interest and fees receivable
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of capital equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Issuance of common stock, net
Repurchase of common stock, net
Retirement of employee shares
Distributions paid
Issuance of 2022 Convertible Notes
Issuance of 2022 Notes
Issuance of 2024 Notes
Issuance of 2025 Notes
Issuance of 2033 Notes
Issuance of 2027 Asset-Backed Notes
Repayments of 2019 Notes
Repayments of 2024 Notes
Repayments of 2021 Asset-Backed Notes
Repayments of Long-Term SBA Debentures
Borrowings of credit facilities
Repayments of credit facilities
Cash paid for debt issuance costs
Cash paid for redemption of convertible notes
Fees paid for credit facilities and debentures
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental non-cash investing and financing activities:
Interest paid
Income taxes paid
Distributions reinvested
(960,844 )
593,502
19,886
21,146
11,087
(9,363 )
(3,914 )
671
(17,025 )
6,095
1,064
6,105
199
11,266
(4,697 )
(1,099 )
11
444
(248,970 )
(475 )
(475 )
144,391
(4,062 )
(893 )
(112,721 )
—
—
—
75,000
40,000
200,000
—
(100,000 )
(49,153 )
(41,200 )
353,597
(300,641 )
(3,782 )
—
(229 )
200,307
(49,138 )
94,995
45,857
$
38,960 $
713 $
2,007 $
(764,795 )
641,016
23,881
(9,265 )
26,711
(9,686 )
(6,711 )
615
(19,098 )
962
1,048
7,492
201
7,247
(648 )
(1,097 )
(10 )
4,739
(18,400 )
(274 )
(274 )
66,935
—
(2,685 )
(100,885 )
230,000
150,000
5,636
—
—
—
(110,364 )
(75,000 )
(60,053 )
—
8,497
(13,513 )
(6,342 )
—
77
92,303
73,629
21,366
94,995 $
33,579 $
1,076 $
2,202 $
(680,971 )
444,758
18,998
36,217
(4,576 )
(7,319 )
(7,163 )
82
(22,614 )
347
(758 )
3,773
202
7,129
(2,375 )
3,234
56
3,892
(138,385 )
(252 )
(252 )
92,827
(4,790 )
(2,525 )
(90,534 )
—
—
149,873
—
—
—
—
—
(20,095 )
—
285,891
(330,877 )
(5,289 )
(17,604 )
(1,261 )
55,616
(83,021 )
104,387
21,366
31,011
184
1,799
$
$
$
$
(1)
Stock-based compensation includes $41, $57 and $87 of restricted stock and option expense related to director compensation for the years ended December 31,
2018, 2017 and 2016, respectively.
See notes to consolidated financial statements.
102
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated
Statement of Assets and Liabilities that sum to the total of the same such amounts in the Consolidated Statement of Cash Flows:
(Dollars in thousands)
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash presented in the
Consolidated Statements of Cash Flows
For the Year Ended December 31,
2017
2016
2018
$
34,212
11,645
$
91,309
3,686
$
13,044
8,322
$
45,857 $
94,995
$
21,366
See “Note 2 – Summary of Significant Accounting Policies” for a description of restricted cash and cash equivalents.
See notes to consolidated financial statements.
103
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Type of
Sub-Industry
Investment(1) Maturity Date Interest Rate and Floor(2)
Principal
Amount Cost(3) Value(4)
Biotechnology Tools
Senior
Secured
September 2019 Interest rate PRIME +
6.45% or Floor rate of
9.95%, 3.85% Exit Fee
Senior
Secured
July 2021
Interest rate PRIME +
3.75% or Floor rate of
8.50%, 6.95% Exit Fee
Unsecured
March 2023
Interest rate FIXED
14.50%
$ 4,999 $ 5,165 $ 5,165
5,165 5,165
5,165 5,165
$ 6,000 6,026 5,983
6,026 5,983
6,026 5,983
$ 15,000
14,729
14,401
14,729 14,401
14,729 14,401
Senior
Secured
Senior
Secured
March 2020
July 2022
Interest rate PRIME +
6.05% or Floor rate of
9.55%, 11.69% Exit Fee
Interest rate PRIME +
4.50% or Floor rate of
9.25%, 4.25% Exit Fee
$ 10,936 11,926 11,842
$ 25,000 25,313 25,081
37,239 36,923
37,239 36,923
Portfolio Company
Debt Investments
Biotechnology Tools
Under 1 Year Maturity
Exicure, Inc. (11)
Subtotal: Under 1 Year Maturity
Subtotal: Biotechnology Tools (0.54%)*
Consumer & Business Products
1-5 Years Maturity
WHOOP, INC. (12)
Consumer & Business
Products
Subtotal: 1-5 Years Maturity
Subtotal: Consumer & Business Products (0.63%)*
Diversified Financial Services
1-5 Years Maturity
Gibraltar Business Capital, LLC. (7)
Diversified Financial
Services
Subtotal: 1-5 Years Maturity
Subtotal: Diversified Financial Services (1.51%)*
Drug Delivery
1-5 Years Maturity
AcelRx Pharmaceuticals, Inc. (11)
Drug Delivery
Antares Pharma Inc. (10)(11)(15)
Drug Delivery
Subtotal: 1-5 Years Maturity
Subtotal: Drug Delivery (3.86%)*
See notes to consolidated financial statements.
104
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Maturity
Date
Interest Rate and Floor(2)
Principal
Amount Cost(3) Value(4)
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior
Secured
Senior
Secured
Senior
Secured
February
2019
September
2019
June 2019
Interest rate PRIME + 6.05% or Floor rate of
9.55%, 5.75% Exit Fee
Interest rate PRIME + 5.70% or Floor rate of
9.20%, 7.82% Exit Fee
Interest rate PRIME + 4.70% or Floor rate of
7.95%, 3.00% Exit Fee
$
$
757 $ 1,471 $ 1,471
4,808
5,281
5,281
$
2,203
2,487
9,239
—
6,752
Portfolio Company
Drug Discovery & Development
Under 1 Year Maturity
Auris Medical Holding, AG (5)(10)
Brickell Biotech, Inc. (12)
Epirus Biopharmaceuticals, Inc. (8)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Acacia Pharma Inc. (10)(11)
Aveo Pharmaceuticals, Inc. (11)
Total Aveo Pharmaceuticals, Inc.
Axovant Sciences Ltd. (5)(10)(11)(16)
BridgeBio Pharma LLC (13)(16)
Total BridgeBio Pharma LLC
Chemocentryx, Inc. (10)(15)
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Mesoblast (5)(10)(11)
Genocea Biosciences, Inc. (11)
Merrimack Pharmaceuticals, Inc. (12)
Metuchen Pharmaceuticals LLC (14)
Motif BioSciences Inc. (5)(10)(11)(15)
Myovant Sciences, Ltd. (5)(10)(11)
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Paratek Pharmaceuticals, Inc. (p.k.a.
Transcept Pharmaceuticals, Inc.) (10)(11)(15)(16)
Nabriva Therapeutics (5)(10)
Stealth Bio Therapeutics Corp. (5)(10)(11)
Tricida, Inc. (11)(15)
uniQure B.V. (5)(10)(11)
Verastem, Inc. (11)
Total Verastem, Inc.
X4 Pharmaceuticals Inc.
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
January
2022
July 2021 Interest rate PRIME + 4.70% or Floor rate of
Interest rate PRIME + 4.50% or Floor rate of
9.25%, 3.95% Exit Fee
$ 10,000
9,871
9,819
9.45%, 5.40% Exit Fee
$ 10,000 10,111 10,042
July 2021 Interest rate PRIME + 4.70% or Floor rate of
9.45%, 3.00% Exit Fee
March
2021
July 2022 Interest rate PRIME + 4.35% or Floor rate of
Interest rate PRIME + 6.80% or Floor rate of
10.55%
$ 10,000 10,220 10,157
$ 20,000 20,331 20,199
$ 50,219 49,485 49,286
9.35%, 6.35% Exit Fee
$ 35,000 35,054 35,263
July 2022 Interest rate PRIME + 3.35% or Floor rate of
9.10%, 5.75% Exit Fee
December
2022
May 2021 Interest rate PRIME + 2.75% or Floor rate of
Interest rate PRIME + 3.30% or Floor rate of
8.05%, 6.25% Exit Fee
7.75%, 10.12% Exit Fee
Interest rate PRIME + 4.00% or Floor rate of
9.25%, 5.55% Exit Fee
Interest rate PRIME + 4.95% or Floor rate of
9.45%, 6.95% Exit Fee
Interest rate PRIME + 7.25% or Floor rate of
10.75%, PIK Interest 1.35%, 2.25% Exit Fee
Interest rate PRIME + 5.50% or Floor rate of
10.00%, 2.15% Exit Fee
Interest rate PRIME + 4.00% or Floor rate of
8.25%, 6.55% Exit Fee
August
2021
March
2022
October
2020
September
2021
November
2021
June 2023 Interest rate PRIME + 4.30% or Floor rate of
September
2020
September
2021
September
2021
August
2022
9.80%, 6.95% Exit Fee
Interest rate PRIME + 2.75% or Floor rate of
8.50%, 4.50% Exit Fee
Interest rate PRIME + 2.75% or Floor rate of
8.50%, 4.50% Exit Fee
Interest rate PRIME + 2.75% or Floor rate of
8.50%, 2.25% Exit Fee
Interest rate PRIME + 2.10% or Floor rate of
7.85%, 6.95% Exit Fee
January
2021
March
2022
June 2023 Interest rate PRIME + 3.35% or Floor rate of
Interest rate PRIME + 5.50% or Floor rate of
9.50%, 6.25% Exit Fee
Interest rate PRIME + 3.35% or Floor rate of
8.85%, 8.19% Exit Fee
December
2020
December
2020
December
2020
December
2020
8.85%, 7.72% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
Interest rate PRIME + 6.00% or Floor rate of
10.50%, 4.50% Exit Fee
Interest rate PRIME + 6.00% or Floor rate of
10.50%, 4.50% Exit Fee
$ 20,000 19,904 19,904
$ 55,000 54,958 55,167
$ 20,000 19,957 20,104
$ 14,000 14,937 14,788
$ 15,000 15,024 15,024
$ 35,000 35,346 35,190
$ 18,569 19,256 19,122
$ 15,000 14,907 14,786
$ 40,000 40,320 40,151
$ 25,000 24,750 24,750
$ 40,000 40,882 40,472
$ 10,000 10,240 10,137
$ 10,000 10,084
9,925
$ 10,000 10,014 10,014
$ 70,000 71,220 70,548
$ 19,313 19,740 19,597
$ 40,000 39,622 39,794
$ 35,000 35,538 35,386
$
5,000
5,058
5,059
$
5,000
5,082
5,083
$
5,000
5,057
5,057
$ 10,000
9,976
$ 25,000 25,230 25,175
10,033
Drug Discovery &
Development
Senior
Secured
November
2021
Interest rate PRIME + 4.25% or Floor rate of
9.50%, 7.95% Exit Fee
$ 10,000
9,746
9,746
520,238 518,632
529,477 525,384
Subtotal: 1-5 Years Maturity
Subtotal: Drug Discovery & Development (54.99%)*
See notes to consolidated financial statements.
105
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Maturity
Date
Interest Rate and Floor(2)
Principal
Amount Cost(3) Value(4)
Portfolio Company
Electronics & Computer Hardware
1-5 Years Maturity
908 DEVICES INC. (15)
Electronics & Computer
Senior Secured September
Interest rate PRIME + 4.00% or
Glo AB (5)(10)(13)(14)
Hardware
2020
Floor rate of 8.25%, 4.25% Exit Fee
$ 10,000 $ 10,145 $ 10,155
Electronics & Computer
Senior Secured February
Interest rate PRIME + 6.20% or
Hardware
2021
Floor rate of 10.45%, PIK Interest
1.75%, 2.95% Exit Fee
Subtotal: 1-5 Years Maturity
Subtotal: Electronics & Computer Hardware (1.64%)*
Healthcare Services, Other
1-5 Years Maturity
Oak Street Health (12)
Healthcare Services, Other Senior Secured September
Interest rate PRIME + 5.00% or
$ 12,192 12,265
5,556
22,410 15,711
22,410 15,711
PH Group Holdings (13)(17)
Healthcare Services, Other Senior Secured September
Interest rate PRIME + 7.45% or
2020
Floor rate of 10.95%
$ 20,000
19,889
19,806
2021
Floor rate of 9.75%, 5.95% Exit Fee
$ 30,000
30,486
30,338
Healthcare Services, Other Senior Secured September
Interest rate PRIME + 7.45% or
2020
Floor rate of 10.95%
9,938
$ 10,000
9,896
$ 30,000 29,827 29,702
60,313 60,040
60,313 60,040
Total PH Group Holdings
Subtotal: 1-5 Years Maturity
Subtotal: Healthcare Services, Other (6.28%)*
Information Services
1-5 Years Maturity
MDX Medical, Inc. (14)(15)(19)
Information Services
Subtotal: 1-5 Years Maturity
Subtotal: Information Services (1.57%)*
Senior Secured December
2020
Interest rate PRIME + 4.00% or
Floor rate of 8.25%, PIK Interest
1.70%
$ 15,288 15,037 14,987
15,037 14,987
15,037 14,987
See notes to consolidated financial statements.
106
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1) Maturity Date
Interest Rate and Floor(2)
Principal
Amount
Cost(3) Value(4)
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Senior Secured October 2019
Senior Secured January 2019
Interest rate PRIME + 6.25% or Floor
rate of 9.75%, 5.00% Exit Fee
Interest rate PRIME + 4.75% or Floor
rate of 8.25%
$
$
3,099 $
3,486 $
3,486
2,000
2,000
5,486
2,000
5,486
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Senior Secured January 2022
Senior Secured April 2021
Senior Secured April 2022
Senior Secured July 2022
Senior Secured July 2022
Senior Secured May 2022
Interest rate PRIME + 5.70% or Floor
rate of 9.95%, 3.45% Exit Fee
Interest rate PRIME + 5.40% or Floor
rate of 10.15%, PIK Interest 1.70%,
1.50% Exit Fee
Interest rate PRIME + 4.05% or Floor
rate of 8.55%, 6.95% Exit Fee
Interest rate PRIME + 2.95% or Floor
rate of 7.95%, PIK Interest 1.25%
Interest rate PRIME + 2.55% or Floor
rate of 7.80%, PIK Interest 2.95%,
1.00% Exit Fee
Interest rate PRIME + 3.90% or Floor
rate of 8.65%, PIK Interest 2.30%
Senior Secured December 2021 Interest rate PRIME + 4.25%, 1.50%
Exit Fee
Senior Secured November 2021 Interest rate PRIME + 6.25% or Floor
Senior Secured
January 2021
Senior Secured January 2021
rate of 11.25%
Interest rate 3-month LIBOR + 8.00% or
Floor rate of 9.00%
Interest rate PRIME + 3.75% or Floor
rate of 7.00%
Senior Secured September 2021 Interest rate PRIME + 5.13% or Floor
Senior Secured March 2021
rate of 10.125%, 2.00% Exit Fee
Interest rate 3-month LIBOR + 8.60%
or Floor rate of 9.85%, 1.75% Exit
Fee
Senior Secured September 2022 Interest rate PRIME + 3.85% or Floor
Senior Secured May 2021
Senior Secured October 2021
Senior Secured July 2020
Senior Secured July 2020
rate of 8.85%, 8.05% Exit Fee
Interest rate PRIME + 5.75% or Floor
rate of 10.25%, 4.55% Exit Fee
Interest rate PRIME + 5.75% or Floor
rate of 10.25%, 2.95% Exit Fee
Interest rate PRIME + 5.15% or Floor
rate of 9.15%, PIK Interest 1.95%,
2.55% Exit Fee
Interest rate PRIME + 5.65% or Floor
rate of 10.65%, PIK Interest 1.95%,
2.55% Exit Fee
Senior Secured June 2021
Senior Secured
June 2021
Interest rate FIXED 6.00%, PIK Interest
3.00%
PIK Interest 8.00%
Senior Secured January 2021
Senior Secured July 2022
Interest rate 3-month LIBOR + 9.25% or
Floor rate of 10.25%
Interest rate 3-month LIBOR + 8.55% or
Floor rate of 9.55%
Senior Secured November 2021 Interest rate PRIME + 3.95% or Floor
rate of 8.45%, 7.09% Exit Fee
$
20,000
20,006
19,941
$
$
$
$
$
$
$
$
$
$
10,117
10,020
10,028
11,000
11,017
11,020
3,750
3,692
3,692
7,500
7,419
7,419
60,729
60,687
60,408
6,667
6,563
6,563
7,500
7,368
7,375
2,776
2,776
2,785
1,500
4,276
1,500
4,276
1,498
4,283
$
12,200
12,210
12,147
$
$
$
$
$
25,000
25,092
24,987
20,000
19,666
19,666
5,000
5,018
4,984
5,000
10,000
4,941
9,959
4,941
9,925
$
41,841
42,139
42,075
$
$
$
$
$
$
$
$
5,033
46,874
4,867
47,006
4,867
46,942
20,924
20,924
18,128
10,680
31,604
240
21,164
—
18,128
6,667
6,667
6,653
20,241
20,076
19,921
11,000
10,997
10,995
303,885 300,093
309,371 305,579
Portfolio Company
Internet Consumer & Business Services
Under 1 Year Maturity
LogicSource
The Faction Group LLC (11)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
AppDirect, Inc. (11)(19)
Art.com, Inc. (12)(14)(15)
Cloudpay, Inc. (5)(10)
Contentful, Inc. (5)(10)(14)
Convercent, Inc. (14)(15)(17)
EverFi, Inc. (11)(14)(16)
Fastly, Inc. (17)(19)
First Insight, Inc. (15)
Greenphire, Inc. (17)
Total Greenphire, Inc.
Intent Media, Inc. (12)(17)
Interactions Corporation (11)(19)
Postmates, Inc. (17)(19)
RumbleON, Inc.
Total RumbleON, Inc.
Snagajob.com, Inc. (13)(14)
Total Snagajob.com, Inc.
Tectura Corporation (7)(8)(9)(14)
Total Tectura Corporation
The Faction Group LLC (11)
Wheels Up Partners LLC (11)
Xometry, Inc. (13)(17)(19)
Subtotal: 1-5 Years Maturity
Subtotal: Internet Consumer & Business Services (31.98%)*
See notes to consolidated financial statements.
107
Portfolio Company
Media/Content/Info
1-5 Years Maturity
Bustle (14)(15)
Subtotal: 1-5 Years Maturity
Subtotal: Media/Content/Info (1.62%)*
Medical Devices & Equipment
Under 1 Year Maturity
Micell Technologies, Inc. (11)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Flowonix Medical, Inc. (11)(14)
Medical Devices & Equipment
Medical Devices & Equipment
Intuity Medical, Inc. (11)(15)
Medical Devices & Equipment
Quanta Fluid Solutions (5)(10)
Medical Devices & Equipment
Quanterix Corporation (11)
Medical Devices & Equipment
Rapid Micro Biosystems, Inc. (11)(15)
Medical Devices & Equipment
Sebacia, Inc. (11)(15)
Medical Devices & Equipment
Transenterix, Inc. (10)(11)
Medical Devices & Equipment
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Subtotal: 1-5 Years Maturity
Subtotal: Medical Devices & Equipment (11.24%)*
Software
Under 1 Year Maturity
Pollen, Inc. (15)
Software
Subtotal: Under 1 Year Maturity
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Maturity
Date
Interest Rate and Floor(2)
Principal
Amount Cost(3) Value(4)
Media/Content/Info
Senior
Secured
June 2021
Interest rate PRIME + 4.10% or Floor
rate of 8.35%, PIK Interest 1.95%,
3.12% Exit Fee
$ 15,315 $ 15,336 $ 15,453
15,336 15,453
15,336 15,453
August 2019 Interest rate PRIME + 7.25% or Floor
rate of 10.50%, 5.00% Exit Fee
$ 2,323
2,724
2,724
2,405
2,405
October 2021
June 2021
April 2020
March 2020
April 2022
Interest rate PRIME + 4.00% or Floor
rate of 9.00%, PIK Interest 0.5%,
7.95% Exit Fee
Interest rate PRIME + 5.00% or Floor
rate of 9.25%, 5.95% Exit Fee
Interest rate PRIME + 8.05% or Floor
rate of 11.55%, 5.00% Exit Fee
Interest rate PRIME + 2.75% or Floor
rate of 8.00%, 0.58% Exit Fee
Interest rate PRIME + 5.15% or Floor
rate of 9.65%, 7.25% Exit Fee
January 2021 Interest rate PRIME + 4.35% or Floor
June 2022
rate of 8.85%, 6.05% Exit Fee
Interest rate PRIME + 4.55% or Floor
rate of 9.55%, 6.95% Exit Fee
$ 15,007 14,673 14,673
$ 17,500 17,504 17,417
$ 5,806
6,324
6,344
$ 7,688
7,656
7,577
$ 18,000 18,143 18,013
$ 11,000 11,151 11,071
$ 30,000 29,972 29,852
105,423 104,947
108,147 107,352
Senior
Secured
April 2019
Interest rate PRIME + 4.25% or Floor
rate of 8.50%, 4.00% Exit Fee
$ 7,000
7,214
7,214
7,214
7,214
See notes to consolidated financial statements.
108
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Maturity
Date
Interest Rate and Floor(2)
Principal
Amount
Cost(3) Value(4)
Portfolio Company
1-5 Years Maturity
Abrigo (p.k.a. Banker's Toolbox, Inc.)
(13)(18)
Businessolver.com, Inc. (16)(17)
Total Businessolver.com, Inc.
Clarabridge, Inc. (12)(14)(17)
Cloudian, Inc.
Couchbase, Inc. (15)(17)(19)
Software
Software
Software
Software
Software
Software
Credible Behavioral Health, Inc. (14)(17) Software
Dashlane, Inc. (14)(19)
Software
DocuTAP, Inc. (17)
Emma, Inc. (17)(18)
Total Emma, Inc.
Evernote Corporation (14)(15)(17)(19)
Software
Software
Software
Software
Software
Software
Total Evernote Corporation
Fuze, Inc. (13)(14)(15)(16)(19)
Software
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Software
Total Impact Radius Holdings, Inc.
Insurance Technologies Corporation
(17)(18)
Lightbend, Inc. (14)(15)
Software
Software
Lithium Technologies, Inc. (11)(16)(17)
Software
Software
Total Lithium Technologies, Inc.
Microsystems Holding Company, LLC
(13)(19)
Quid, Inc. (14)(15)
Software
Software
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
March 2023
Interest rate 3-month LIBOR + 7.88% or
Floor rate of 7.88%
$ 39,701
$ 38,871
$ 38,617
May 2023
Interest rate 3-month LIBOR + 7.50% or
Floor rate of 7.50%
$ 52,913
51,958
51,417
May 2023
Interest rate 3-month LIBOR + 7.50% or
Floor rate of 7.50%
$
2,550
$ 55,463
2,551
54,509
2,550
53,967
April 2022
Interest rate PRIME + 4.80% or Floor rate
of 8.55%, PIK Interest 2.25%
$ 42,300
41,843
41,921
November
Interest rate PRIME + 3.25% or Floor rate
2022
of 8.25%, 9.75% Exit Fee
$ 15,000
14,814
14,814
September
Interest rate PRIME + 5.25% or Floor rate
2021
of 10.75%
$ 15,000
14,921
14,921
September
Interest rate PRIME + 3.20% or Floor rate
2021
of 7.95%, PIK Interest 3.30%
$
7,573
7,493
7,493
April 2022
Interest rate PRIME + 4.05% or Floor rate
of 8.55%, PIK Interest 1.10%, 9.25% Exit
Fee
October 2023 Interest rate 3-month LIBOR + 8.00% or
$ 10,067
10,107
10,137
Floor rate of 8.00%
$ 14,000
13,609
13,609
September
Interest rate 3-month LIBOR + 8.39% or
2022
Floor rate of 8.39%
$ 37,037
35,858
35,251
September
Interest rate 3-month LIBOR + 8.18% or
2022
Floor rate of 8.18%
October 2020
Interest rate PRIME + 5.45% or Floor rate
of 8.95%
July 2021
Interest rate PRIME + 6.00% or Floor rate
$
6,000
$ 43,037
5,827
41,685
5,826
41,077
$
5,549
5,537
5,592
of 9.50%, PIK Interest 1.25%
$
4,074
4,058
4,074
July 2022
Interest rate PRIME + 6.00% or Floor rate
of 9.50%, PIK Interest 1.25%
July 2021
Interest rate PRIME + 3.70% or Floor rate
of 7.95%, PIK Interest 1.55%, 3.55% Exit
Fee
Interest rate PRIME + 4.25% or Floor rate
of 8.75%, PIK Interest 1.55%, 1.75% Exit
Fee
December
Interest rate PRIME + 4.25% or Floor rate
2020
of 8.75%, PIK Interest 1.55%
$
5,015
$ 14,638
4,982
14,577
4,993
14,659
$ 51,129
51,284
51,943
$ 10,191
10,271
10,237
$
2,014
$ 12,205
2,014
12,285
2,008
12,245
March 2023
Interest rate 3-month LIBOR + 7.82% or
Floor rate of 8.75%
$ 12,500
12,258
12,071
February
2022
Interest rate PRIME + 4.25% or Floor rate
of 8.50%, PIK Interest 2.00%
$ 16,179
15,850
15,741
October 2022 Interest rate 1-month LIBOR + 8.00% or
Floor rate of 9.00%
$ 12,000
11,785
11,659
October 2022 Interest rate 1-month LIBOR + 8.00% or
Floor rate of 9.00%
$ 43,000
$ 55,000
42,047
53,832
42,047
53,706
July 2022
Interest rate 3-month LIBOR + 8.25% or
Floor rate of 9.25%
$ 12,000
11,854
11,842
February
2021
Interest rate PRIME + 4.75% or Floor rate
of 8.25%, PIK Interest 2.25%, 3.00% Exit
Fee
$
8,494
8,632
8,619
Impact Radius Holdings, Inc. (11)(14)
Software
Senior
Secured
December
2020
See notes to consolidated financial statements.
109
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Portfolio Company
RapidMiner, Inc. (12)(14)
Regent Education (14)
Salsa Labs, Inc. (11)(17)
Signpost, Inc. (11)(14)
Sub-Industry
Software
Software
Software
Software
ThreatConnect, Inc. (14)(15)(19)
Software
Vela Trading Technologies (11)(18)
YouEarnedIt, Inc. (18)
ZocDoc (11)(19)
Software
Software
Software
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Type of
Investment(1)
Senior
Secured
Senior
Secured
Senior
Secured
Senior
Secured
Maturity
Interest Rate and Floor(2)
Date
Interest rate PRIME + 5.50% or Floor
December
rate of 9.75%, PIK Interest 1.65%
2020
January 2021 Interest rate FIXED 10.00%, PIK
April 2023
Interest 2.00%, 6.35% Exit Fee
Interest rate 3-month LIBOR + 8.15%
or Floor rate of 9.15%
February 2020 Interest rate PRIME + 4.15% or Floor
Principal
Amount Cost(3) Value(4)
$
$
$
7,119 $
7,018 $
6,965
3,092
3,115
1,579
6,000
5,894
5,823
October 2022
July 2022
July 2023
rate of 8.15%, PIK Interest 1.75%,
5.75% Exit Fee
Interest rate PRIME + 4.95% or Floor
rate of 9.95%, PIK Interest 1.05%,
2.20% Exit Fee
Interest rate 3-month LIBOR + 9.50%
or Floor rate of 10.50%
Interest rate 1-month LIBOR + 8.66%
$ 15,787
16,293
16,267
$
7,519
7,443
7,443
$ 19,750
19,345
19,309
$
8,978
8,735
8,735
August 2021
Interest rate PRIME + 6.20% or Floor
rate of 10.95%, 2.00% Exit Fee
$ 30,000
30,003
29,875
516,270 513,378
523,484 520,592
$ 10,000
10,151
10,151
$
649
650
650
$
603
$ 11,252
603
11,404
11,404
603
11,404
11,404
$ 13,091
13,362
13,330
$ 11,909
$ 25,000 $
11,908
25,270 $
11,874
25,204
$ 30,000
29,981
29,680
$
7,254
7,400
7,360
$ 25,484
26,775
26,888
$
5,097
$ 30,581
5,381
32,156
94,807
5,386
32,274
94,518
106,211 105,922
1,752,945 1,733,492
Subtotal: 1-5 Years Maturity
Subtotal: Software (54.49%)*
Sustainable and Renewable Technology
Under 1 Year Maturity
Solar Spectrum Holdings LLC (p.k.a.
Sungevity, Inc.) (6)(14)(19)
Total Solar Spectrum LLC
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
FuelCell Energy, Inc. (12)
Total FuelCell Energy, Inc.
Impossible Foods, Inc. (12)(17)
Metalysis Limited (5)(10)(11)
Proterra, Inc. (11)(14)
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior
Secured
Senior
Secured
Senior
Secured
August 2019
February 2019
February 2019
Interest rate PRIME + 8.70% or Floor
rate of 12.95%, 5.00% Exit Fee
PIK Interest 10.00%
Interest rate PRIME + 10.70% or
Floor rate of 15.70%, PIK Interest
2.00%
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior
Secured
Senior
Secured
April 2020
April 2020
Interest rate PRIME + 5.40% or Floor
rate of 9.90%, 6.68% Exit Fee
Interest rate PRIME + 5.40% or Floor
rate of 9.90%, 8.50% Exit Fee
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior
Secured
Senior
Secured
Senior
Secured
January 2022
March 2021
November
2020
Sustainable and
Renewable Technology
Senior
Secured
November
2020
Interest rate PRIME + 3.95% or Floor
rate of 8.95%, 9.00% Exit Fee
Interest rate PRIME + 5.00% or Floor
rate of 9.25%, 6.95% Exit Fee
Interest rate PRIME + 3.70% or Floor
rate of 7.95%, PIK Interest 1.75%,
5.95% Exit Fee
Interest rate PRIME + 3.70% or Floor
rate of 7.95%, PIK Interest 1.75%,
7.00% Exit Fee
Total Proterra, Inc.
Subtotal: 1-5 Years Maturity
Subtotal: Sustainable and Renewable Technology (11.09%)*
Total: Debt Investments (181.43%)*
See notes to consolidated financial statements.
110
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Portfolio Company
Equity Investments
Communications & Networking
GlowPoint, Inc. (4)
Peerless Network Holdings, Inc.
Subtotal: Communications & Networking (0.51%)*
Sub-Industry
Diagnostic
Singulex, Inc.
Subtotal: Diagnostic (0.04%)*
Diversified Financial Services
Gibraltar Business Capital, LLC. (7)
Communications & Networking
Communications & Networking
Equity
Equity
Common Stock
Preferred Series A
114,192 $
1,135,000
Diagnostic
Equity
Common Stock
937,998
102 $
1,229
1,331
14
4,847
4,861
750
750
348
348
Diversified Financial Services
Diversified Financial Services
Equity
Equity
Common Stock
Preferred Series A
830,000
10,602,752
11,432,752
1,884
1,688
26,122 23,402
28,006 25,090
28,006 25,090
Total Gibraltar Business Capital, LLC
Subtotal: Diversified Financial Services (2.63%)*
Drug Delivery
AcelRx Pharmaceuticals, Inc. (4)
BioQ Pharma Incorporated (15)
Edge Therapeutics, Inc. (4)
Neos Therapeutics, Inc. (4)(15)
Subtotal: Drug Delivery (0.12%)*
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Discovery & Development
Aveo Pharmaceuticals, Inc. (4)(15)
Axovant Sciences Ltd. (4)(5)(10)(16)
BridgeBio Pharma LLC (16)
Cerecor, Inc. (4)
Dare Biosciences, Inc. (p.k.a. Cerulean Pharma,
Inc.) (4)
Dicerna Pharmaceuticals, Inc. (4)
Dynavax Technologies (4)(10)
Eidos Therapeutics, Inc. (4)(10)
Genocea Biosciences, Inc. (4)
Insmed, Incorporated (4)
Melinta Therapeutics (4)
Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.) (4)(10)(16)
Rocket Pharmaceuticals, Ltd (p.k.a. Inotek
Pharmaceuticals Corporation) (4)
Tricida, Inc. (4)
Subtotal: Drug Discovery & Development (1.18%)*
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Common Stock
Preferred Series D
Common Stock
Common Stock
176,730
165,000
49,965
125,000
Common Stock
Common Stock
Preferred Series D
Common Stock
Common Stock
1,901,791
129,827
1,008,929
119,087
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
13,550
142,858
20,000
15,000
223,463
70,771
51,821
1,329
500
309
1,500
3,638
1,715
1,269
2,000
1,000
1,000
1,000
550
255
2,000
1,000
2,000
318
599
16
206
1,139
3,112
129
1,819
385
10
1,527
183
206
64
929
42
Equity
Common Stock
Equity
Common Stock
76,362
2,744
392
944
105,260
1,500
2,000
14
2,481
20,033 11,293
Electronics & Computer Hardware
Identiv, Inc. (4)
Subtotal: Electronics & Computer Hardware (0.00%)*
Electronics & Computer Hardware Equity
Common Stock
6,700
Information Services
DocuSign, Inc. (4)
Subtotal: Information Services (1.62%)*
Information Services
Equity
Common Stock
385,000
34
34
24
24
6,081 15,431
6,081 15,431
See notes to consolidated financial statements.
111
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Preferred Series B
Common Stock
Preferred Series D
Common Stock
Preferred Series C
Preferred Series D
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Preferred Series F
Common Stock
Preferred Series A
Preferred Series A-1
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Preferred Series G
Preferred Series H
Internet Consumer & Business Services Equity
Internet Consumer & Business Services Equity
Common Stock
Preferred Series BB
220,653 $
9,023
217
105,000
230,030
198,677
428,707
91,648
328,190
286,080
108,710
394,790
218,351
87,802
306,153
414,994,863
1,000,000
415,994,863
Media/Content/Info
Equity
Preferred Series Seed
620,000
Portfolio Company
Internet Consumer & Business Services
Blurb, Inc.
Brigade Group, Inc. (p.k.a. Philotic, Inc.)
Contentful, Inc. (5)(10)
DoorDash, Inc.
Lightspeed POS, Inc. (5)(10)
Total Lightspeed POS, Inc.
Lyft, Inc.
Nextdoor.com, Inc.
OfferUp, Inc.
Total OfferUp, Inc.
Oportun (p.k.a. Progress Financial)
Total Oportun (p.k.a. Progress Financial)
Tectura Corporation (7)
Media/Content/Info
Pinterest, Inc.
Subtotal: Media/Content/Info (0.40%)*
Medical Devices & Equipment
AtriCure, Inc. (4)(15)
Flowonix Medical Incorporated
Gelesis, Inc.
Total Gelesis, Inc.
Medrobotics Corporation (15)
Total Medrobotics Corporation
Optiscan Biomedical, Corp. (6)
Total Tectura Corporation
Subtotal: Internet Consumer & Business Services (2.09%)*
Total Optiscan Biomedical, Corp.
Outset Medical, Inc. (p.k.a. Home Dialysis
Plus, Inc.)
Quanterix Corporation (4)
Subtotal: Medical Devices & Equipment (1.19%)*
Software
CapLinked, Inc.
Docker, Inc.
Druva, Inc.
Software
Software
Software
Software
Total Druva, Inc.
HighRoads, Inc.
Palantir Technologies
Total Palantir Technologies
Sprinklr, Inc.
WildTangent, Inc.
Subtotal: Software (2.15%)*
Software
Software
Software
Software
Software
Software
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Common Stock
Preferred Series AA
Common Stock
Preferred Series A-1
Preferred Series A-2
Preferred Series E
Preferred Series F
Preferred Series G
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series E
Equity
Preferred Series B
Equity
Common Stock
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Preferred Series A-3
Common Stock
Preferred Series 2
Preferred Series 3
Common Stock
Preferred Series D
Preferred Series E
Preferred Series G
Common Stock
Preferred Series 3
10,119
221,893
198,202
191,210
191,626
581,038
136,798
73,971
163,934
374,703
61,855
19,273
551,038
311,989
944,155
232,061
84,778
53,614
200,000
458,841
93,620
552,461
190
9,535
1,749,089
326,797
2,085,421
700,000
100,000
See notes to consolidated financial statements.
112
175 $
93
500
6,051
250
250
500
4,819
4,854
1,663
632
2,295
250
250
500
900
—
900
44
—
504
6,051
363
326
689
4,819
4,854
1,565
595
2,160
537
279
816
—
—
—
20,687 19,937
4,085
4,085
3,787
3,787
266
1,500
—
425
500
925
250
155
500
905
3,000
655
5,257
2,609
11,521
310
27
677
729
691
2,097
24
26
87
137
393
111
3,524
2,771
6,799
527
1,000
473
1,553
16,644 11,396
51
4,284
1,000
300
1,300
307
47
10,489
2,211
87
4,284
1,972
433
2,405
—
47
8,662
1,618
12,747 10,327
3,226
176
22,840 20,505
3,749
402
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series E
Preferred Series F
Preferred Series F-1
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series F
219,298 $
656,538
1,991,157
2,786,367
1,523,693
2,418,125
9,595,178
88,961
119,999
260,000
100,200
569,160
250 $
282
712
429
118
150
1,941
1,100
300
650
500
2,550
4,491
8
25
79
125
117
167
521
356
479
1,040
401
2,276
2,797
—
40
192
761
3,107,520
500
99,280
500
449
380
$
61,502
3,115
3,604
63,263
191,883 $ 120,212
Sub-Industry
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Portfolio Company
Surgical Devices
Gynesonics, Inc. (15)
Total Gynesonics, Inc.
Transmedics, Inc.
Total Transmedics, Inc.
Subtotal: Surgical Devices (0.29%)*
Sustainable and Renewable Technology
Flywheel Building Intelligence, Inc. (p.k.a.
SCIEnergy, Inc.)
Modumetal, Inc.
Proterra, Inc.
Sustainable and Renewable
Equity
Common Stock
Technology
Sustainable and Renewable
Equity
Preferred Series C
Technology
Sustainable and Renewable
Equity
Preferred Series 5
Technology
Solar Spectrum Holdings LLC (p.k.a.
Sungevity, Inc.) (6)
Subtotal: Sustainable and Renewable Technology (0.38%)*
Total: Equity Investments (12.58%)*
Technology
Sustainable and Renewable
Equity
Common Stock
See notes to consolidated financial statements.
113
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Biotechnology Tools
Communications & Networking
Communications & Networking
Consumer & Business Products
Consumer & Business Products
Consumer & Business Products
Consumer & Business Products
Portfolio Company
Warrant Investments
Biotechnology Tools
Labcyte, Inc.
Subtotal: Biotechnology Tools (0.12%)*
Communications & Networking
Peerless Network Holdings, Inc.
Spring Mobile Solutions, Inc.
Subtotal: Communications & Networking (0.00%)*
Consumer & Business Products
Gadget Guard (p.k.a Antenna79) (15)
Intelligent Beauty, Inc.
The Neat Company
WHOOP, INC.
Subtotal: Consumer & Business Products (0.02%)*
Drug Delivery
Agile Therapeutics, Inc. (4)
BioQ Pharma Incorporated
Dance Biopharm, Inc. (15)
Edge Therapeutics, Inc. (4)
Kaleo, Inc. (p.k.a. Intelliject, Inc.)
Neos Therapeutics, Inc. (4)(15)
Pulmatrix Inc. (4)
ZP Opco, Inc. (p.k.a. Zosano Pharma) (4)
Subtotal: Drug Delivery (0.26%)*
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Warrant
Preferred Series C
1,127,624 $
323 $
323
1,114
1,114
Warrant
Warrant
Common Stock
Common Stock
3,328
2,834,375
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
1,662,441
Common Stock
Preferred Series B
190,234
Preferred Series C-1 540,540
68,627
Preferred Series C
Common Stock
Common Stock
Common Stock
Common Stock
Preferred Series B
Common Stock
Common Stock
Common Stock
180,274
459,183
110,882
78,595
82,500
70,833
25,150
3,618
—
418
418
228
230
365
18
841
730
1
74
390
593
285
116
266
2,455
10
—
10
—
191
—
5
196
6
525
—
3
1,923
—
—
—
2,457
See notes to consolidated financial statements.
114
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Portfolio Company
Drug Discovery & Development
Acacia Pharma Inc. (4)(10)
ADMA Biologics, Inc. (4)
Auris Medical Holding, AG (4)(5)(10)
Brickell Biotech, Inc.
Cerecor, Inc. (4)
Chroma Therapeutics, Ltd. (5)(10)
Concert Pharmaceuticals, Inc. (4)(10)(15)
CTI BioPharma Corp. (p.k.a. Cell Therapeutics,
Inc.) (4)
CytRx Corporation (4)(15)
Dare Biosciences, Inc. (p.k.a. Cerulean Pharma,
Inc.) (4)
Dicerna Pharmaceuticals, Inc. (4)
Evofem Biosciences, Inc. (p.k.a Neothetics, Inc.)
(4)(15)
Fortress Biotech, Inc. (p.k.a. Coronado
Biosciences, Inc.) (4)
Genocea Biosciences, Inc. (4)
Immune Pharmaceuticals (4)
Melinta Therapeutics (4)
Motif BioSciences Inc. (4)(5)(10)(15)
Myovant Sciences, Ltd. (4)(5)(10)
Neuralstem, Inc. (4)(15)
Ology Bioservices, Inc. (p.k.a. Nanotherapeutics,
Inc.) (15)
Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.) (4)(10)(15)(16)
Savara Inc. (p.k.a. Mast Therapeutics, Inc.) (4)(15) Drug Discovery & Development
Sorrento Therapeutics, Inc. (4)(10)
Drug Discovery & Development
Stealth Bio Therapeutics Corp. (5)(10)
Drug Discovery & Development
Tricida, Inc. (4)(15)
Drug Discovery & Development
uniQure B.V. (4)(5)(10)
Drug Discovery & Development
Drug Discovery & Development
X4 Pharmaceuticals, Inc.
XOMA Corporation (4)(10)(15)
Drug Discovery & Development
Subtotal: Drug Discovery & Development (0.35%)*
Electronics & Computer Hardware
908 DEVICES INC. (15)
Subtotal: Electronics & Computer Hardware (0.00%)*
Healthcare Services, Other
Chromadex Corporation (4)
Subtotal: Healthcare Services, Other (0.01%)*
Information Services
INMOBI Inc. (5)(10)
MDX Medical, Inc. (15)
Netbase Solutions, Inc.
RichRelevance, Inc.
Subtotal: Information Services (0.05%)*
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Information Services
Information Services
Information Services
Information Services
Drug Discovery & Development
Healthcare Services, Other
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Common Stock
Preferred Series C
Common Stock
Preferred Series D
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Warrant
Common Stock
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Warrant
Common Stock
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Preferred Series A
Common Stock
Common Stock
Preferred Series B
Common Stock
201,330 $
89,750
15,672
26,086
22,328
325,261
132,069
29,239
105,694
17,190
200
304 $
295
249
119
70
490
545
165
160
369
28
7,806
266
73,009
403,136
10,742
40,545
73,452
73,710
5,783
142
431
164
626
282
460
77
171,389
838
94,841
32,467
306,748
216,666
106,916
37,174
210,638
9,063
52
5
—
48
8
—
289
—
—
—
—
15
—
40
—
—
78
502
—
—
20
52
192
55
1,268
468
206
2
3,300
28
28
102
102
—
144
378
—
522
204
203
889
158
863
218
270
279
9,164
101
101
157
157
82
283
356
98
819
Electronics & Computer Hardware Warrant
Preferred Series D
79,856
Warrant
Common Stock
139,673
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Preferred Series 1
Preferred Series E
65,587
2,812,500
60,000
112,612
See notes to consolidated financial statements.
115
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Portfolio Company
Internet Consumer & Business Services
Aria Systems, Inc.
Art.com, Inc. (15)
Blurb, Inc. (15)
ClearObject, Inc. (p.k.a. CloudOne, Inc.)
Cloudpay, Inc. (5)(10)
Contentful, Inc. (5)(10)
Fastly, Inc.
First Insight, Inc. (15)
Intent Media, Inc.
Interactions Corporation
Just Fabulous, Inc.
Lightspeed POS, Inc. (5)(10)
LogicSource
Oportun (p.k.a. Progress Financial)
Postmates, Inc.
RumbleON, Inc. (4)
ShareThis, Inc.
Snagajob.com, Inc.
Sub-Industry
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Total Snagajob.com, Inc.
Tapjoy, Inc.
The Faction Group LLC
Thumbtack, Inc.
Xometry, Inc.
Subtotal: Internet Consumer & Business Services (0.42%)*
Media/Content/Info
Machine Zone, Inc.
Napster (p.k.a. Rhapsody International,
Inc.)
WP Technology, Inc. (Wattpad, Inc.) (5)(10) Media/Content/Info
Zoom Media Group, Inc.
Media/Content/Info
Subtotal: Media/Content/Info (0.25%)*
Medical Devices & Equipment
SINTX Technologies, Inc. (p.k.a. Amedica
Corporation) (4)(15)
Aspire Bariatrics, Inc. (15)
Avedro, Inc. (15)
Flowonix Medical Incorporated
Media/Content/Info
Media/Content/Info
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Total Flowonix Medical Incorporated
Gelesis, Inc.
InspireMD, Inc. (4)(5)(10)
Intuity Medical, Inc. (15)
Medrobotics Corporation (15)
Micell Technologies, Inc.
NinePoint Medical, Inc.
Optiscan Biomedical, Corp. (6)
Outset Medical, Inc. (p.k.a. Home Dialysis
Plus, Inc.)
Quanterix Corporation (4)
Sebacia, Inc.
SonaCare Medical, LLC (p.k.a. US HIFU,
LLC)
Tela Bio, Inc.
ViewRay, Inc. (4)(15)
Subtotal: Medical Devices & Equipment (0.28%)*
Semiconductors
Achronix Semiconductor Corporation
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Semiconductors
Semiconductors
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series G
Preferred Series B
Preferred Series C
Preferred Series E
Preferred Series B
Preferred Series C
Preferred Series F
Preferred Series B
Common Stock
Preferred Series G-3
Preferred Series B
Preferred Series C
Preferred Series C
Preferred Series G
Common Stock
Common Stock
Preferred Series C
Preferred Series A
Preferred Series B
Preferred Series D
Preferred Series A
Common Stock
Preferred Series B
231,535 $
311,005
234,280
968,992
4,960
82
152,195
56,938
140,077
68,187
206,184
245,610
79,625
174,562
189,865
102,768
493,502
1,800,000
173,076
1,973,076
748,670
8,703
102,821
87,784
73 $
66
636
19
45
1
71
70
168
204
1,101
20
30
78
317
87
547
782
8
790
316
234
124
47
5,044
—
—
13
27
11
41
72
55
168
401
1,877
165
26
247
239
89
—
121
7
128
12
260
102
63
3,996
Warrant
Warrant
Common Stock
Common Stock
Warrant
Warrant
Common Stock
Preferred Series A
1,552,710
1,960
2,361
715,755
255,818
1,204
383
4
348
2,695
38
5
22
2,426
Warrant
Common Stock
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series B-1
Preferred Series AA
Preferred Series AA
Preferred Series BB
Preferred Series A-1
Common Stock
Preferred Series 4
Preferred Series E
Preferred Series D-2
Preferred Series A-1
Preferred Series E
Preferred Series A
Common Stock
Preferred Series D
Preferred Series A
Warrant
Warrant
Preferred Series B
Common Stock
Warrant
Warrant
Preferred Series C
Preferred Series D-2
8,603
112,858
300,000
155,325
725,806
881,131
74,784
1,105
1,819,078
455,539
84,955
587,840
74,424
500,000
66,039
778,301
6,464
387,930
128,231
360,000
750,000
1,110,000
19,683
459
455
401
362
351
713
78
—
294
370
262
170
573
402
204
133
—
—
367
—
351
351
158
—
508
25
—
90
178
184
394
186
188
61
333
5,096
—
55
176
2,672
160
99
259
4
263
354
543
897
2
899
Total Achronix Semiconductor Corporation
Aquantia Corp. (4)
Subtotal: Semiconductors (0.09%)*
Semiconductors
Warrant
Common Stock
See notes to consolidated financial statements.
116
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Warrant
Warrant
Common Stock
Preferred Series F
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series B
Preferred Series B
Preferred Series C
Preferred Series C-A
Common Stock
Preferred Series C
Common Stock
Preferred Series F
Preferred Series C-1
Preferred Series C
Common Stock
Common Stock
Common Stock
Preferred Series D
Preferred Series C-1
Preferred Series C-
Prime
Preferred Series C
Preferred Series B
Common Stock
73,584 $
31,673
105,257
413,433
539,818
592,019
2,218,214
3,350,051
477,454
909,091
62,500
256,158
712,323
503,718
221,150
381,620
132,168
71,576
4,982
640,603
324,005
134,086
698,760
Warrant
Common Stock
1,717,709
180,480
1,575,965
1,756,445
175,000
50,544
225,544
249 $
343
592
257
167
730
231
1,128
72
97
106
89
109
334
22
304
—
1
24
66
314
26
461
4,002
861
861
74
321
395
100
38
138
533
77
90
167
25
5
9
133
147
57
126
100
—
49
499
—
401
—
3
17
28
187
25
6,024
7,855
24
24
4
24
28
263
—
263
291
Portfolio Company
Software
Actifio, Inc.
Total Actifio, Inc.
CareCloud Corporation (15)
Clickfox, Inc. (15)
Total Clickfox, Inc.
Cloudian, Inc.
DNAnexus, Inc.
Evernote Corporation
Fuze, Inc. (15)(16)
Lightbend, Inc. (15)
Message Systems, Inc. (15)
Neos, Inc.
OneLogin, Inc. (15)
Poplicus, Inc.
Quid, Inc. (15)
RapidMiner, Inc.
RedSeal Inc. (15)
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Signpost, Inc.
ThreatConnect, Inc. (15)
Wrike, Inc.
Subtotal: Software (0.82%)*
Specialty Pharmaceuticals
Alimera Sciences, Inc. (4)
Subtotal: Specialty Pharmaceuticals (0.00%)*
Surgical Devices
Gynesonics, Inc. (15)
Specialty Pharmaceuticals
Surgical Devices
Surgical Devices
Warrant
Warrant
Preferred Series C
Preferred Series D
Total Gynesonics, Inc.
Transmedics, Inc.
Total Transmedics, Inc.
Subtotal: Surgical Devices (0.03%)*
Surgical Devices
Surgical Devices
Warrant
Warrant
Preferred Series D
Preferred Series F
See notes to consolidated financial statements.
117
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
(dollars in thousands)
Sub-Industry
Type of
Investment(1)
Series
Shares
Cost(3)
Value(4)
Portfolio Company
Sustainable and Renewable Technology
Agrivida, Inc.
American Superconductor Corporation (4)
Calera, Inc.
Fluidic, Inc.
Flywheel Building Intelligence, Inc. (p.k.a.
SCIEnergy, Inc.)
Fulcrum Bioenergy, Inc.
GreatPoint Energy, Inc. (15)
Kinestral Technologies, Inc.
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series D
Common Stock
Preferred Series C
Preferred Series D
Common Stock
Sustainable and Renewable Technology
Warrant
Preferred Series 2-A
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Preferred Series C-1
Preferred Series D-1
Preferred Series A
Preferred Series B
Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)
Total Kinestral Technologies, Inc.
Polyera Corporation (15)
Proterra, Inc.
Rive Technology, Inc. (15)
Solar Spectrum Holdings LLC (p.k.a.
Sungevity, Inc.) (6)
TAS Energy, Inc.
Tendril Networks
Subtotal: Sustainable and Renewable Technology (0.08%)*
Total: Warrant Investments (2.79%)*
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Preferred Series C
Preferred Series 4
Preferred Series E
Class A Units
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Preferred Series AA
Preferred Series 3-A
0.69
428,571
1,019,793
471,327 $
58,823
44,529
61,804
5,310
63
5,373
280,897
393,212
325,000
131,883
456,883
311,609
477,517
234,477
120 $
39
513
102
181
50
231
274
547
155
63
218
338
41
13
—
208
—
—
—
—
—
365
—
45
13
58
—
138
8
—
299
189
2,924
35,696
—
—
—
777
26,669
Total Investments in Securities (196.81%)*
$
1,980,524 $ 1,880,373
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Value as a percent of net assets
Preferred and common stock, warrants, and equity interests are generally non-income producing.
Interest rate PRIME represents 5.50% at December 31, 2018. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 2.39%, 2.52%, 2.80% and
3.01%, respectively, at December 31, 2018.
Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $39.6 million, $158.7 million and
$119.1 million, respectively. The tax cost of investments is $2.0 billion.
Except for warrants in 37 publicly traded companies and common stock in 21 publicly traded companies, all investments are restricted at December 31, 2018 and were
valued at fair value using Level 3 significant unobservable inputs as determined in good faith by the Company’s board of directors (the “Board of Directors”). No
unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
Non-U.S. company or the company’s principal place of business is outside the United States.
Affiliate investment as defined under the Investment Company Act of 1940, as amended, (the “1940 Act”) in which Hercules owns at least 5% but generally less than 25%
of the company’s voting securities.
Control investment as defined under the 1940 Act in which Hercules owns at least 25% of the company’s voting securities or has greater than 50% representation on its
board.
Debt is on non-accrual status at December 31, 2018, and is therefore considered non-income producing. Note that at December 31, 2018, only the $11.0 million PIK loan is
on non-accrual for the Company’s debt investment in Tectura Corporation.
Denotes that all or a portion of the debt investment is convertible debt.
Indicates assets that the Company deems not “qualifying assets” under section 55(a) of 1940 Act. Qualifying assets must represent at least 70% of the Company’s total
assets at the time of acquisition of any additional non-qualifying assets.
(11) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitization (as defined in Note 4).
(12) Denotes that all or a portion of the debt investment is pledged as collateral under the Wells Facility (as defined in Note 4).
(13) Denotes that all or a portion of the debt investment is pledged as collateral under the Union Bank Facility (as defined in Note 4).
(14) Denotes that all or a portion of the debt investment principal includes accumulated PIK interest and is net of repayments.
(15) Denotes that all or a portion of the investment in this portfolio company is held by Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business
investment company, or SBIC, subsidiary.
(16) Denotes that the fair value of the Company’s total investments in this portfolio company represent greater than 5% of the Company’s total assets at December 31, 2018.
(17) Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at December 31, 2018. Refer to Note 10.
(18) Denotes unitranche debt with first lien “last-out” senior secured position and security interest in all assets of the portfolio company whereby the “last-out” portion will be
subordinated to the “first-out” portion in a liquidation, sale or other disposition.
(19) Denotes second lien senior secured debt.
See notes to consolidated financial statements.
118
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Sub-Industry
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Portfolio Company
Debt Investments
Biotechnology Tools
1-5 Years Maturity
Exicure, Inc. (12)
Biotechnology Tools
Senior Secured September 2019 Interest rate PRIME + 6.45%
or Floor rate of 9.95%, 3.85% Exit Fee
$
4,999 $
Subtotal: 1-5 Years Maturity
Subtotal: Biotechnology Tools (0.61%)*
Communications & Networking
Under 1 Year Maturity
OpenPeak, Inc. (8)
Communications & Networking Senior Secured April 2018
Subtotal: Under 1 Year Maturity
Subtotal: Communications & Networking (0.00%)*
Interest rate PRIME + 8.75%
or Floor rate of 12.00%
$ 11,464
5,115 $
5,115
5,115
5,146
5,146
5,146
8,228
8,228
8,228
—
—
—
Consumer & Business Products
Under 1 Year Maturity
Antenna79 (p.k.a. Pong Research
Corporation) (15)
Consumer & Business Products Senior Secured December 2018 Interest rate PRIME + 6.00%
or Floor rate of 9.50%
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Antenna79 (p.k.a. Pong Research
Consumer & Business Products Senior Secured December 2019 Interest rate PRIME + 7.45%
Corporation) (15)
Second Time Around (Simplify
Holdings, LLC) (7)(8)(15)
Subtotal: 1-5 Years Maturity
Subtotal: Consumer & Business Products (2.33%)*
Consumer & Business Products Senior Secured February 2019
or Floor rate of 10.95%, 2.95% Exit Fee
Interest rate PRIME + 7.25%
or Floor rate of 10.75%, 4.75% Exit Fee
Pulmatrix Inc. (9)(11)
Drug Delivery
Senior Secured July 2018
Senior Secured December 2018 Interest rate PRIME + 4.75%
or Floor rate of 9.00%, 3.70% Exit Fee
Interest rate PRIME + 6.25%
or Floor rate of 9.50%, 3.50% Exit Fee
Senior Secured December 2018 Interest rate PRIME + 2.70%
or Floor rate of 7.95%, 2.87% Exit Fee
Drug Delivery
Under 1 Year Maturity
Agile Therapeutics, Inc. (11)
Drug Delivery
ZP Opco, Inc (p.k.a. Zosano
Drug Delivery
Pharma) (11)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
AcelRx Pharmaceuticals, Inc.
Drug Delivery
(10)(11)(15)
Senior Secured March 2020
Antares Pharma Inc. (10)(15)
Drug Delivery
Senior Secured July 2022
Edge Therapeutics, Inc. (12)
Drug Delivery
Senior Secured February 2020
Subtotal: 1-5 Years Maturity
Subtotal: Drug Delivery (10.17%)*
Interest rate PRIME + 6.05%
or Floor rate of 9.55%, 11.69% Exit Fee
Interest rate PRIME + 4.50%
or Floor rate of 9.00%, 4.25% Exit Fee
Interest rate PRIME + 4.65%
or Floor rate of 9.15%, 4.95% Exit Fee
$
1,000
1,000
1,000
1,000
1,000
$ 18,440
18,580
18,571
$
1,746
1,781
20,361
21,361
—
18,571
19,571
$ 10,888
11,292
11,292
$
3,259
3,455
3,455
$
6,316
6,609
21,356
6,609
21,356
$ 18,653
18,925
18,875
$ 25,000
25,006
24,958
$ 20,000
20,377
64,308
85,664
20,331
64,164
85,520
See notes to consolidated financial statements.
119
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Sub-Industry
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount
Cost (3)
Value (4)
Drug Discovery &
Development
Drug Discovery &
Development
Senior Secured August 2018
Senior Secured April 2018
Interest rate PRIME + 6.00%
or Floor rate of 9.50%, 7.09% Exit Fee
Interest rate PRIME + 4.70%
or Floor rate of 7.95%, 3.00% Exit Fee
Portfolio Company
Drug Discovery & Development
Under 1 Year Maturity
CytRx Corporation (11)(15)
Epirus Biopharmaceuticals, Inc. (8)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Auris Medical Holding, AG (5)(10)
Aveo Pharmaceuticals, Inc. (10)(13)
Total Aveo Pharmaceuticals, Inc.
Axovant Sciences Ltd. (5)(10)
Brickell Biotech, Inc. (12)
Chemocentryx, Inc. (10)(15)(17)
Genocea Biosciences, Inc. (11)
Insmed, Incorporated (11)
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior Secured January 2020
Senior Secured July 2021
Senior Secured July 2021
Interest rate PRIME + 6.05%
or Floor rate of 9.55%, 5.75% Exit Fee
Interest rate PRIME + 4.70%
or Floor rate of 9.45%, 5.40% Exit Fee
Interest rate PRIME + 4.70%
or Floor rate of 9.45%, 3.00% Exit Fee
Senior Secured March 2021
Interest rate PRIME + 6.80%
or Floor rate of 10.55%
Senior Secured September 2019 Interest rate PRIME + 5.70%
Senior Secured December 2021
Senior Secured January 2019
Senior Secured October 2020
or Floor rate of 9.20%, 6.75% Exit Fee
Interest rate PRIME + 3.30%
or Floor rate of 8.05%, 6.25% Exit Fee
Interest rate PRIME + 2.25%
or Floor rate of 7.25%, 4.95% Exit Fee
Interest rate PRIME + 4.75%
or Floor rate of 9.25%, 4.86% Exit Fee
Interest rate PRIME + 7.25%
or Floor rate of 10.75%,
PIK Interest 1.35%, 2.25% Exit Fee
or Floor rate of 10.00%, 2.15% Exit Fee
Interest rate PRIME + 4.00%
or Floor rate of 8.25%, 6.55% Exit Fee
Metuchen Pharmaceuticals LLC (12)(14) Drug Discovery &
Senior Secured October 2020
Motif BioSciences Inc. (15)
Myovant Sciences, Ltd. (5)(10)(13)(17)
Paratek Pharmaceuticals, Inc. (p.k.a.
Transcept Pharmaceuticals, Inc.) (15)
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior Secured September 2021 Interest rate PRIME + 5.50%
Senior Secured May 2021
Senior Secured September 2020 Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 4.50% Exit Fee
Senior Secured September 2020 Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 4.50% Exit Fee
Senior Secured September 2020 Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 2.25% Exit Fee
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,986 $
11,172 $
11,172
3,027
3,310
14,482
340
11,512
10,341
10,610
10,563
10,000
10,345
10,344
10,000
20,000
9,918
20,263
9,915
20,259
55,000
53,631
53,448
6,090
6,380
6,361
5,000
4,947
4,947
13,851
14,482
14,385
55,000
55,425
54,963
25,561
25,721
25,643
15,000
14,651
14,651
25,000
24,704
24,704
40,000
40,144
39,829
10,000
10,040
9,958
$
$
10,000
60,000
9,964
60,148
9,895
59,682
Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)
PhaseRx, Inc. (15)
Drug Discovery &
Development
Senior Secured December 2019
Stealth Bio Therapeutics Corp. (5)(10)(12) Drug Discovery &
Senior Secured January 2021
uniQure B.V. (5)(10)(11)
Verastem, Inc. (12)(17)
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Drug Discovery &
Development
Senior Secured May 2020
Senior Secured December 2020
Senior Secured December 2020
Senior Secured December 2020
Total Verastem, Inc.
Subtotal: 1-5 Years Maturity
Subtotal: Drug Discovery & Development (42.00%)*
Interest rate PRIME + 5.75%
or Floor rate of 9.25%, 5.85% Exit Fee
Interest rate PRIME + 5.50%
or Floor rate of 9.50%, 5.00% Exit Fee
Interest rate PRIME + 3.00%
or Floor rate of 8.25%, 5.48% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
$
$
$
$
$
$
$
4,694
4,842
1,917
15,000
14,898
14,847
20,000
20,579
20,543
5,000
4,957
4,910
5,000
4,996
4,949
5,000
15,000
4,953
14,906
4,907
14,766
346,187 341,679
360,669 353,191
See notes to consolidated financial statements.
120
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Sub-Industry
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Portfolio Company
Electronics & Computer Hardware
1-5 Years Maturity
908 DEVICES INC. (15)
Electronics & Computer Hardware
Subtotal: 1-5 Years Maturity
Subtotal: Electronics & Computer Hardware (1.18%)*
Senior Secured September 2020 Interest rate PRIME + 4.00%
or Floor rate of 8.25%, 4.25% Exit Fee
$ 10,000 $
10,014 $
10,014
10,014
9,887
9,887
9,887
Healthcare Services, Other
1-5 Years Maturity
Medsphere Systems Corporation
(14)(15)
Healthcare Services, Other
Senior Secured February 2021
Healthcare Services, Other
Senior Secured February 2021
Interest rate PRIME + 4.75%
or Floor rate of 9.00%,
PIK Interest 1.75%
Interest rate PRIME + 4.75%
or Floor rate of 9.00%,
PIK Interest 1.75%
Senior Secured September 2021 Interest rate PRIME + 5.00%
or Floor rate of 9.75%, 5.95% Exit Fee
$ 20,000
19,965
19,965
Senior Secured September 2020 Interest rate PRIME + 7.45%
or Floor rate of 10.95%
Senior Secured September 2020 Interest rate PRIME + 7.45%
or Floor rate of 10.95%
Total Medsphere Systems Corporation
Oak Street Health (12)
Healthcare Services, Other
PH Group Holdings (13)
Healthcare Services, Other
Healthcare Services, Other
Total PH Group Holdings
Subtotal: 1-5 Years Maturity
Subtotal: Healthcare Services, Other (8.56%)*
Information Services
1-5 Years Maturity
MDX Medical, Inc. (14)(15)(17)
Information Services
Netbase Solutions, Inc. (13)(14)
Information Services
Senior Secured August 2020
Subtotal: 1-5 Years Maturity
Subtotal: Information Services (1.91%)*
Senior Secured December 2020 Interest rate PRIME + 4.25%
or Floor rate of 8.25%,
PIK Interest 1.70%
Interest rate PRIME + 6.00%
or Floor rate of 10.00%,
PIK Interest 2.00%, 3.00% Exit Fee
$ 17,607
17,437
17,437
$ 5,009
$ 22,616
4,963
22,400
4,963
22,400
$ 20,000
19,878
19,803
$ 10,000
$ 30,000
9,922
29,800
—
72,165
9,840
29,643
—
72,008
$ 7,568
7,369
7,327
$ 9,051
8,730
16,099
16,099
8,730
16,057
16,057
See notes to consolidated financial statements.
121
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Portfolio Company
Internet Consumer & Business Services
1-5 Years Maturity
AppDirect, Inc.
Sub-Industry
Internet Consumer & Business
Services
Aria Systems, Inc. (11)(14) Internet Consumer & Business
Senior Secured
January 2022
Senior Secured
June 2019
Services
Internet Consumer & Business
Services
Senior Secured
June 2019
Interest rate PRIME + 5.70%
or Floor rate of 9.95%, 3.45% Exit Fee
Interest rate PRIME + 3.20%
or Floor rate of 6.95%,
PIK Interest 1.95%, 1.50% Exit Fee
Interest rate PRIME + 5.20%
or Floor rate of 8.95%,
PIK Interest 1.95%, 1.50% Exit Fee
Total Aria Systems, Inc.
Greenphire Inc.
Internet Consumer & Business
Services
Internet Consumer & Business
Services
Senior Secured
January 2021
Senior Secured
January 2021
Interest rate 3-month LIBOR + 8.00%
or Floor rate of 9.00%
Interest rate PRIME + 3.75%
or Floor rate of 7.00%
Total Greenphire Inc.
Intent Media, Inc. (14)(15)
Internet Consumer & Business
Services
Senior Secured
May 2019
Internet Consumer & Business
Services
Senior Secured
May 2019
Internet Consumer & Business
Services
Senior Secured
May 2019
Total Intent Media, Inc.
Interactions Corporation Internet Consumer & Business
Senior Secured
March 2021
LogicSource (15)
Services
Internet Consumer & Business
Services
Snagajob.com, Inc. (13)(14) Internet Consumer & Business
Services
Tectura Corporation
(7)(8)(9)(14)
Internet Consumer & Business
Services
Internet Consumer & Business
Services
Senior Secured
June 2021
Senior Secured
June 2021
Senior Secured
October 2019
Senior Secured
July 2020
Interest rate PRIME + 5.25%
or Floor rate of 8.75%,
PIK Interest 1.00%, 2.00% Exit Fee
Interest rate PRIME + 5.50%
or Floor rate of 9.00%,
PIK Interest 2.35%, 2.00% Exit Fee
Interest rate PRIME + 5.50%
or Floor rate of 9.00%,
PIK Interest 2.50%, 2.00% Exit Fee
Interest rate 3-month LIBOR + 8.60%
or Floor rate of 9.85%, 1.75% Exit Fee
Interest rate PRIME + 6.25%
or Floor rate of 9.75%, 5.00% Exit Fee
Interest rate PRIME + 5.15%
or Floor rate of 9.15%,
PIK Interest 1.95%, 2.55% Exit Fee
Interest rate FIXED 6.00%,
PIK Interest 3.00%
PIK Interest 8.00%
Total Tectura Corporation
The Faction Group
Internet Consumer & Business
Services
Internet Consumer & Business
Services
Senior Secured
January 2021
Senior Secured
January 2019
Interest rate 3-month LIBOR + 9.25%
or Floor rate of 10.25%
Interest rate PRIME + 4.75%
or Floor rate of 8.25%
Total The Faction Group
Subtotal: 1-5 Years Maturity
Subtotal: Internet Consumer & Business Services (17.09%)*
$ 10,000 $
9,885 $ 9,885
$
2,103
2,104
1,803
$ 18,832 18,839 16,144
$ 20,935 20,943 17,947
$
3,883
3,883
3,883
$
$
1,000
4,883
1,000
4,883
1,000
4,883
$
5,050
5,011
5,027
$
2,020
1,987
1,991
$
$
2,022
9,092
1,988
8,986
1,992
9,010
$ 25,000 25,013 25,013
$
6,452
6,701
6,726
$ 41,023 40,633 41,036
$ 20,298 20,298 19,219
$ 11,015
—
$ 31,313 20,538 19,219
240
$
8,000
8,000
8,000
2,000
2,000
2,000
$
$ 10,000 10,000 10,000
147,582 143,719
147,582 143,719
Media/Content/Info
Under 1 Year Maturity
Machine Zone, Inc. (14)(16) Media/Content/Info
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Bustle (14)(15)
Media/Content/Info
Senior Secured
May 2018
Interest rate PRIME + 2.50%
or Floor rate of 6.75%,
PIK Interest 3.00%
$ 106,986 106,641 106,641
106,641 106,641
Senior Secured
June 2021
Interest rate PRIME + 4.10%
or Floor rate of 8.35%,
PIK Interest 1.95%, 1.95% Exit Fee
$ 15,016 14,935 14,935
FanDuel, Inc. (9)(12)(14)
Media/Content/Info
Senior Secured
November 2019 Interest rate PRIME + 7.25%
or Floor rate of 10.75%, 10.41% Exit Fee
Media/Content/Info
Convertible Debt September 2020 PIK Interest 25.00%
Total FanDuel, Inc.
Subtotal: 1-5 Years Maturity
Subtotal: Media/Content/Info (16.92%)*
See notes to consolidated financial statements.
122
1,000
1,000
$ 19,354 19,762 19,695
$
1,000
$ 20,354 20,762 20,695
35,697 35,630
142,338 142,271
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Portfolio Company
Medical Devices & Equipment
Under 1 Year Maturity
Amedica Corporation (9)(15) Medical Devices & Equipment
Sub-Industry
Senior Secured January 2018
Aspire Bariatrics, Inc. (15)
Medical Devices & Equipment
Senior Secured October 2018
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
IntegenX, Inc. (15)
Medical Devices & Equipment
Senior Secured June 2019
Medical Devices & Equipment
Senior Secured June 2019
Medical Devices & Equipment
Senior Secured June 2019
Total IntegenX, Inc.
Intuity Medical, Inc. (15)
Medical Devices & Equipment
Senior Secured June 2021
Micell Technologies, Inc.
Medical Devices & Equipment
Senior Secured August 2019
(12)
Quanta Fluid Solutions
Medical Devices & Equipment
Senior Secured April 2020
(5)(10)(11)
Quanterix Corporation (11)
Medical Devices & Equipment
Senior Secured March 2019
Sebacia, Inc. (15)
Medical Devices & Equipment
Senior Secured July 2020
Interest rate PRIME + 7.70%
or Floor rate of 10.95%, 8.25% Exit Fee
Interest rate PRIME + 4.00%
or Floor rate of 9.25%, 5.42% Exit Fee
$
605 $
2,255 $
2,255
$ 2,527
2,848
5,103
2,848
5,103
Interest rate PRIME + 6.05%
or Floor rate of 10.05%, 6.75% Exit Fee
Interest rate PRIME + 6.05%
or Floor rate of 10.05%, 6.75% Exit Fee
Interest rate PRIME + 6.05%
or Floor rate of 10.05%, 9.75% Exit Fee
Interest rate PRIME + 5.00%
or Floor rate of 9.25%, 4.95% Exit Fee
Interest rate PRIME + 7.25%
or Floor rate of 10.50%, 5.00% Exit Fee
Interest rate PRIME + 8.05%
or Floor rate of 11.55%, 5.00% Exit Fee
Interest rate PRIME + 2.75%
or Floor rate of 8.00%, 4.00% Exit Fee
Interest rate PRIME + 4.35%
or Floor rate of 8.85%, 6.05% Exit Fee
$ 12,500
13,042
12,991
$ 2,500
2,599
2,598
$ 2,500
$ 17,500
2,618
18,259
2,601
18,190
$ 17,500
17,013
17,013
$ 5,469
5,744
5,708
$ 10,117
10,432
10,386
$ 9,043
9,477
9,477
$ 8,000
7,927
7,919
$ 5,000
4,991
73,843
78,946
4,973
73,666
78,769
Tela Bio, Inc. (15)
Medical Devices & Equipment
Senior Secured December 2020 Interest rate PRIME + 4.95%
or Floor rate of 9.45%, 3.15% Exit Fee
Subtotal: 1-5 Years Maturity
Subtotal: Medical Devices & Equipment (9.37%)*
Semiconductors
1-5 Years Maturity
Achronix Semiconductor
Corporation (15)(17)
Semiconductors
Senior Secured August 2020
Semiconductors
Senior Secured February 2019
Total Achronix Semiconductor Corporation
Subtotal: 1-5 Years Maturity
Subtotal: Semiconductors (1.11%)*
Interest rate PRIME + 7.00%
or Floor rate of 11.00%, 12.50% Exit Fee
Interest rate PRIME + 6.00%
or Floor rate of 10.00%
$ 5,000
5,084
5,100
$ 4,274
$ 9,274
4,274
9,358
9,358
9,358
4,273
9,373
9,373
9,373
See notes to consolidated financial statements.
123
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Sub-Industry
Type of
Investment (1)
Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Emma, Inc.
Software
Senior Secured
September 2022 Interest rate daily LIBOR + 7.75%
Impact Radius Holdings, Inc.
(14)(17)
Software
Senior Secured
December 2020 Interest rate PRIME + 4.25%
Portfolio Company
Software
Under 1 Year Maturity
Clickfox, Inc. (13)
Software
Senior Secured
May 2018
Digital Train Limited (p.k.a.
Software
Jumpstart Games, Inc.) (15)
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Clarabridge, Inc. (12)(14)
Software
Senior Secured
July 2018
Senior Secured
April 2021
Evernote Corporation (14)(15)(17) Software
Senior Secured
October 2020
Software
Senior Secured
July 2021
Total Evernote Corporation
Fuze, Inc. (13)(14)(15)
Software
Senior Secured
July 2021
Lithium Technologies, Inc. (17) Software
Senior Secured
October 2022
Microsystems Holding
Company, LLC
OneLogin, Inc. (14)(15)
Software
Senior Secured
July 2022
Software
Senior Secured
August 2019
PerfectServe, Inc.
Software
Senior Secured
April 2021
Software
Senior Secured
April 2021
Total PerfectServe, Inc.
Pollen, Inc. (15)
Poplicus, Inc. (8)(14)
Quid, Inc. (14)(15)
Software
Senior Secured
April 2019
Software
Senior Secured
May 2022
Software
Senior Secured
October 2019
Regent Education (14)
Signpost, Inc. (14)
Software
Senior Secured
January 2021
Software
Senior Secured
February 2020
Vela Trading Technologies
Software
Senior Secured
July 2022
Wrike, Inc. (14)(17)
Software
Senior Secured
February 2021
ZocDoc
Software
Senior Secured
April 2021
Interest rate PRIME + 8.00%
or Floor rate of 11.50%, 12.01% Exit Fee
Interest rate 12-month LIBOR + 2.50%
Interest rate PRIME + 4.80%
or Floor rate of 8.55%,
PIK Interest 3.25%
or Floor rate of 8.75%
Interest rate PRIME + 5.45%
or Floor rate of 8.95%
Interest rate PRIME + 6.00%
or Floor rate of 9.50%,
PIK Interest 1.25%
Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.55%, 3.55% Exit Fee
or Floor rate of 8.75%,
PIK Interest 1.55%, 1.75% Exit Fee
Interest rate 1-month LIBOR + 8.00%
or Floor rate of 9.00%
Interest rate 3-month LIBOR + 8.25%
or Floor rate of 9.25%
Interest rate PRIME + 6.45%
or Floor rate of 9.95%,
PIK Interest 3.25%
Interest rate 3-month LIBOR + 9.00%
or Floor rate of 10.00%, 2.50% Exit Fee
Interest rate 3-month LIBOR + 9.00%
or Floor rate of 10.00%, 2.50% Exit Fee
Interest rate PRIME + 4.25%
or Floor rate of 8.50%, 4.00% Exit Fee
Interest rate FIXED 6.00%,
PIK Interest 3.00%
Interest rate PRIME + 4.75%
or Floor rate of 8.25%,
PIK Interest 2.25%, 3.00% Exit Fee
or Floor rate of 9.75%,
PIK Interest 1.65%
Interest rate FIXED 10.00%,
PIK Interest 2.00%, 6.35% Exit Fee
Interest rate PRIME + 4.15%
or Floor rate of 8.15%,
PIK Interest 1.75%, 3.75% Exit Fee
Interest rate daily LIBOR + 9.50%
or Floor rate of 10.50%
Interest rate PRIME + 6.00%
or Floor rate of 9.50%,
PIK Interest 2.00%, 3.00% Exit Fee
Interest rate 3-month LIBOR + 9.50%
or Floor rate of 10.50%, 1.00% Exit Fee
$ 6,378 $
7,671 $ 7,671
$ 5,671
5,671
4,073
13,342 11,744
$ 40,893
40,870 41,063
$ 50,000
48,565 48,565
$ 6,000
5,974
6,100
$ 4,023
$ 10,023
3,999
3,992
9,973 10,092
$ 50,332
50,464 50,420
$ 7,544
7,552
7,498
$ 12,000
11,740 11,740
$ 12,000
11,821 11,821
$ 15,883
15,811 16,071
$ 16,000
16,023 16,023
$ 4,000
$ 20,000
4,005
4,005
20,028 20,028
$ 7,000
6,964
6,964
$ 1,250
1,250
—
$ 8,303
8,397
8,430
$ 7,001
6,971
6,971
$ 3,285
3,291
3,291
$ 15,510
15,603 15,685
$ 20,000
19,495 19,557
$ 10,165
9,971 10,007
$ 20,000
20,011 20,011
$ 10,000
$ 30,000
10,005 10,005
30,016 30,016
318,782 318,219
332,124 329,963
Software
Senior Secured
November 2021 Interest rate 3-month LIBOR + 9.50%
or Floor rate of 10.50%, 1.00% Exit Fee
Total ZocDoc
Subtotal: 1-5 Years Maturity
Subtotal: Software (39.24%)*
See notes to consolidated financial statements.
124
RapidMiner, Inc. (14)
Software
Senior Secured
December 2020 Interest rate PRIME + 5.50%
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Specialty Pharmaceuticals
Under 1 Year Maturity
Jaguar Animal Health, Inc. (11) Specialty
Sub-Industry
Pharmaceuticals
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
Alimera Sciences, Inc. (11)(14) Specialty
Pharmaceuticals
Subtotal: 1-5 Years Maturity
Subtotal: Specialty Pharmaceuticals (4.40%)*
Type of
Investment (1) Maturity Date
Interest Rate and Floor (2)
Principal
Amount Cost (3)
Value (4)
Senior Secured
August 2018
Interest rate PRIME + 5.65%
or Floor rate of 9.90%, 7.00% Exit Fee
Senior Secured
November 2020 Interest rate PRIME + 7.50%
or Floor rate of 11.00%,
PIK Interest 1.00%, 4.00% Exit Fee
$ 1,089 $
1,496 $
1,496
1,496
1,496
$ 35,398
35,517
35,517
37,013
35,517
35,517
37,013
Surgical Devices
1-5 Years Maturity
Transmedics, Inc. (13)
Surgical Devices
Senior Secured
February 2020 Interest rate PRIME + 5.30%
or Floor rate of 9.55%, 6.70% Exit Fee
$ 8,500
Subtotal: 1-5 Years Maturity
Subtotal: Surgical Devices (1.04%)*
8,756
8,756
8,756
8,757
8,757
8,757
Sustainable and Renewable Technology
Under 1 Year Maturity
FuelCell Energy, Inc. (12)
Kinestral Technologies Inc.
Subtotal: Under 1 Year Maturity
1-5 Years Maturity
ChargePoint Inc.
Solar Spectrum Holdings LLC
(p.k.a. Sungevity, Inc.) (6)
Proterra, Inc. (11)(14)(17)
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior Secured
Total Proterra, Inc.
Rive Technology, Inc. (15)
Tendril Networks (12)
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior Secured
October 2018
Senior Secured
October 2018
Interest rate PRIME + 5.50%
or Floor rate of 9.50%, 8.50% Exit Fee
Interest rate 3-month LIBOR + 7.75%
or Floor rate of 8.75%, 3.23% Exit Fee
$ 16,806
18,190
18,190
$ 3,867
3,882
22,072
3,882
22,072
Senior Secured
August 2020
Senior Secured
August 2019
Interest rate 3-month LIBOR + 8.75%
or Floor rate of 9.75%, 2.00% Exit Fee
Interest rate PRIME + 8.70%
or Floor rate of 12.95%, 4.50% Exit Fee
$ 19,394
19,416
19,416
$ 14,000
13,604
13,604
Senior Secured
November 2020 Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.75%, 5.95% Exit Fee
November 2020 Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.75%, 7.00% Exit Fee
$ 25,036
25,997
26,097
$ 5,007
$ 30,043
5,173
31,170
5,190
31,287
Senior Secured
January 2019
Senior Secured
June 2019
Interest rate PRIME + 6.20%
or Floor rate of 9.45%, 4.00% Exit Fee
Interest rate FIXED 9.25%, 8.50% Exit Fee
$ 4,258
4,498
4,515
$ 13,156
13,863
82,551
13,845
82,667
104,623 104,739
1,440,055 1,415,984
Subtotal: 1-5 Years Maturity
Subtotal: Sustainable and Renewable Technology (12.45%)*
Total: Debt Investments (168.38%)*
See notes to consolidated financial statements.
125
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3)
Value (4)
Equity Investments
Biotechnology Tools
NuGEN Technologies, Inc. (15)
Subtotal: Biotechnology Tools (0.00%)*
Biotechnology Tools
Equity
Common Stock
55,780 $
500 $
500
—
—
3,100
102
1,000
4,202
750
750
108
500
309
1,500
2,417
1,715
1,270
1,000
1,000
1,000
550
1,000
2,000
1,500
1,000
2,000
242
41
5,865
6,148
720
720
109
826
468
1,275
2,678
5,315
707
381
29
1,290
374
—
259
10
2,154
693
34
34
22
22
6,081
6,081
8,011
8,011
76,362
2,743
16,778
1,367
12,579
Communications & Networking
Achilles Technology Management Co II, Inc.
(7)(15)
GlowPoint, Inc. (4)
Peerless Network Holdings, Inc.
Subtotal: Communications & Networking (0.73%)*
Communications & Networking
Communications & Networking
Communications & Networking
Equity
Common Stock
Equity
Equity
Common Stock
Preferred Series A
100
114,192
1,000,000
Diagnostic
Singulex, Inc.
Subtotal: Diagnostic (0.09%)*
Drug Delivery
AcelRx Pharmaceuticals, Inc. (4)(10)
BioQ Pharma Incorporated (15)
Edge Therapeutics, Inc. (4)
Neos Therapeutics, Inc. (4)(15)
Subtotal: Drug Delivery (0.32%)*
Drug Discovery & Development
Aveo Pharmaceuticals, Inc. (4)(10)(15)
Axovant Sciences Ltd. (4)(5)(10)
Cerecor, Inc. (4)
Dare Biosciences, Inc. (p.k.a. Cerulean Pharma,
Inc.) (4)
Dicerna Pharmaceuticals, Inc. (4)(15)
Dynavax Technologies (4)(10)
Epirus Biopharmaceuticals, Inc. (4)
Genocea Biosciences, Inc. (4)
Inotek Pharmaceuticals Corporation (4)
Insmed, Incorporated (4)
Melinta Therapeutics (4)
Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.) (4)
Diagnostic
Equity
Common Stock
937,998
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Common Stock
Preferred Series D
Common Stock
Common Stock
54,240
165,000
49,965
125,000
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
1,901,791
129,827
119,087
13,550
142,858
20,000
200,000
223,463
3,778
70,771
43,840
Subtotal: Drug Discovery & Development (1.50%)*
Electronics & Computer Hardware
Identiv, Inc. (4)
Subtotal: Electronics & Computer Hardware (0.00%)*
Electronics & Computer Hardware
Equity
Common Stock
6,700
Information Services
DocuSign, Inc.
Subtotal: Information Services (0.95%)*
Information Services
Equity
Common Stock
385,000
See notes to consolidated financial statements.
126
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
Internet Consumer & Business Services
Blurb, Inc. (15)
Brigade Group, Inc. (p.k.a. Philotic, Inc.)
Lightspeed POS, Inc. (5)(10)
Total Lightspeed POS, Inc.
OfferUp, Inc.
Total OfferUp, Inc.
Oportun (p.k.a. Progress Financial)
Total Oportun (p.k.a. Progress Financial)
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Equity
Equity
Equity
Equity
Preferred Series B
Common Stock
Preferred Series C
Preferred Series D
Internet Consumer & Business Services
Internet Consumer & Business Services
Equity
Equity
Preferred Series A
Preferred Series A-1
Internet Consumer & Business Services
Internet Consumer & Business Services
Equity
Equity
Preferred Series G
Preferred Series H
RazorGator Interactive Group, Inc.
Tectura Corporation (7)
Subtotal: Internet Consumer & Business Services (0.52%)*
Internet Consumer & Business Services
Internet Consumer & Business Services
Equity
Equity
Preferred Series AA
Preferred Series BB
220,653 $
9,023
230,030
198,677
428,707
286,080
108,710
394,790
218,351
87,802
306,153
34,783
1,000,000
175 $
93
250
250
500
1,663
632
2,295
250
250
500
15
—
3,578
46
—
233
213
446
2,236
850
3,086
451
255
706
49
—
4,333
Media/Content/Info
Equity
Preferred Series Seed
620,000
4,085
4,085
5,055
5,055
Media/Content/Info
Pinterest, Inc.
Subtotal: Media/Content/Info (0.60%)*
Medical Devices & Equipment
AtriCure, Inc. (4)(15)
Flowonix Medical Incorporated
Gelesis, Inc. (15)
Total Gelesis, Inc.
Medrobotics Corporation (15)
Total Medrobotics Corporation
Optiscan Biomedical, Corp. (6)(15)
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Common Stock
Preferred Series AA
Common Stock
Preferred Series A-1
Preferred Series A-2
Preferred Series E
Preferred Series F
Preferred Series G
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series E
7,536
221,893
198,202
191,210
191,626
581,038
136,798
73,971
163,934
374,703
6,185,567
1,927,309
55,103,923
15,638,888
78,855,687
232,061
84,778
Total Optiscan Biomedical, Corp.
Outset Medical, Inc. (p.k.a. Home Dialysis Plus,
Medical Devices & Equipment
Equity
Preferred Series B
Inc.)
Quanterix Corporation (4)
Subtotal: Medical Devices & Equipment (1.49%)*
Medical Devices & Equipment
Equity
Common Stock
Software
CapLinked, Inc.
Druva, Inc.
Total Druva, Inc.
ForeScout Technologies, Inc. (4)
HighRoads, Inc.
NewVoiceMedia Limited (5)(10)
Palantir Technologies
Total Palantir Technologies
Sprinklr, Inc.
WildTangent, Inc. (15)
Subtotal: Software (2.53%)*
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Preferred Series A-3
Preferred Series 2
Preferred Series 3
Common Stock
Common Stock
Preferred Series E
Preferred Series E
Preferred Series G
Common Stock
Preferred Series 3
53,614
458,841
93,620
552,461
199,844
190
669,173
727,696
326,797
1,054,493
700,000
100,000
See notes to consolidated financial statements.
127
266
1,500
—
425
500
925
250
155
500
905
3,000
655
5,257
1,307
10,219
527
1,000
15,342
51
1,000
300
1,300
529
307
963
5,431
2,211
7,642
3,749
402
14,943
138
—
879
939
894
2,712
302
225
532
1,059
402
114
4,232
1,457
6,205
596
1,820
12,530
90
1,044
312
1,356
6,373
—
1,544
4,923
2,211
7,134
4,600
179
21,276
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
Surgical Devices
Gynesonics, Inc. (15)
Total Gynesonics, Inc.
Transmedics, Inc.
Total Transmedics, Inc.
Subtotal: Surgical Devices (0.43%)*
Sustainable and Renewable Technology
Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy,
Inc.)
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series E
Preferred Series B
Preferred Series C
Preferred Series D
Preferred Series F
219,298 $
656,538
1,991,157
2,786,367
5,653,360
88,961
119,999
260,000
100,200
569,160
250 $
282
712
429
44
60
795
521
1,673 1,420
376
1,100
309
300
957
650
531
500
2,550 2,173
4,223 3,593
Sustainable and Renewable Technology
Equity
Common Stock
19,250
3,107,520
99,280
761
500
500
—
477
539
288 61,502 11,400
63,263 12,416
136,196 89,361
Sustainable and Renewable Technology
Modumetal, Inc.
Proterra, Inc.
Sustainable and Renewable Technology
Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6) Sustainable and Renewable Technology
Subtotal: Sustainable and Renewable Technology (1.48%)*
Total: Equity Investments (10.63%)*
Equity
Equity
Equity
Preferred Series C
Preferred Series 5
Common Stock
See notes to consolidated financial statements.
128
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3)
Value (4)
Warrant Investments
Biotechnology Tools
Labcyte, Inc. (15)
Subtotal: Biotechnology Tools (0.05%)*
Communications & Networking
PeerApp, Inc.
Peerless Network Holdings, Inc.
Spring Mobile Solutions, Inc.
Subtotal: Communications & Networking (0.06%)*
Biotechnology Tools
Communications & Networking
Communications & Networking
Communications & Networking
Warrant
Preferred Series C
1,127,624 $
Warrant
Warrant
Warrant
Preferred Series B
Preferred Series A
Common Stock
298,779
135,000
2,834,375
Consumer & Business Products
Antenna79 (p.k.a. Pong Research Corporation)
(15)
Intelligent Beauty, Inc. (15)
The Neat Company (15)
Subtotal: Consumer & Business Products (0.03%)*
Consumer & Business Products
Consumer & Business Products
Consumer & Business Products
Warrant
Common Stock
Drug Delivery
AcelRx Pharmaceuticals, Inc. (4)(10)(15)
Agile Therapeutics, Inc. (4)
BioQ Pharma Incorporated
Celsion Corporation (4)
Dance Biopharm, Inc. (15)
Edge Therapeutics, Inc. (4)
Kaleo, Inc. (p.k.a. Intelliject, Inc.)
Neos Therapeutics, Inc. (4)(15)
Pulmatrix Inc. (4)
ZP Opco, Inc (p.k.a. Zosano Pharma) (4)
Subtotal: Drug Delivery (0.36%)*
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Drug Delivery
Warrant
Warrant
Preferred Series B
Preferred Series C-1
1,662,441
190,234
540,540
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Preferred Series B
Common Stock
Common Stock
Common Stock
176,730
180,274
459,183
13,927
110,882
78,595
82,500
70,833
25,150
72,379
323 $
323
61
95
418
574
228
230
365
823
786
730
1
428
74
390
594
285
116
266
3,670
458
458
—
501
—
501
—
221
—
221
61
65
968
—
—
230
1,540
148
4
—
3,016
See notes to consolidated financial statements.
129
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
Drug Discovery & Development
ADMA Biologics, Inc. (4)
Anthera Pharmaceuticals, Inc. (4)(15)
Audentes Therapeutics, Inc (4)(10)(15)
Auris Medical Holding, AG (4)(5)(10)
Brickell Biotech, Inc.
Cerecor, Inc. (4)
Chroma Therapeutics, Ltd. (5)(10)
Cleveland BioLabs, Inc. (4)(15)
Concert Pharmaceuticals, Inc. (4)(15)
CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.) (4)
CytRx Corporation (4)(15)
Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.) (4)
Dicerna Pharmaceuticals, Inc. (4)(15)
Epirus Biopharmaceuticals, Inc. (4)
Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.) (4)
Genocea Biosciences, Inc. (4)
Immune Pharmaceuticals (4)
Melinta Therapeutics (4)
Motif BioSciences Inc. (4)(15)
Myovant Sciences, Ltd. (4)(5)(10)
Neothetics, Inc. (p.k.a. Lithera, Inc) (4)(15)
Neuralstem, Inc. (4)(15)
Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.) (15)
Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.) (4)(15)
PhaseRx, Inc. (4)(15)
Savara Inc. (p.k.a. Mast Therapeutics, Inc.) (4)(15)
Sorrento Therapeutics, Inc. (4)(10)
Stealth Bio Therapeutics Corp. (5)(10)
uniQure B.V. (4)(5)(10)
XOMA Corporation (4)(10)(15)
Subtotal: Drug Discovery & Development (0.40%)*
Electronics & Computer Hardware
908 DEVICES INC. (15)
Clustrix, Inc.
Subtotal: Electronics & Computer Hardware (0.01%)*
Healthcare Services, Other
Chromadex Corporation (4)(15)
Subtotal: Healthcare Services, Other (0.04%)*
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Drug Discovery & Development
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Common Stock
Common Stock
Common Stock
Preferred Series C
Common Stock
Preferred Series D
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Preferred Series A
Common Stock
Common Stock
89,750 $
5,022
9,914
156,726
26,086
22,328
325,261
7,813
132,069
29,239
105,694
17,190
200
64,194
73,009
73,725
10,742
31,655
73,452
49,800
46,838
5,783
171,389
75,214
63,000
32,467
306,748
487,500
37,174
9,063
Electronics & Computer Hardware Warrant
Electronics & Computer Hardware Warrant
Preferred Series D
Common Stock
79,856
50,000
Healthcare Services, Other
Warrant
Common Stock
139,673
295 $
984
62
249
119
70
490
105
545
165
160
369
28
276
142
266
164
626
282
283
266
77
838
178
125
203
889
116
218
279
8,869
12
—
147
19
93
15
—
3
1,344
2
58
—
—
—
29
4
—
12
414
128
53
—
—
212
—
8
453
107
240
50
3,403
100
12
112
73
—
73
157
157
329
329
See notes to consolidated financial statements.
130
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
Information Services
INMOBI Inc. (5)(10)
InXpo, Inc. (15)
Total InXpo, Inc.
MDX Medical, Inc. (15)
Netbase Solutions, Inc.
RichRelevance, Inc. (15)
Subtotal: Information Services (0.07%)*
Information Services
Information Services
Information Services
Information Services
Information Services
Information Services
Internet Consumer & Business Services
Aria Systems, Inc.
Blurb, Inc. (15)
ClearObject, Inc. (p.k.a. CloudOne, Inc.)
The Faction Group
Intent Media, Inc. (15)
Interactions Corporation
Just Fabulous, Inc.
Lightspeed POS, Inc. (5)(10)
LogicSource (15)
Oportun (p.k.a. Progress Financial)
ShareThis, Inc. (15)
Snagajob.com, Inc.
Tapjoy, Inc.
TraceLink, Inc.
Subtotal: Internet Consumer & Business Services (0.82%)*
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Internet Consumer & Business Services
Media/Content/Info
FanDuel, Inc.
Total FanDuel, Inc.
Machine Zone, Inc. (16)
Rhapsody International, Inc. (15)
WP Technology, Inc. (Wattpad, Inc.) (5)(10)
Zoom Media Group, Inc.
Subtotal: Media/Content/Info (0.67%)*
Media/Content/Info
Media/Content/Info
Media/Content/Info
Media/Content/Info
Media/Content/Info
Media/Content/Info
Medical Devices & Equipment
Amedica Corporation (4)(15)
Aspire Bariatrics, Inc. (15)
Avedro, Inc. (15)
Flowonix Medical Incorporated
Gelesis, Inc. (15)
InspireMD, Inc. (4)(5)(10)
IntegenX, Inc. (15)
Intuity Medical, Inc. (15)
Medrobotics Corporation (15)
Micell Technologies, Inc.
NetBio, Inc.
NinePoint Medical, Inc. (15)
Optiscan Biomedical, Corp. (6)(15)
Outset Medical, Inc. (p.k.a. Home Dialysis Plus,
Inc.)
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Medical Devices & Equipment
Quanterix Corporation (4)
Medical Devices & Equipment
Sebacia, Inc. (15)
Medical Devices & Equipment
SonaCare Medical, LLC (p.k.a. US HIFU, LLC) Medical Devices & Equipment
Medical Devices & Equipment
Strata Skin Sciences, Inc. (p.k.a. MELA
Sciences, Inc.) (4)
Tela Bio, Inc. (15)
ViewRay, Inc. (4)(15)
Subtotal: Medical Devices & Equipment (0.39%)*
Medical Devices & Equipment
Medical Devices & Equipment
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Common Stock
Preferred Series C
Preferred Series C-1
Common Stock
Preferred Series 1
Preferred Series E
65,587 $
648,400
1,165,183
1,813,583
2,250,000
60,000
112,612
Preferred Series G
Preferred Series C
Preferred Series E
Preferred Series A
Common Stock
Preferred Series G-3
Preferred Series B
Preferred Series C
Preferred Series C
Preferred Series G
Preferred Series C
Preferred Series A
Preferred Series D
Preferred Series A-2
231,535
234,280
968,992
8,703
140,077
68,187
206,184
245,610
79,625
174,562
493,502
1,800,000
748,670
283,353
Common Stock
Preferred Series A
Common Stock
Common Stock
Common Stock
Preferred Series A
15,570
4,648
20,218
1,552,710
715,755
255,818
1,204
Common Stock
Preferred Series B-1
Preferred Series AA
Preferred Series AA
Preferred Series A-1
Common Stock
Preferred Series C
Preferred Series 4
Preferred Series E
Preferred Series D-2
Preferred Series A
Preferred Series A-1
Preferred Series D
Preferred Series A
Common Stock
Preferred Series D
Preferred Series A
Common Stock
Preferred Series B
Common Stock
8,603
112,858
300,000
155,325
74,784
39,364
547,752
1,819,078
455,539
84,955
7,841
587,840
10,535,275
500,000
66,039
778,301
6,464
13,864
387,930
128,231
82 $
98
74
172
246
356
98
954
73
636
18
234
168
204
1,102
20
30
78
547
782
316
1,833
6,041
—
730
730
1,958
385
4
348
3,425
459
455
401
362
78
242
15
294
370
262
408
170
1,252
402
205
133
188
401
62
333
6,492
—
21
37
58
129
363
—
550
—
9
154
234
207
204
2,627
93
36
196
—
1,257
7
1,833
6,857
—
1,875
1,875
3,743
4
17
33
5,672
1
65
275
—
216
—
—
294
411
150
56
82
86
430
536
127
—
—
153
414
3,296
See notes to consolidated financial statements.
131
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
160 $
99
259
4
46
309
249
343
592
188
258
330
730
230
1,290
97
106
89
538
334
130
22
33
150
720
—
1
23
66
314
462
5,413
861
861
75
320
395
225
100
38
363
758
308
519
827
11
195
1,033
84
79
163
—
113
129
179
4,458
4,766
97
175
53
168
639
353
—
190
227
720
—
7
23
44
106
1,040
8,884
488
488
15
291
306
16
429
60
505
811
Portfolio Company
Sub-Industry
Semiconductors
Achronix Semiconductor Corporation (15)
Total Achronix Semiconductor Corporation
Aquantia Corp. (4)
Avnera Corporation
Subtotal: Semiconductors (0.12%)*
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Software
Actifio, Inc.
Total Actifio, Inc.
Braxton Technologies, LLC
CareCloud Corporation (15)
Clickfox, Inc. (15)
Total Clickfox, Inc.
DNAnexus, Inc.
Evernote Corporation (15)
Fuze, Inc. (15)
Mattersight Corporation (4)
Message Systems, Inc. (15)
Mobile Posse, Inc. (15)
Neos, Inc. (15)
NewVoiceMedia Limited (5)(10)
OneLogin, Inc. (15)
PerfectServe, Inc.
Poplicus, Inc.
Quid, Inc. (15)
RapidMiner, Inc.
RedSeal Inc. (15)
Signpost, Inc.
Wrike, Inc.
Subtotal: Software (1.06%)*
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series C
Preferred Series D-2
Common Stock
Preferred Series E
360,000 $
750,000
1,110,000
19,683
141,567
Common Stock
Preferred Series F
Preferred Series A
Preferred Series B
Preferred Series B
Preferred Series C
Preferred Series C-A
Preferred Series C
Common Stock
Preferred Series F
Common Stock
Preferred Series C
Preferred Series C
Common Stock
Preferred Series E
Common Stock
Preferred Series C
Common Stock
Preferred Series D
Preferred Series C-1
Preferred Series C-
Prime
Preferred Series C
Common Stock
73,584
31,673
105,257
168,750
413,433
1,038,563
592,019
2,218,214
3,848,796
909,091
62,500
256,158
357,143
503,718
396,430
221,150
225,586
228,972
129,073
132,168
71,576
4,982
640,603
324,005
698,760
Specialty Pharmaceuticals
Alimera Sciences, Inc. (4)
Subtotal: Specialty Pharmaceuticals (0.06%)*
Surgical Devices
Gynesonics, Inc. (15)
Total Gynesonics, Inc.
Transmedics, Inc.
Total Transmedics, Inc.
Subtotal: Surgical Devices (0.10%)*
Specialty Pharmaceuticals
Warrant
Common Stock
1,717,709
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Surgical Devices
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series C
Preferred Series D
Preferred Series B
Preferred Series D
Preferred Series F
180,480
1,575,965
1,756,445
40,436
175,000
50,544
265,980
See notes to consolidated financial statements.
132
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(dollars in thousands)
Portfolio Company
Sub-Industry
Type of
Investment (1)
Series
Shares
Cost (3) Value (4)
Sustainable and Renewable Technology
Agrivida, Inc. (15)
Alphabet Energy, Inc. (15)
American Superconductor Corporation (4)
Brightsource Energy, Inc.
Calera, Inc. (15)
EcoMotors, Inc. (15)
Fluidic, Inc.
Flywheel Building Intelligence, Inc. (p.k.a.
SCIEnergy, Inc.)
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series D
Preferred Series 1B
Common Stock
Preferred Series 1
Preferred Series C
Preferred Series B
Preferred Series D
Common Stock
Sustainable and Renewable Technology
Warrant
Preferred Series 2-A
Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)
Fulcrum Bioenergy, Inc.
GreatPoint Energy, Inc. (15)
Kinestral Technologies, Inc.
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Preferred Series C-1
Preferred Series D-1
Preferred Series A
Preferred Series B
Total Kinestral Technologies, Inc.
Polyera Corporation (15)
Proterra, Inc.
Rive Technology, Inc. (15)
Stion Corporation (6)
TAS Energy, Inc.
Tendril Networks
Subtotal: Sustainable and Renewable Technology (0.15%)*
Total: Warrant Investments (4.38%)*
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Sustainable and Renewable Technology
Warrant
Warrant
Warrant
Warrant
Warrant
Warrant
Preferred Series C
Preferred Series 4
Preferred Series E
Preferred Series Seed
Preferred Series AA
Preferred Series 3-A
471,327 $
13,667
58,823
116,666
44,529
437,500
61,804
120 $
82
39
104
513
308
102
530,811
6,229
537,040
280,897
393,212
325,000
131,883
456,883
311,609
477,517
234,477
2,154
428,571
1,019,793
181
50
231
275
548
155
63
218
338
41
12
1,378
299
189
4,797
43,578
88
—
7
—
—
—
—
—
—
—
357
—
155
63
218
—
599
8
—
—
—
1,277
36,869
Total Investments in Securities (183.39%)*
$ 1,619,829 $ 1,542,214
Value as a percent of net assets
*
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2)
Interest rate PRIME represents 4.50% at December 31, 2017. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 1.44%, 1.57%, 1.69% and
2.11%, respectively, at December 31, 2017.
(3) Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $32.5 million, $119.7 million and $87.2
million respectively. The tax cost of investments is $1.6 billion.
(4) Except for warrants in 43 publicly traded companies and common stock in 20 publicly traded companies, all investments are restricted at December 31, 2017 and were
valued at fair value using Level 3 significant unobservable inputs as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are
outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment as defined under the 1940 Act in which Hercules owns at least 5% but generally less than 25% of the company’s voting securities.
(7) Control investment as defined under the 1940 Act in which Hercules owns at least 25% of the company’s voting securities or has greater than 50% representation on its
board.
(8) Debt is on non-accrual status at December 31, 2017, and is therefore considered non-income producing. Note that at December 31, 2017, only the $11.0 million PIK loan is
on non-accrual for the Company’s debt investment in Tectura Corporation.
(9) Denotes that all or a portion of the debt investment is convertible debt.
(10) Indicates assets that the Company deems not “qualifying assets” under section 55(a) of 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets
at the time of acquisition of any additional non-qualifying assets.
(11) Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitization (as defined in Note 4).
(12) Denotes that all or a portion of the debt investment is pledged as collateral under the Wells Facility (as defined in Note 4).
(13) Denotes that all or a portion of the debt investment is pledged as collateral under the Union Bank Facility (as defined in Note 4).
(14) Denotes that all or a portion of the debt investment principal includes accumulated PIK interest and is net of repayments.
(15) Denotes that all or a portion of the investment in this portfolio company is held by HT II or HT III, the Company’s wholly owned SBIC subsidiaries.
(16) Denotes that the fair value of the Company’s total investments in this portfolio company represent greater than 5% of the Company’s total assets at December 31, 2017.
(17) Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at December 31, 2017. Refer to Note 10.
See notes to consolidated financial statements.
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Hercules Capital, Inc. (the “Company”) is a specialty finance company focused on providing senior secured loans to high-
growth, innovative venture capital-backed companies in a variety of technology, life sciences, and sustainable and renewable
technology industries. The Company sources its investments through its principal office located in Palo Alto, CA, as well as through
its additional offices in Boston, MA, New York, NY, Washington, DC, Hartford, CT, Westport, CT, Chicago, IL, and San Diego, CA.
The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003.
The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a
business development company (“BDC”) under the 1940 Act. From incorporation through December 31, 2005, the Company was
subject to tax as a corporation under Subchapter C of the Code. Effective January 1, 2006, the Company elected to be treated for tax
purposes as a RIC under Subchapter M of the Code (see Note 5). As an investment company, the Company follows accounting and
reporting guidance as set forth in Topic 946 (“Financial Services – Investment Companies”) of the FASB Accounting Standards
Codification, as amended (“ASC”).
HT II, HT III, and HT IV, are Delaware limited partnerships that were formed in January 2005, September 2009 and December
2010, respectively. HT II and HT III were licensed to operate as small business investment companies (“SBICs”) under the authority
of the Small Business Administration (“SBA”) on September 27, 2006 and May 26, 2010, respectively. On July 13, 2018, the
Company completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with
respect to HT II.
As an SBIC, HT III is subject to a variety of regulations concerning, among other things, the size and nature of the companies in
which it may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license;
however, the Company has not received such license, and HT IV currently has no material assets or liabilities. The Company also
formed Hercules Technology SBIC Management, LLC (“HTM”), a limited liability company, in November 2003. HTM is a wholly
owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the
Company’s consolidated financial statements).
HT III holds approximately $307.5 million in assets which accounts for approximately 14.3% of the Company’s total assets,
prior to consolidation at December 31, 2018.
The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited
liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through
entities). By investing through these wholly owned subsidiaries, the Company is able to benefit from the tax treatment of these entities
and create a tax structure that is more advantageous with respect to the Company’s RIC status. These taxable subsidiaries are
consolidated for financial reporting purposes and in accordance with U.S. GAAP, and the portfolio investments held by these taxable
subsidiaries are included in the Company’s consolidated financial statements and recorded at fair value. These taxable subsidiaries are
not consolidated with Hercules for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities
as a result of their ownership of certain portfolio investments.
Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
134
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all VIEs of which the
Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional
subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary
beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s
economic performance and the obligation to absorb the losses or the right to receive benefits that could be significant to the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic
performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights
and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance
and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions
affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation
to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its
economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the
VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the
Company has a potentially significant interest in the VIE, then it consolidates the VIE.
The Company performs periodic reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The
reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through
changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to
be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework.
As of the date of this report, the only VIE consolidated by the Company is its securitization VIE formed in conjunction with the
issuance of the 2027 Asset-Backed Notes (as defined herein). See “Note 4 – Borrowings.”
Valuation of Investments
The most significant estimate inherent in the preparation of the Company’s consolidated financial statements is the valuation of
investments and the related amounts of unrealized appreciation and depreciation of investments recorded.
At December 31, 2018, approximately 96.7% of the Company’s total assets represented investments in portfolio companies
whose fair value is determined in good faith by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the
market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value
is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the
1940 Act and ASC Topic 946 and measured in accordance with ASC Topic 820 (“Fair Value Measurements”). The Company’s debt
securities are primarily invested in venture capital-backed companies in technology-related industries including technology, drug
discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology at all stages of
development. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these
portfolio companies are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market
indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at
fair value as determined in good faith pursuant to a consistent valuation policy by the Board of Directors in accordance with the
provisions of ASC Topic 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do
not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board of
Directors may differ significantly from the value that would have been used had a readily available market existed for such
investments, and the differences could be material.
The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance
with respect to certain portfolio investments. The Company engages independent valuation firms on a discretionary basis. Specifically,
on a quarterly basis, the Company will identify portfolio investments with respect to which an independent valuation firm will assist in
valuing. The Company selects these portfolio investments based on a number of factors, including, but not limited to, the potential for
material fluctuations in valuation results, size, credit quality and the time lapse since the last valuation of the portfolio investment by
an independent valuation firm.
135
The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the
Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to
cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of
Directors. The Board of Directors are ultimately and solely, responsible for determining the fair value of the Company’s investments
in good faith.
With respect to investments for which market quotations are not readily available or when such market quotations are deemed
not to represent fair value, the Board of Directors have approved a multi-step valuation process each quarter, as described below:
(1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment
professionals responsible for the portfolio investment;
(2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s
investment committee;
(3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as
provided by the investment committee which incorporates the results of the independent valuation firm as appropriate; and
(4) the Board of Directors, upon the recommendation of the Audit Committee, discusses valuations and determines the fair value
of each investment in the Company’s portfolio in good faith based on the input of, where applicable, the respective independent
valuation firm and the investment committee.
ASC Topic 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy
which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC Topic 820 also requires
disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC Topic
820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC Topic 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The Company has categorized all investments recorded at fair value in accordance with ASC Topic 820 based upon the level of
judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC Topic 820 and directly
related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets
carried at Level 1 fair value generally are equities listed in active markets.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in
connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets
that are generally included in this category are publicly held debt investments and warrants held in a public company.
Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the
measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and
equities held in a private company.
Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of
significant input to the valuations as of December 31, 2018 and December 31, 2017.
136
The Company transfers investments in and out of Level 1, 2 and 3 as of the beginning of the period, based on changes in the use
of observable and unobservable inputs utilized to perform the valuation for the period. During the year ended December 31, 2018,
there were no transfers between Levels 1 or 2.
(in thousands)
Description
Senior Secured Debt
Unsecured Debt
Preferred Stock
Common Stock
Warrants
Escrow Receivable
Total
(in thousands)
Description
Senior Secured Debt
Preferred Stock
Common Stock
Warrants
Escrow Receivable
Total
Balance
December 31, 2018
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
1,719,091 $
14,401
68,625
51,587
26,669
970
1,881,343 $
— $
—
—
27,346
—
—
27,346 $
— $
—
—
—
3,996
—
3,996 $
1,719,091
14,401
68,625
24,241
22,673
970
1,850,001
Balance
December 31, 2017
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
1,415,984 $
40,683
48,678
36,869
752
1,542,966 $
— $
—
22,825
—
—
22,825 $
— $
—
—
5,664
—
5,664 $
1,415,984
40,683
25,853
31,205
752
1,514,477
$
$
$
$
The table below presents a reconciliation for all financial assets and liabilities measured at fair value on a recurring basis,
excluding accrued interest components, using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and
December 31, 2017.
(in thousands)
Senior Debt
Unsecured Debt
Preferred Stock
Common Stock
Warrants
Escrow Receivable
Total
(in thousands)
Senior Debt
Preferred Stock
Common Stock
Warrants
Escrow Receivable
Total
Balance
January 1,
2018
$ 1,415,984 $
—
40,683
25,853
31,205
752
$ 1,514,477 $
Balance
January 1,
2017
$ 1,323,978 $
39,418
10,965
24,246
1,382
$ 1,399,989 $
Net Realized
Gains
(Losses) (1)
Net Change in
Unrealized
Appreciation
(Depreciation) (2) Purchases (5) Sales
Gross
Transfers
into
Level 3 (3)
Gross
Transfers
out of
Level 3 (3)
Balance
December 31,
2018
Repayments (6)
(14,066 ) $
—
2,540
(3,299 )
(982 )
1
(15,806 ) $
4,947 $
(328 )
(11,068 )
(7,583 )
(2,982 )
(143 )
(17,157 ) $
896,831 $ — $
20,583
—
39,993 (3,706 )
17,950
(301 )
2,050 (6,402 )
(532 )
978,299 $ (10,941 ) $
892
(584,605 ) $
(5,671 )
—
—
—
—
(590,276 ) $
— $ 1,719,091
— $
14,401
(183 )
—
68,625
—
183
24,241
(8,379 )
—
22,673
(216 )
—
—
970
—
183 $ (8,778 ) $ 1,850,001
Net Realized
Gains
(Losses) (1)
Net Change in
Unrealized
Appreciation
(Depreciation) (2) Purchases (5) Sales
Gross
Transfers
into
Level 3 (4)
Gross
Transfers
out of
Level 3 (4)
Balance
December 31,
2017
Repayments (6)
(24,684 ) $
(7,531 )
(487 )
727
261
(31,714 ) $
29,610 $
11,955
(49,462 )
8,450
—
553 $
776,648 $ — $
2,683
(468 )
3,748 (1,582 )
5,449 (7,303 )
3,127 (4,018 )
791,655 $ (13,371 ) $
— $ (62,671 ) $ 1,415,984
(626,897 ) $
40,683
—
—
25,853
— 62,671
31,205
—
—
752
—
—
(626,897 ) $ 62,671 $ (68,409 ) $ 1,514,477
(5,374 )
—
(364 )
—
(1)
(2)
(3)
(4)
(5)
(6)
Included in net realized gains or losses in the accompanying Consolidated Statement of Operations.
Included in net change in unrealized appreciation (depreciation) in the accompanying Consolidated Statement of Operations.
Transfers out of Level 3 during the year ended December 31, 2018 relate to the initial public offerings of DocuSign, Inc. and Tricida, Inc. and the conversion of
our debt investment in Gynesonics, Inc. to preferred stock. Transfers into Level 3 for the year ended December 31, 2018 relate to the conversion of our debt
investment in Gynesonics, Inc. to preferred stock.
Transfers out of Level 3 during the year ended December 31, 2017 relate to the conversion of our debt investment in Sungevity, Inc. and a portion of our debt
investment in Gamma Medica, Inc. to common stock through bankruptcy transactions, IPOs of ForeScout Technologies, Inc., Aquantia Corporation, and
Quanterix Corporation, and merger of our former portfolio company Cempra, Inc. and current portfolio company Melinta Therapeutics, Inc. into NASDAQ-
listed company Melinta Therapeutics, Inc. Transfers into Level 3 during the year ended December 31, 2017 relate to the conversion of our debt investment in
Sungevity, Inc. and a portion of our debt investment in Gamma Medica, Inc. to common stock through bankruptcy transactions.
Amounts listed above are inclusive of loan origination fees received at the inception of the loan which are deferred and amortized into fee income as well as the
accretion of existing loan discounts and fees during the period. Escrow receivable purchases may include additions due to proceeds held in escrow from the
liquidation of level 3 investments.
Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures.
137
For the year ended December 31, 2018, approximately $10.5 million and $10.9 million in net unrealized depreciation was
recorded for preferred stock and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. For
the same period, approximately $14.5 million and $294,000 in net unrealized depreciation was recorded for debt and warrant Level 3
investments, respectively, relating to assets still held at the reporting date.
For the year ended December 31, 2017, approximately $4.2 million in net unrealized appreciation and $49.2 million in net
unrealized depreciation was recorded for preferred stock and common stock Level 3 investments, respectively, relating to assets still
held at the reporting date. The depreciation on common stock during the period reflects the conversion of the Company’s debt
investment in Sungevity, Inc. to common stock at cost through a bankruptcy transaction and subsequent depreciation to fair value. For
the same period, approximately $10.5 million in net unrealized depreciation and $9.0 million in net unrealized appreciation was
recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.
The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of December
31, 2018 and December 31, 2017. In addition to the techniques and inputs noted in the tables below, according to the Company’s
valuation policy the Company may also use other valuation techniques and methodologies when determining the Company’s fair
value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3
inputs as they relate to the Company’s fair value measurements.
The significant unobservable input used in the fair value measurement of the Company’s escrow receivables is the amount
recoverable at the contractual maturity date of the escrow receivable.
Investment Type - Level
Three
Debt Investments
Pharmaceuticals
Technology
Fair Value at
December 31, 2018
(in thousands)
Valuation Techniques/
Methodologies
Unobservable Input (1)
$
25,039 Originated Within 4-6 Months
480,737 Market Comparable Companies Hypothetical Market Yield
Origination Yield
63,125 Originated Within 4-6 Months
618,141 Market Comparable Companies Hypothetical Market Yield
Premium/(Discount)
Origination Yield
Sustainable and Renewable
Technology
Medical Devices
1,579 Liquidation (3)
75,834
Market Comparable Companies
Hypothetical Market Yield
Premium/(Discount)
Probability weighting of alternative outcomes
5,556 Liquidation (3)
14,673 Originated Within 4-6 Months
115,355 Market Comparable Companies Hypothetical Market Yield
Premium/(Discount)
Probability weighting of alternative outcomes
Origination Yield
2,405 Liquidation (3)
Premium/(Discount)
Probability weighting of alternative outcomes
Lower Middle Market
123,589 Market Comparable Companies Hypothetical Market Yield
18,128 Liquidation (3)
Premium/(Discount)
Probability weighting of alternative outcomes
Debt Investments Where Fair Value Approximates Cost
153,312 Debt Investments originated within 3 months
36,019 Debt Investments Maturing in Less than One Year
$
1,733,492 Total Level Three Debt Investments
Weighted
Average (2)
11.68%
13.33%
13.02%
13.08%
13.47%
15.15%
13.77%
14.24%
Range
10.50% - 12.47%
10.25% - 16.86%
(0.25%) - 0.50%
11.71% - 19.94%
10.73% - 16.13%
0.00% - 0.75%
40.00% - 60.00%
11.90% - 17.48%
(0.25%) - 0.25%
20.00% - 50.00%
15.15%
10.99% - 22.38%
0.00% - 0.75%
50.00%
9.74% - 17.25%
(0.25%) - 0.00%
30.00% - 70.00%
(1)
The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and
premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants
where buyers and sellers are willing participants. The premiums/(discounts) relate to company specific characteristics such as underlying investment
performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation may result in a significantly
lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated
Schedule of Investments are included in the industries noted above as follows:
Pharmaceuticals, above, is comprised of debt investments in the Healthcare Services - Other, Drug Discovery & Development, Drug Delivery and
Biotechnology Tools industries in the Consolidated Schedule of Investments.
Technology, above, is comprised of debt investments in the Software, Electronics & Computer Hardware, Media/Content/Info, Internet Consumer &
Business Services, Consumer & Business Products, and Information Services industries in the Consolidated Schedule of Investments.
Sustainable and Renewable Technology, above, is comprised of debt investments in the Sustainable and Renewable Technology, Internet Consumer &
Business Services, and Electronics & Computer Hardware industries in the Consolidated Schedule of Investments.
Medical Devices, above, is comprised of debt investments in the Drug Delivery, and Medical Devices & Equipment industries in the Consolidated
Schedule of Investments.
Lower Middle Market, above, is comprised of debt investments in the Healthcare Services - Other, Internet Consumer & Business Services, Diversified
Financial Services, Sustainable and Renewable Technology, and Software industries in the Consolidated Schedule of Investments.
(2)
(3)
The weighted averages are calculated based on the fair market value of each investment.
The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.
138
Investment Type - Level
Three Debt Investments
Pharmaceuticals
$
Technology
Sustainable and Renewable
Technology
Medical Devices
Lower Middle Market
Fair Value at
December 31, 2017
(in thousands)
Valuation Techniques/
Methodologies
Unobservable Input (1)
Range
Weighted
Average (2)
44,301 Originated Within 6 Months
379,841 Market Comparable Companies Hypothetical Market Yield
Origination Yield
2,257 Liquidation (3)
158,916 Originated Within 6 Months
290,561 Market Comparable Companies Hypothetical Market Yield
Premium/(Discount)
Probability weighting of alternative outcomes
Origination Yield
Premium/(Discount)
Probability weighting of alternative outcomes 5.00% - 100.00%
Origination Yield
22,020 Liquidation (3)
33,020 Originated Within 6 Months
49,647 Market Comparable Companies Hypothetical Market Yield
17,013 Originated Within 6 Months
89,869 Market Comparable Companies Hypothetical Market Yield
Premium/(Discount)
Origination Yield
97,291 Originated Within 6 Months
19,219 Liquidation (3)
Premium/(Discount)
Origination Yield
Probability weighting of alternative outcomes 10.00% - 100.00%
12.01%
10.71% - 12.61% 11.89%
10.14% - 16.14% 12.94%
(0.25%) - 0.75%
100.00%
9.4% - 25.11%
9.47% - 19.21%
(0.25%) - 1.00%
11.68%
13.55%
11.97% - 20.06% 15.31%
11.15% - 14.16% 12.13%
0.00% - 0.25%
13.49%
9.66% - 17.57%
0.00% - 0.50%
8.29% - 12.68%
13.49%
12.28%
Debt Investments Where Fair Value Approximates Cost
35,517 Imminent Payoffs (4)
176,512 Debt Investments Maturing in Less than One Year
$
1,415,984 Total Level Three Debt Investments
(1)
The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and
premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants
where buyers and sellers are willing participants. The premiums/(discounts) relate to company specific characteristics such as underlying investment
performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation may result in a significantly
lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated
Schedule of Investments are included in the industries noted above as follows:
Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery and
Biotechnology Tools industries in the Consolidated Schedule of Investments.
Technology, above, is comprised of debt investments in the Software, Semiconductors, Internet Consumer and Business Services, Consumer and
Business Products, Information Services, and Communications and Networking industries in the Consolidated Schedule of Investments.
Sustainable and Renewable Technology, above, aligns with the Sustainable and Renewable Technology Industry in the Consolidated Schedule of
Investments.
Medical Devices, above, is comprised of debt investments in the Surgical Devices and Medical Devices and Equipment industries in the Consolidated
Schedule of Investments.
Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Electronics and Computer Hardware,
Healthcare Services - Other, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals
industries in the Consolidated Schedule of Investments.
(2)
(3)
(4)
The weighted averages are calculated based on the fair market value of each investment.
The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.
Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.
139
Investment Type - Level Three
Equity and Warrant Investments
Equity Investments
Warrant Investments
Fair Value at
December 31,
2018
(in thousands)
$
Valuation Techniques/
Methodologies
34,204 Market Comparable Companies
Unobservable Input (1)
EBITDA Multiple (2)
Revenue Multiple (2)
Discount for Lack of Marketability (3)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
16,040 Market Adjusted OPM Backsolve Market Equity Adjustment (5)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
EBITDA Multiple (2)
Revenue Multiple (2)
3,115 Liquidation
39,507 Other (7)
11,267 Market Comparable Companies
EBITDA Multiple (2)
Revenue Multiple (2)
Discount for Lack of Marketability (3)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
4,243 Market Adjusted OPM Backsolve Market Equity Adjustment (5)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
7,163 Other (7)
Weighted
Average (6)
8.4x
3.9x
Range
6.3x - 14.7x
0.4x - 11.8x
12.53% - 22.68%
40.19% - 88.21%
2.61%
10 - 14
(95.22%) - 12.81%
34.1% - 100.56%
1.00% - 2.84%
10 - 43
11.3x
1.5x - 1.7x
15.79%
60.37%
2.61%
12
(3.45%)
76.79%
2.16%
16
11.3x
1.6x
6.3x - 13.8x
0.2x - 7.7x
9.3x
4.0x
12.53% - 32.2%
17.14%
33.76% - 100.71% 63.71%
2.59%
14
2.46% - 2.63%
10 - 48
(69.28%) - 22.02% (7.75%)
34.1% - 109.24%
1.04% - 2.97%
4 - 47
74.15%
2.27%
23
Total Level Three Warrant and
Equity Investments
$
115,539
(1)
The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA
multiples, market equity adjustment factors, and discounts for lack of marketability. Additional inputs used in the OPM include industry volatility, risk free
interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value
measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of
financing or merger/acquisition events near the measurement date.
Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.
Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.
Represents the range of industry volatility used by market participants when pricing the investment.
Represents the range of changes in industry valuations since the portfolio company's last external valuation event.
(2)
(3)
(4)
(5)
(6) Weighted averages are calculated based on the fair market value of each investment.
(7)
The fair market value of these investments is derived based on recent private market and merger and acquisition transaction prices.
140
Investment Type - Level Three
Equity and Warrant Investments
Equity Investments
$
Fair Value at
December 31,
2017
(in thousands)
Valuation Techniques/
Methodologies
7,684 Market Comparable Companies
Warrant Investments
Unobservable Input (1)
EBITDA Multiple (2)
Revenue Multiple (2)
Discount for Lack of Marketability (3)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
19,323 Market Adjusted OPM Backsolve Market Equity Adjustment (5)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
39,529 Other (7)
19,310 Market Comparable Companies
EBITDA Multiple (2)
Revenue Multiple (2)
Discount for Lack of Marketability (3)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
6,713 Market Adjusted OPM Backsolve Market Equity Adjustment (5)
Average Industry Volatility (4)
Risk-Free Interest Rate
Estimated Time to Exit (in months)
5,182 Other (7)
Range
5.1x - 40.2x
0.5x - 6.2x
7.49% - 12.97%
27.8% - 77.3%
1.40% - 1.90%
3 - 10
(16.43%) - 29.4%
33.17% - 78.77%
0.84% - 1.51%
5 - 26
5x - 40.2x
0.5x - 6.4x
5.16% - 27.41%
27.8% - 102.77%
1.31% - 2.09%
2 - 48
(68.52%) - 154.5%
33.17% - 110.32%
0.96% - 2.09%
5 - 48
Weighted
Average (6)
13.2x
2.9x
8.77%
53.35%
1.47%
5
11.79%
68.99%
1.42%
13
14.6x
2.6x
13.57%
55.15%
1.66%
13
11.76%
66.97%
1.59%
20
Total Level Three Warrant and
Equity Investments
$
97,741
(1)
The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA
multiples, market equity adjustment factors, and discounts for lack of marketability. Additional inputs used in the OPM include industry volatility, risk free
interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value
measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of
financing or merger/acquisition events near the measurement date.
Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.
Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.
Represents the range of industry volatility used by market participants when pricing the investment.
Represents the range of changes in industry valuations since the portfolio company's last external valuation event.
(2)
(3)
(4)
(5)
(6) Weighted averages are calculated based on the fair market value of each investment.
(7)
The fair market value of these investments is derived based on recent private market and merger and acquisition transaction prices.
Debt Investments
The Company follows the guidance set forth in ASC Topic 820 which establishes a framework for measuring the fair value of
assets and liabilities and outlines a fair value hierarchy, which prioritizes the inputs used to measure fair value and the effect of fair
value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology-
related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and
renewable technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of the
Company’s investments in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there is no known
or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In addition, the
Company may, from time to time, invest in public debt of companies that meet the Company’s investment objectives. These
investments are considered Level 2 assets.
In making a good faith determination of the value of the Company’s investments, the Company generally starts with the cost
basis of the investment, which includes the value attributed to the original issue discount (“OID”), if any, and payment-in-kind
(“PIK”) interest or other receivables which have been accrued as earned. The Company then applies the valuation methods as set forth
below.
The Company applies a procedure for debt investments that assumes the sale of each investment in a hypothetical market to a
hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios
where the underlying security was simply repaid or extinguished, but includes an exit concept. The Company determines the yield at
inception for each debt investment. The Company then uses senior secured, leveraged loan yields provided by third party providers to
determine the change in market yields between inception of the debt investment and the measurement date. Industry specific indices
and other relevant market data are used to benchmark and assess market-based movements.
141
Under this process, the Company also evaluates the collateral for recoverability of the debt investments. The Company
considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield
to derive a credit adjusted hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from
each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.
The Company’s process includes an analysis of, among other things, the underlying investment performance, the current
portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market
yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated debt investments
using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt
investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a
liquidation analysis.
The Company records unrealized depreciation on investments when it believes that an investment has decreased in value,
including where collection of a debt investment is doubtful or, if under the in-exchange premise, when the value of a debt investment
is less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it
believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in
value or, if under the in-exchange premise, the value of a debt investment is greater than amortized cost.
When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the
borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their
respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related
securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is
accreted into interest income over the life of the debt investment.
Debt investments that are traded on a public exchange are valued at the prevailing market price as of the valuation date.
Equity-Related Securities and Warrants
Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at
period end. The Company has a limited amount of equity securities in public companies. In accordance with the 1940 Act, unrestricted
publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement
date.
The Company estimates the fair value of warrants using a Black Scholes OPM. At each reporting date, privately held warrant
and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s
operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios,
discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event
occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized
to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation
of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the
portfolio company may have increased or decreased since the last valuation measurement date.
Escrow Receivables
Escrow receivables are collected in accordance with the terms and conditions of the escrow agreement. Escrow balances are
typically distributed over a period greater than one year and may accrue interest during the escrow period. Escrow balances are
measured for collectability on at least a quarterly basis and fair value is determined based on the amount of the estimated recoverable
balances and the contractual maturity date. As of December 31, 2018 there were no material past due escrow receivables.
Portfolio Composition
As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in
the 1940 Act as investments in those companies that the Company is deemed to “control.” Under the 1940 Act, the Company is
generally deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or
has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated
companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an
“affiliate” of a company in which it has invested if it owns 5% or more, but generally less than 25%, of the voting securities of such
company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments.
142
The following table summarizes the Company’s realized gains and losses and changes in unrealized appreciation and
depreciation on control and affiliate investments for the years ended December 31, 2018, 2017, and 2016.
(in thousands)
Portfolio Company
Control Investments
Achilles Technology Management Co II, Inc.
Gibraltar Business Capital, LLC
Second Time Around (Simplify Holdings, LLC)
Tectura Corporation
Total Control Investments
Type
Control
Control
Control
Control
Affiliate Investments
Optiscan BioMedical, Corp.
Affiliate
Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) Affiliate
Stion Corporation
Affiliate
Total Affiliate Investments
Total Control & Affiliate Investments
(in thousands)
Portfolio Company
Control Investments
Achilles Technology Management Co II, Inc.
HercGamma, Inc.
SkyCross, Inc.
Tectura Corporation
Second Time Around (Simplify Holdings, LLC)
Total Control Investments
Type
Control
Control
Control
Control
Control
Affiliate Investments
Affiliate
Optiscan BioMedical, Corp.
Affiliate
Stion Corporation
Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) Affiliate
Total Affiliate Investments
Total Control & Affiliate Investments
(in thousands)
Portfolio Company
Control Investments
SkyCross, Inc.
Achilles Technology Management Co II, Inc.
Total Control Investments
Affiliate Investments
Optiscan BioMedical, Corp.
Stion Corporation
Total Affiliate Investments
Total Control & Affiliate Investments
Type
Control
Control
Affiliate
Affiliate
Fair Value at
December 31,
2018
Interest
Income
Year Ended December 31, 2018
Net Change in
Unrealized
Appreciation/
(Depreciation)
Fee Income
Realized
Gain/(Loss)
$
$
$
$
$
— $
39,491
—
18,128
57,619 $
6,977 $
14,519
—
21,496 $
79,115 $
— $
1,508
—
1,883
3,391 $
— $
2,058
—
2,058 $
5,449 $
— $
5
—
—
5 $
— $
336
—
336 $
341 $
2,858 $
(3,244 )
1,781
(2,617 )
(1,222 ) $
65 $
(8,285 )
1,378
(6,842 ) $
(8,064 ) $
(2,900 )
—
(1,743 )
335
(4,308 )
(680 )
—
(1,378 )
(2,058 )
(6,366 )
Fair Value at
December 31,
2017
Interest
Income
Year Ended December 31, 2017
Net Change in
Unrealized
Appreciation/
(Depreciation)
Fee Income
Realized
Gain/(Loss)
$
$
$
$
$
242 $
—
—
19,219
—
19,461 $
6,291 $
—
25,004
31,295 $
50,756 $
144 $
—
—
1,827
—
1,971 $
— $
2
799
801 $
2,772 $
11 $
—
—
—
—
11 $
— $
—
43
43 $
54 $
(2,254 ) $
—
17,294
(1,028 )
140
14,152 $
1,419 $
—
(50,102 )
(48,683 ) $
(34,531 ) $
(486 )
(487 )
(15,452 )
(51 )
—
(16,476 )
—
—
—
—
(16,476 )
Fair Value at
December 31,
2016
Interest
Income
Year Ended December 31, 2016
Net Change in
Unrealized
Appreciation/
(Depreciation)
Fee Income
Realized
Gain/(Loss)
$
$
$
$
$
— $
4,700
4,700 $
4,699 $
333
5,032 $
9,732 $
— $
78
78 $
12 $
148
160 $
238 $
— $
6
6 $
— $
—
— $
6 $
(3,421 ) $
(604 )
(4,025 ) $
(3,409 ) $
1,187
(2,222 ) $
(6,247 ) $
—
—
—
—
—
—
—
In March 2018, the Company acquired 100% ownership in Gibraltar Business Capital LLC and classified it as a control
investment in accordance with the requirements of the 1940 Act. Gibraltar Business Capital LLC is focused on providing asset-based
and other secured financing solutions.
In July 2017, the Company acquired the primary assets of Second Time Around (Simplify Holdings, LLC) as part of an article 9
consensual foreclosure and public auction. These assets represent the remaining possible recovery on the Company’s debt and as such
143
this investment became classified as a control investment as of September 30, 2017. In February 2018, all material recoveries had
been made and subsequently the Company’s investments were deemed wholly worthless and written off for a realized loss.
In April 2017, the Company’s investment in Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) became classified as a
control investment as a result of obtaining more than 25% of the portfolio company’s voting securities. In April 2017, under Section
363 of the Bankruptcy Code, Sungevity, Inc. entered into a $50.0 million asset purchase agreement and DIP financing facility with a
group of investors, led by Northern Pacific Group and including the Company. On April 7, 2017, the U.S. Bankruptcy Court approved
the DIP financing facility and on April 17, 2017, the U.S. Bankruptcy Court approved the asset purchase agreement. On April 26,
2017, Solar Spectrum Holdings LLC, a new company backed by the investment group, announced that it had acquired certain assets of
Sungevity, Inc. as part of the bankruptcy court-approved sale. As a result, the cost basis of the Company’s debt investment in
Sungevity, Inc. was converted to an equity position in Solar Spectrum Holdings LLC and the Company’s warrant and equity positions
in Sungevity, Inc. were written off for a realized loss.
In August 2017, the Company’s ownership in Solar Spectrum Holdings LLC was diluted below 25% as a result of additional
equity contributions by other investors to fund the acquisition of Horizon Solar Power, Inc. by Solar Spectrum Holdings LLC. The
Company made a $15.0 million debt investment to fund the acquisition. Accordingly, the Company’s equity and new debt investment
in Solar Spectrum Holdings LLC became classified as affiliate investments as of September 30, 2017.
In January 2017, the Company’s investment in Tectura Corporation became classified as a control investment as a result of
obtaining more than 50% representation on the portfolio company’s board. In March 2017, the Company’s warrants in Tectura
Corporation expired and were written off for a realized loss. In May 2018, the Company purchased common shares, thereby obtaining
greater than 25% of voting securities of Tectura.
In June 2016, the Company acquired 100% ownership of the equity of Achilles Technology Management Co II, Inc. and
classified it as a control investment in accordance with the requirements of the 1940 Act. In August 2017, the Company’s debt
investment in Achilles Technology Management II, Inc. was fully repaid by net proceeds from sales of the portfolio company’s assets.
In addition, the Company’s equity investment in Achilles Technology Management II, Inc. was reduced by $900,000 in lieu of a
success fee on the repayment of our debt investment. In May 2018, the Company received $375,000 as part of a legal settlement and
the remaining equity investment in Achilles Technology Management II, Inc. was deemed wholly worthless and written off for
realized loss.
The following table shows the fair value of the Company’s portfolio of investments by asset class as of December 31, 2018 and
December 31, 2017:
(in thousands)
Senior Secured Debt with Warrants
Senior Secured Debt
Unsecured Debt
Preferred Stock
Common Stock
Total
December 31, 2018
December 31, 2017
Investments at
Fair Value
Percentage of
Total Portfolio
Investments at
Fair Value
Percentage of
Total Portfolio
$
$
716,505
1,029,255
14,401
68,625
51,587
1,880,373
38.1 % $
54.8 %
0.8 %
3.6 %
2.7 %
100.0 % $
880,115
572,738
—
40,683
48,678
1,542,214
57.1 %
37.1 %
—
2.6 %
3.2 %
100.0 %
The increase in senior secured debt and the decrease in senior secured debt with warrants during the period is primarily due to
an increase in new debt investments that do not include detachable equity enhancement features.
144
A summary of the Company’s investment portfolio, at value, by geographic location as of December 31, 2018 and December
31, 2017 is shown as follows:
(in thousands)
United States
United Kingdom
Australia
Netherlands
Ireland
Cayman Islands
Sweden
Switzerland
Canada
Total
December 31, 2018
December 31, 2017
Investments at
Fair Value
Percentage of
Total Portfolio
Investments at
Fair Value
Percentage of
Total Portfolio
$
$
1,668,027
89,016
35,190
35,854
24,750
19,650
5,556
1,471
859
1,880,373
88.8 % $
4.7 %
1.9 %
1.9 %
1.3 %
1.0 %
0.3 %
0.1 %
0.0 %
100.0 % $
1,404,235
91,105
—
20,783
—
14,954
—
10,581
556
1,542,214
91.1 %
5.9 %
0.0 %
1.3 %
0.0 %
1.0 %
0.0 %
0.7 %
0.0 %
100.0 %
The following table shows the fair value of the Company’s portfolio by industry sector at December 31, 2018 and December 31,
2017:
December 31, 2018
December 31, 2017
Percentage of
Total Portfolio
(in thousands)
Software
Drug Discovery & Development
Internet Consumer & Business Services
Medical Devices & Equipment
Sustainable and Renewable Technology
Healthcare Services, Other
Drug Delivery
Diversified Financial Services
Information Services
Media/Content/Info
Electronics & Computer Hardware
Biotechnology Tools
Consumer & Business Products
Communications & Networking
Surgical Devices
Semiconductors
Diagnostic
Specialty Pharmaceuticals
Total
$
$
Investments at
Fair Value
Percentage of
Total Portfolio
Investments at
Fair Value
548,952
539,977
329,512
121,420
110,303
60,142
40,519
39,491
30,940
21,666
15,763
6,279
6,179
4,871
3,088
899
348
24
1,880,373
29.2 % $
28.7 %
17.5 %
6.5 %
5.9 %
3.2 %
2.2 %
2.1 %
1.6 %
1.2 %
0.8 %
0.3 %
0.3 %
0.3 %
0.2 %
0.0 %
0.0 %
0.0 %
100.0 % $
360,123
369,173
154,909
94,595
118,432
72,337
91,214
—
24,618
152,998
9,982
5,604
19,792
6,649
13,161
10,406
720
37,501
1,542,214
23.4 %
23.9 %
10.0 %
6.1 %
7.7 %
4.7 %
5.9 %
0.0 %
1.6 %
9.9 %
0.6 %
0.4 %
1.3 %
0.4 %
0.9 %
0.7 %
0.1 %
2.4 %
100.0 %
No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of December
31, 2018 or December 31, 2017.
Investment Collateral
In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio
company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a
company’s intellectual property. At December 31, 2018, approximately 85.3% of the Company’s debt investments were in a senior
secured first lien position, with 48.5% secured by a first priority security in all of the assets of the portfolio company, including its
intellectual property and 28.8% secured by a first priority security in all of the assets of the portfolio company and the portfolio
company was prohibited from pledging or encumbering its intellectual property, 1.1% of the Company’s debt investments were senior
secured by the equipment of the portfolio company and 6.9% of the Company’s debt investments were in a first lien “last-out” senior
secured position with security interest in all of the assets of the portfolio company, whereby the “last-out” loans will be subordinated
to the “first-out” portion of the unitranche loan in a liquidation, sale or other disposition. Another 13.8% of the Company’s debt
investments were secured by a second priority security interest in the portfolio company’s assets, and 0.9% were unsecured.
145
Cash, Restricted Cash, and Cash Equivalents
Cash and cash equivalents consist solely of funds deposited with financial institutions and short-term liquid investments in
money market deposit accounts. Cash and cash equivalents are carried at cost, which approximates fair value. Restricted cash and cash
equivalents include amounts that are collected and are held by trustees who have been appointed as custodians of the assets securing
certain of the Company’s financing transactions.
Other Assets
Other assets generally consist of prepaid expenses, deferred financing costs net of accumulated amortization, fixed assets net of
accumulated depreciation, deferred revenues and deposits and other assets, including escrow receivable. The escrow receivable
balance as of December 31, 2018 and December 31, 2017 was approximately $972,000 and $752,000, respectively, and was fair
valued and held in accordance with ASC Topic 820.
Income Recognition
The Company records interest income on an accrual basis and recognizes it as earned in accordance with the contractual terms
of the loan agreement, to the extent that such amounts are expected to be collected. OID initially represents the value of detachable
equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the
loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect that
principal, interest, and other obligations due will be collected in full, the Company will generally place the loan on non-accrual status
and cease recognizing interest income on that loan until all principal and interest due has been paid or the Company believes the
portfolio company has demonstrated the ability to repay the Company’s current and future contractual obligations. Any uncollected
interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be
doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the
process of collection.
At December 31, 2018, the Company had two debt investments on non-accrual with a cumulative investment cost of
approximately $2.7 million and a fair value of zero. At December 31, 2017, the Company had five debt investments on non-accrual
with a cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the
cumulative cost and fair value of debt investments on non-accrual between December 31, 2018 and December 31, 2017 is the result of
the liquidation of two debt investments that were on non-accrual at December 31, 2017, which resulted in a realized loss of
approximately $10.3 million, slightly offset by a loan repayment in full from one debt investment.
Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as
well as fees for transaction services and management services rendered by the Company to portfolio companies and other third parties.
Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized
as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the
effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as
additional origination fees. The Company had approximately $36.3 million of unamortized fees at December 31, 2018, of which
approximately $31.1 million was included as an offset to the cost basis of its current debt investments and approximately $5.2 million
was deferred contingent upon the occurrence of a funding or milestone. At December 31, 2017, the Company had approximately
$33.3 million of unamortized fees, of which approximately $29.3 million was included an offset to the cost basis of the Company’s
current debt investments and approximately $4.0 million was deferred contingent upon the occurrence of a funding or milestone.
The Company recognizes nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to
specific loan modifications. Certain fees may still be recognized as one-time fee income, including prepayment penalties, fees related
to select covenant default waiver fees and acceleration of previously deferred loan fees and OID related to early loan pay-off or
material modification of the specific debt outstanding. The Company recorded approximately $7.9 million and $8.5 million in one-
time fee income during the years ended December 31, 2018 and December 31, 2017, respectively.
In addition, the Company may also be entitled to an exit fee that is amortized into income over the life of the loan. Loan exit
fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. At December 31,
2018, the Company had approximately $25.6 million in exit fees receivable, of which approximately $23.3 million was included as a
component of the cost basis of its current debt investments and approximately $2.3 million was deferred related to expired
commitments. At December 31, 2017, the Company had approximately $27.5 million in exit fees receivable, of which approximately
$23.9 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $3.6 million
was deferred related to expired commitments.
146
The Company has debt investments in its portfolio that contain a PIK provision. Contractual PIK interest, which represents
contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on an
accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there
is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and
interest due. The Company recorded approximately $9.4 million and $10.0 million in PIK income in the years ended December 31,
2018 and 2017, respectively.
To maintain the Company’s ability to be subject to tax as a RIC, PIK and exit fee income generally must be accrued and
distributed to stockholders in the form of dividends for U.S. federal income tax purposes even though the cash has not yet been
collected. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments.
In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and
external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction
closes. The Company had no income from advisory services in the years ended December 31, 2018 and December 31, 2017.
Equity Offering Expenses
The Company’s offering costs are charged against the proceeds from equity offerings when received.
Stock Based Compensation
The Company has issued and may, from time to time, issue stock options and restricted stock to employees under the 2018
Equity Incentive Plan and the Director Plan. Management follows the guidelines set forth under ASC Topic 718, to account for stock
options granted. Under ASC Topic 718, compensation expense associated with stock-based compensation is measured at the grant
date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and
calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility,
forfeiture rate and expected option life.
Income Taxes
The Company intends to operate so as to qualify to be subject to tax as a RIC under Subchapter M of the Code and, as such, will
not be subject to federal income tax on the portion of taxable income (including gains) distributed as dividends for U.S. federal
income tax purposes to stockholders. Taxable income includes the Company’s taxable interest, dividend and fee income, reduced by
certain deductions, as well as taxable net realized securities gains. Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net
unrealized appreciation or depreciation, as such gains or losses are not included in taxable income until they are realized.
As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the
Company makes distributions treated as dividends for U.S. federal income tax purposes in a timely manner to its stockholders in
respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. The Company will not be subject
to this excise tax on any amount on which the Company incurred U.S. federal corporate income tax (such as the tax imposed on a
RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, the Company may choose to carry over taxable income in
excess of current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into
the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income
that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as
dividends for U.S. federal income tax purposes paid in the following taxable year, subject to certain declaration and payment
guidelines. To the extent the Company chooses to carry over taxable income into the next taxable year, distributions declared and paid
by the Company in a taxable year may differ from the Company’s taxable income for that taxable year as such distributions may
include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into
and distributed in the current taxable year, or returns of capital.
The Company intends to distribute 100% of our spillover earnings from ordinary income for the taxable year ended
December 31, 2018 to our stockholders during 2019. The Company distributed 100% of our spillover earnings from ordinary income
for our taxable year ended December 31, 2017 to our stockholders during 2018.
147
Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions
in accordance with tax regulations may differ from net investment income and net realized securities gains recognized for financial
reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the
financial statements to reflect their appropriate tax character. Permanent differences may also result from the change in the
classification of certain items, such as the treatment of short-term gains as ordinary income for tax purposes. Temporary differences
arise when certain items of income, expense, gain or loss are recognized at some time in the future. Also, recent tax legislation
requires that income be recognized for tax purposes no later than when recognized for financial reporting purposes.
Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of
common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future service is
required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in
addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future
service is required as a condition to the delivery of the underlying common stock.
Comprehensive Income
The Company reports all changes in comprehensive income in the Consolidated Statement of Operations. The Company did not
have other comprehensive income in 2018, 2017, or 2016. The Company’s comprehensive income is equal to its net increase in net
assets resulting from operations.
Distributions
Distributions to common stockholders are approved by the Board of Directors on a quarterly basis and the distribution payable
is recorded on the ex-dividend date.
The Company maintains an “opt out” dividend reinvestment plan that provides for reinvestment of the Company’s distribution
on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company declares a
distribution, cash distributions will be automatically reinvested in additional shares of its common stock unless the stockholder
specifically “opts out” of the dividend reinvestment plan and chooses to receive cash distributions. During 2018, 2017, and 2016, the
Company issued 159,560, 163,584, and 144,308 shares, respectively, of common stock to shareholders in connection with the
dividend reinvestment plan.
Segments
The Company lends to and invests in portfolio companies in various technology-related industries including technology, drug
discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology. The Company
separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and
investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and
investment segment.
Recent Accounting Pronouncements
In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things, requires that (i) all
equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through
earnings and (ii) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. Additionally, the ASU changes the disclosure requirements for
financial instruments. ASU 2016-01 is effective for annual reporting periods, and the interim periods within those periods, beginning
after December 15, 2017. The Company has adopted this standard, which did not have a material impact, on its consolidated financial
statements and related disclosures for the periods presented.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which, among other things, requires recognition of
lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Additionally, the
ASU requires the classification of all cash payments on leases within operating activities in the Consolidated Statement of Cash
Flows. ASU 2016-02 is effective for annual reporting periods, and the interim periods within those periods, beginning after December
15, 2018. Early adoption is permitted. The Company anticipates an increase in the recognition of right-of-use assets and lease
liabilities, however, the Company does not believe that ASU 2016-02 will have a material impact on its consolidated financial
statements and disclosures.
148
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments,” which addresses eight specific cash flow issues including, among other things, the classification of debt
prepayment or debt extinguishment costs. ASU 2016-15 is effective for annual reporting periods, and the interim periods within those
periods, beginning after December 15, 2017. The Company has adopted this standard, which did not have a material impact, on its
consolidated financial statements and related disclosures for the periods presented.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230),” which requires that a statement of
cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be
included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017. The
Company has adopted this standard, which did not have a material impact, on its consolidated financial statements and related
disclosures for the periods presented.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting”. This amendment expands the scope of Topic 718, Compensation—Stock
Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to
nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be
substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees and is effective
for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2018. The Company does not
believe that ASU 2018-07 will have a material impact on its consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
Disclosure Requirements for Fair Value Measurement”, which is intended to improve the effectiveness of fair value measurement
disclosures. The amendment, among other things, affects certain disclosure requirements related to transfers between level 1 and level
2 of the fair value hierarchy, and level 3 fair value measurements as they relate to valuation process, unrealized gains and losses,
measurement uncertainty, and significant unobservable inputs. The new guidance is effective for interim and annual periods beginning
after December 15, 2019. Early adoption is permitted for any interim or annual period. The Company does not believe that ASU 2018-
13 will have a material impact on its consolidated financial statements and disclosures.
In August 2018, the SEC issued Final Rule Release No. 33-10532 - “Disclosure Update and Simplification.” This rule amends
various SEC disclosure requirements that have been determined to be redundant, duplicative, overlapping, outdated, or superseded.
The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period
disclosure requirements related to changes in stockholders' equity. This final rule is effective on November 5, 2018. The Company has
adopted these amendments as currently required and these are reflected in its consolidated financial statements and related disclosures.
Certain prior year information has been adjusted to conform with these amendments.
3. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in
nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The
Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables
including escrow receivables, accounts payable and accrued liabilities, approximate the fair values of such items due to the short
maturity of such instruments. The borrowings of the Company are recorded at amortized cost and not at fair value on the Consolidated
Statement of Assets and Liabilities. The fair value of the Company’s outstanding borrowings is based on observable market trading
prices or quotations and unobservable market rates as applicable for each instrument.
Based on market quotations on or around December 31, 2018, the 2022 Notes, 2027 Asset-Backed Notes, and 2022 Convertible
Notes were quoted for 0.976, 1.006 and 0.946 per dollar at par value, respectively. At December 31, 2018, the 2024 Notes, 2025
Notes, and 2033 Notes were trading on the NYSE for $25.28, $24.05 and $23.35 per unit at par value, respectively. The par value at
underwriting for the 2024 Notes, 2025 Notes, and 2033 Notes was $25.00 per unit. Calculated based on the net present value of
payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of the SBA
debentures is approximately $150.4 million, compared to the principal amount of $149.0 million as of December 31, 2018. The fair
value of the outstanding borrowings under the Union Bank Facility and the Wells Facility is equal to their principal outstanding
balances as of December 31, 2018.
See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The
methodology for the determination of the fair value of the Company’s investments is discussed in Note 2.
149
The following tables provide additional information about the fair value and level in the fair value hierarchy of the Company’s
outstanding borrowings at December 31, 2018 and December 31, 2017:
(in thousands)
Description
SBA Debentures
2022 Notes
2024 Notes
2025 Notes
2033 Notes
2027 Asset-Backed Notes
2022 Convertible Notes
Union Facility
Wells Facility
Total
(in thousands)
Description (1)
SBA Debentures
2022 Notes
2024 Notes
2021 Asset-Backed Notes (2)
2022 Convertible Notes
Total
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
December 31, 2018
$
150,387 $
146,385
84,445
72,150
37,360
201,188
217,672
39,849
13,107
962,543 $
— $
—
—
—
—
—
—
—
—
— $
— $
146,385
84,445
72,150
37,360
201,188
217,672
—
—
759,200 $
150,387
—
—
—
—
—
—
39,849
13,107
203,343
$
$
December 31, 2017
$
198,038 $
152,091
188,061
49,199
236,470
823,859 $
Identical Assets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
— $
—
—
—
—
— $
— $
152,091
188,061
49,199
236,470
625,821 $
198,038
—
—
—
—
198,038
(1)
(2)
As of December 31, 2017, there were no borrowings outstanding on both the Well Facility and Union Facility.
The 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.
4. Borrowings
Outstanding Borrowings
At December 31, 2018 and December 31, 2017, the Company had the following available and outstanding borrowings:
December 31, 2018
December 31, 2017
(in thousands)
SBA Debentures (2)
2022 Notes
2024 Notes
2025 Notes
2033 Notes
2021 Asset-Backed Notes (3)
2027 Asset-Backed Notes
2022 Convertible Notes
Wells Facility (4)
Union Bank Facility (4)
Total
Total Available Principal
149,000 $
$
150,000
83,510
75,000
40,000
—
200,000
230,000
75,000
100,000
1,102,510 $
149,000 $
150,000
83,510
75,000
40,000
—
200,000
230,000
13,107
39,849
980,466 $
Carrying Value (1) Total Available
147,655 $
147,990
81,852
72,590
38,427
—
197,265
225,051
13,107
39,849
963,786 $
190,200 $
150,000
183,510
—
—
49,153
—
230,000
120,000
75,000
997,863 $
$
Principal
Carrying Value (1)
188,141
147,572
179,001
—
—
48,650
—
223,488
—
—
786,852
190,200 $
150,000
183,510
—
—
49,153
—
230,000
—
—
802,863 $
(1)
(2)
(3)
(4)
Except for the Wells Facility and Union Bank Facility, all carrying values represent the principal amount outstanding less the remaining unamortized debt
issuance costs and unaccreted premium or discount, if any, associated with the loan as of the balance sheet date.
At December 31, 2018, the total available borrowings under the SBA debentures were $149.0 million all of which were available in HT III. On July 13, 2018,
the Company completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II. At
December 31, 2017, the total available borrowings under the SBA debentures were $190.2 million, of which $41.2 million was available in HT II and $149.0
million was available in HT III.
The 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.
Availability subject to us meeting the borrowing base requirements. On July 31, 2018, the Wells Facility was reduced to $75.0 million as we fully repaid the
pro-rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc. On May 25, 2018, the Company entered into an
amendment to the Union Bank Facility to increase the commitments thereunder from $75.0 million to $100.0 million. See “Note 4 – Borrowings”.
150
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing and are
recognized as prepaid expenses and amortized over the life of the related debt instrument using the effective yield method or the
straight-line method, which closely approximates the effective yield method. In accordance with ASC Subtopic 835-30 (“Interest –
Imputation of Interest”), debt issuance costs are presented as a reduction to the associated liability balance on the Consolidated
Statement of Assets and Liabilities, except for debt issuance costs associated with line-of-credit arrangements. Debt issuance costs, net
of accumulated amortization, as of December 31, 2018 and December 31, 2017 were as follows:
(in thousands)
SBA Debentures
2022 Notes
2024 Notes
2025 Notes
2033 Notes
2021 Asset-Backed Notes (1)
2027 Asset-Backed Notes
2022 Convertible Notes
Wells Facility (2)
Union Bank Facility (2)
Total
$
December 31, 2018 December 31, 2017
2,059
$
1,633
4,591
—
—
503
—
3,715
227
379
13,107
1,345
1,379
1,686
2,410
1,573
—
2,735
2,823
100
165
14,216
$
$
(1) The 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.
(2) As the Wells Facility and Union Bank Facility are line-of-credit arrangements, the debt issuance costs associated with these instruments are presented separately
as an asset on the Consolidated Statement of Assets and Liabilities in accordance with ASC Subtopic 835-30.
Long-Term SBA Debentures
On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and was able to borrow funds
from the SBA against eligible investments and additional contributions to regulatory capital. On July 13, 2018, the Company
completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to
HT II. Prior to repayment of debentures and surrender of the license, HT II had paid the SBA commitment fees and facility fees of
approximately $1.5 million and $3.6 million, respectively.
On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program in which HT III can borrow funds
from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of
$74.5 million in HT III as of December 31, 2018, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed
debentures, subject to SBA approval, of which $149.0 million was outstanding as of December 31, 2018. As of December 31, 2018,
HT III has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of
December 31, 2018, the Company held investments in HT III in 49 companies with a fair value of approximately $244.4 million,
accounting for approximately 13.0% of the Company’s total investment portfolio at December 31, 2018. HT III held approximately
$307.5 million in assets and accounted for approximately 14.3% of the Company’s total assets prior to consolidation at December 31,
2018.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations,
eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully
taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its
investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding
$6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations
also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are
based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small
businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through the
Company’s wholly-owned subsidiary HT III, the Company plans to provide long-term loans to qualifying small businesses, and in
connection therewith, make equity investments.
HT III is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If HT III fails
to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT III’s use of
debentures, declare outstanding debentures immediately due and payable, and/or limit HT III from making new investments. In
addition, HT III may also be limited in its ability to make distributions to the Company if they do not have sufficient capital in
accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT III is the
Company’s wholly owned subsidiary. HT III was in compliance with the terms of the SBIC’s leverage as of December 31, 2018 as a
result of having sufficient capital as defined under the SBA regulations.
151
The rates of borrowings under various draws from the SBA beginning in March 2009 are set semiannually in March and
September and range from 2.25% to 4.62% excluding annual fees. Interest payments on SBA debentures are payable semiannually.
There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA
generally mature ten years after being borrowed. Based on the initial draw down date of September 2010 for HT III, the initial
maturity of the SBA debentures will occur in September 2020. In addition, the SBA charges a fee that is set annually, depending on
the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the
SBIC. The annual fees related to HT III debentures that pooled on March 27, 2013 were 0.804%. The annual fees on other debentures
have been set at 0.515%. The rates of borrowings on the Company’s outstanding SBA debentures range from 3.05% to 4.37% when
including these annual fees.
On July 13, 2018, the Company completed repayment of the remaining outstanding HT II debentures and subsequently
surrendered the SBA license with respect to HT II. The average amount of debentures outstanding for the year ended December 31,
2018 for HT III was approximately $149.0 million with an average interest rate of approximately 3.43%.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the SBA debentures are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
2018
Year Ended December 31,
2017
2016
$
$
$
6,370 $
714
7,084 $
6,942 $
6,969 $
640
7,609 $
6,942 $
6,988
671
7,659
6,961
At December 31, 2018, with the Company’s net investment of $74.5 million, HT III has the capacity to issue $149.0 million of
SBA-guaranteed debentures which is subject to SBA approval. The Company has issued $149.0 million in SBA-guaranteed
debentures in the Company’s SBIC subsidiaries.
The Company reported the following SBA debentures outstanding principal balances as of December 31, 2018 and 2017:
Interest Rate (1)
5.53%
$
4.64%
3.62%
3.50%
4.37%
3.16%
3.28%
3.05%
3.05%
3.16%
$
December 31,
2018
December 31,
2017
— $
—
—
10,000
28,750
25,000
25,000
11,250
24,250
24,750
149,000 $
18,400
3,400
6,500
22,900
28,750
25,000
25,000
11,250
24,250
24,750
190,200
(in thousands)
Issuance/Pooling Date
March 25, 2009
September 23, 2009
September 22, 2010
September 22, 2010
March 29, 2011
September 21, 2011
March 21, 2012
March 21, 2012
September 19, 2012
March 27, 2013
Total SBA Debentures
Maturity Date
March 1, 2019
September 1, 2019
September 1, 2020
September 1, 2020
March 1, 2021
September 1, 2021
March 1, 2022
March 1, 2022
September 1, 2022
March 1, 2023
(1)
Interest rate includes annual charge.
152
2019 Notes
In April and July 2012, the Company issued $84.5 million in aggregate principal amount of 7.00% notes due 2019 (the “April
2019 Notes”). In September and October 2012, the Company issued $85.9 million in aggregate principal amount of 7.00% notes due
2019 (the “September 2019 Notes”). The April 2019 Notes and September 2019 Notes are together referred to as the “2019 Notes.”
In April 2015, the Company redeemed $20.0 million of the $84.5 million issued and outstanding aggregate principal amount of
April 2019 Notes, as previously approved by the Board of Directors. In December 2015, the Company redeemed $40.0 million of the
$85.9 million issued and outstanding aggregate principal amount of September 2019 Notes, as previously approved by the Board of
Directors. The remaining 2019 Notes were fully redeemed on February 24, 2017.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2019 Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
— $
—
— $
— $
1,159 $
1,546
2,705 $
1,911 $
7,725
639
8,364
7,726
2022 Notes
On October 23, 2017, the Company issued $150.0 million in aggregate principal amount of the 2022 Notes. The 2022 Notes
were issued pursuant to the Fourth Supplemental Indenture to the Base Indenture, dated October 23, 2017 (the “2022 Notes
Indenture”), between the Company and U.S. Bank, National Association, as trustee (the “2022 Trustee”). The sale of the 2022 Notes
generated net proceeds of approximately $147.4 million, including a public offering discount of $826,500. Aggregate estimated
offering expenses in connection with the transaction, including the underwriter’s discounts and commissions of approximately
$975,000, were approximately $1.8 million.
The 2022 Notes mature on October 23, 2022, unless previously repurchased in accordance with their terms. The 2022 Notes
bear interest at a rate of 4.625% per year payable semiannually in arrears on April 23 and October 23 of each year, commencing on
April 23, 2018.
The 2022 Notes are unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing
and future indebtedness that is expressly subordinated, or junior, in right of payment to the 2022 Notes. The 2022 Notes are not
guaranteed by any of the Company’s current or future subsidiaries. The 2022 Notes rank pari passu, or equally, in right of payment
with all of the Company’s existing and future liabilities that are not so subordinated, or junior. The 2022 Notes effectively rank
subordinated, or junior, to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later
secures) to the extent of the value of the assets securing such indebtedness. The 2022 Notes rank structurally subordinated, or junior,
to all existing and future indebtedness (including trade payables) incurred by subsidiaries, financing vehicles or similar facilities of the
Company.
The Company may redeem some or all of the 2022 Notes at any time, or from time to time, at the redemption price set forth
under the terms of the indenture after September 23, 2022. No sinking fund is provided for the 2022 Notes. The 2022 Notes were
issued in denominations of $2,000 and integral multiples of $1,000 thereof. As of December 31, 2018, the Company was in
compliance with the terms of the 2022 Notes Indenture.
As of December 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Notes were as follows:
December 31, 2018 December 31, 2017
$
150,000
(1,633 )
(795 )
147,572
150,000 $
(1,379 )
(631 )
147,990 $
$
(in thousands)
Principal amount of debt
Unamortized debt issuance cost
Original issue discount, net of accretion
Carrying value of 2022 Notes
153
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2022 Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Accretion of original issue discount
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
6,938 $
351
165
7,454 $
6,938 $
1,305 $
49
31
1,385 $
— $
—
—
—
—
—
2024 Notes
On July 14, 2014, the Company and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the
“Third Supplemental Indenture”) to the Base Indenture between the Company and the 2024 Trustee, dated July 14, 2014, relating to
the Company’s issuance, offer and sale of $100.0 million aggregate principal amount the 2024 Notes. On August 6, 2014, the
underwriters issued notification to exercise their over-allotment option for an additional $3.0 million in aggregate principal amount of
the 2024 Notes.
On May 2, 2016, the Company closed an underwritten public offering of an additional $72.9 million in aggregate principal
amount of the 2024 Notes. The $72.9 million in aggregate principal amount includes $65.4 million from the initial offering on April
21, 2016 and $7.5 million as a result of underwriters exercising a portion of their option to purchase up to an additional $9.8 million in
aggregate principal to cover overallotments on April 29, 2016.
On June 27, 2016, the Company closed an underwritten public offering of an additional $60.0 million in aggregate principal
amount of the 2024 Notes. On June 30, 2016, the underwriters exercised their option to purchase up to an additional $9.0 million in
aggregate principal to cover overallotments, resulting in total aggregate principal of $69.0 million from the offering.
On October 11, 2016, the Company entered into a debt distribution agreement, pursuant to which it may offer for sale, from
time to time, up to $150.0 million in aggregate principal amount of 2024 Notes through FBR Capital Markets & Co. acting as its sales
agent (the “2024 Notes Agent”). Sales of the 2024 Notes may be made in negotiated transactions or transactions that are deemed to be
“at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE, or similar
securities exchange or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at
negotiated prices.
The 2024 Notes Agent receives a commission from the Company equal to up to 2.00% of the gross sales of any 2024 Notes sold
through the 2024 Notes Agent under the debt distribution agreement. The 2024 Notes Agent is not required to sell any specific
principal amount of the 2024 Notes, but will use its commercially reasonable efforts consistent with its sales and trading practices to
sell the 2024 Notes. The 2024 Notes are expected to trade “flat,” which means that purchasers in the secondary market will not pay,
and sellers will not receive, any accrued and unpaid interest on the 2024 Notes that is not reflected in the trading price.
During the year ended December 31, 2018, the Company did not sell any notes under the debt distribution agreement. During
the year ended December 31, 2017, the Company sold 225,457 notes for approximately $5.6 million in aggregate principal amount. As
of December 31, 2018, approximately $136.4 million in aggregate principal amount remains available for issuance and sale under the
debt distribution agreement.
All issuances of 2024 Notes rank equally in right of payment and form a single series of notes.
The 2024 Notes will mature on July 30, 2024 and may be redeemed in whole or in part at the Company’s option at any time or
from time to time on or after July 30, 2017, upon not less than 30 days nor more than 60 days written notice by mail prior to the date
fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid
interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for
redemption. The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on January 30, April 30, July 30 and
October 30 of each year, commencing on July 30, 2014, and trade on the NYSE under the trading symbol “HTGX.”
154
The 2024 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other outstanding
and future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is
subordinated to the 2024 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including
indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets
securing such indebtedness; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the
Company’s subsidiaries.
The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants
requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18
(a)(1)(A) of the 1940 Act as modified by Section 61(a)(1) of the 1940 Act and to comply with the restrictions on dividends and other
distributions as well as the purchase of capital stock set forth in Section 18(a)(1)(B) of the 1940 Act as modified by Section 61(a)(1)
of the 1940 Act. These covenants are subject to important limitations and exceptions that are described in the Base Indenture, as
supplemented by the Third Supplemental Indenture. The Base Indenture, as supplemented by the Third Supplemental Indenture, also
contains certain reporting requirements, including a requirement that the Company provide financial information to the holders of the
2024 Notes and the 2024 Trustee if the Company should no longer be subject to the reporting requirements under the Exchange Act of
1934, as amended (the “Exchange Act”). The Base Indenture provides for customary events of default and further provides that the
2024 Trustee or the holders of 25% in aggregate principal amount of the outstanding 2024 Notes in a series may declare such 2024
Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. As of
December 31, 2018, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third
Supplemental Indenture.
On October 24, 2017, the Board of Directors approved a redemption of $75.0 million of outstanding aggregate principal amount
of the 2024 Notes, which were redeemed on November 23, 2017. On February 9, 2018, the Board of Directors approved a redemption
of $100.0 million of outstanding aggregate principal amount of the 2024 Notes and notice for such redemption was provided. The
Company redeemed this portion of the 2024 Notes on April 2, 2018. Further, on December 7, 2018, our 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. See “Note 14 – Subsequent Events.”
As of December 31, 2018 and December 31, 2017, the components of the carrying value of the 2024 Notes were as follows:
(in thousands)
Principal amount of debt
Unamortized debt issuance cost
Original issue premium, net of amortization
Carrying value of 2024 Notes
December 31, 2018
$
December 31, 2017
83,510 $
(1,686 )
28
81,852 $
183,510
(4,591 )
82
179,001
$
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2024 Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Amortization of original issue premium
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
6,830 $
2,905
(54 )
9,681 $
7,858 $
15,610 $
3,050
(56 )
18,604 $
16,370 $
11,775
686
3
12,464
10,873
2025 Notes
On April 26, 2018, the Company issued $75.0 million in aggregate principal amount of the 2025 Notes. The 2025 Notes were
issued pursuant to the 2025 Notes Indenture. The sale of the 2025 Notes generated net proceeds of approximately $72.4 million.
Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were
approximately $2.6 million.
The 2025 Notes will mature on April 30, 2025, unless previously repurchased in accordance with their terms. The 2025 Notes
bear interest at a rate of 5.25% per year payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year,
commencing on July 30, 2018 and trade on the NYSE under the symbol “HCXZ.”
155
The 2025 Notes will be the Company’s direct unsecured obligations and rank pari passu, or equally in right of payment, with all
outstanding and future unsecured unsubordinated indebtedness issued by the Company.
The Company may redeem some or all of the 2025 Notes at any time, or from time to time, at the redemption price set forth
under the terms of the indenture after April 30, 2021. No sinking fund is provided for the 2025 Notes. The 2025 Notes were issued in
denominations of $25 and integral multiples of $25 thereof. As of December 31, 2018, the Company was in compliance with the terms
of the 2025 Notes Indenture.
As of December 31, 2018 and December 31, 2017, the components of the carrying value of the 2025 Notes were as follows:
(in thousands)
Principal amount of debt
Unamortized debt issuance cost
Carrying value of 2025 Notes
December 31, 2018
December 31, 2017
$
$
75,000 $
(2,410 )
72,590 $
—
—
—
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2025 Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
2,680 $
221
2,901 $
2,013 $
— $
—
— $
— $
—
—
—
—
2033 Notes
On September 24, 2018, the Company issued $40.0 million in aggregate principal amount of the 2033 Notes. The 2033 Notes
were issued pursuant to the 2033 Notes Indenture. The sale of the 2033 Notes generated net proceeds of approximately $38.4 million.
Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were
approximately $1.6 million.
The 2033 Notes will mature on October 30, 2033, unless previously repurchased in accordance with their terms. The 2033 Notes
bear interest at a rate of 6.25% per year payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year,
commencing on October 30, 2018 and trade on the NYSE under the symbol “HCXY.”
The 2033 Notes will be the Company’s direct unsecured obligations and rank pari passu, or equally in right of payment, with all
outstanding and future unsecured unsubordinated indebtedness issued by the Company.
The Company may redeem some or all of the 2033 Notes at any time, or from time to time, at the redemption price set forth
under the terms of the indenture after October 30, 2023. No sinking fund is provided for the 2033 Notes. The 2033 Notes were issued
in denominations of $25 and integral multiples of $25 thereof. As of December 31, 2018, the Company was in compliance with the
terms of the 2033 Notes Indenture.
As of December 31, 2018 and December 31, 2017, the components of the carrying value of the 2033 Notes were as follows:
(in thousands)
Principal amount of debt
Unamortized debt issuance cost
Carrying value of 2033 Notes
December 31, 2018
December 31, 2017
$
$
40,000 $
(1,573 )
38,427 $
—
—
—
156
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2033 Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
674 $
25
699 $
250 $
— $
—
— $
— $
—
—
—
—
2021 Asset-Backed Notes
On November 13, 2014, the Company completed a $237.4 million term debt securitization in connection with which an affiliate
of the Company made an offer of $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes, which were rated
A(sf) by KBRA. The 2021 Asset-Backed Notes were sold by Hercules Capital Funding Trust 2014-1 pursuant to a note purchase
agreement, dated as of November 13, 2014, by and among the Company, Hercules Capital Funding 2014-1, LLC as trust depositor
(the “2014 Trust Depositor”), Hercules Capital Funding Trust 2014-1 as issuer (the “2014 Securitization Issuer”), and Guggenheim
Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies
and secured by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has an 18-month
reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021
Asset-Backed Notes is paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have
a stated maturity of April 16, 2021.
In July 2018, changes in the payment schedule of obligors in the 2021 Asset-Backed Notes collateral pool triggered a rapid
amortization event in accordance with the sale and servicing agreement for the 2021 Asset-Backed Notes. Due to this event, the 2021
Asset-Backed Notes were fully repaid as of October 16, 2018. At December 31, 2018, there is no outstanding principal balance for the
2021 Asset-Backed Notes. At December 31, 2017, the 2021 Asset-Backed Notes had an outstanding principal balance of $49.2
million.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2021 Asset-Backed Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
2017
2016
689 $
503
1,192 $
833 $
2,830 $
731
3,561 $
3,036 $
4,366
1,071
5,437
4,396
Year Ended December 31,
Under the terms of the 2021 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through
interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and
principal payments on the 2021 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash.
As the 2021 Asset-Backed Notes were fully repaid as of October 16, 2018, there were no funds segregated as restricted cash related to
the 2021 Asset-Backed Notes at December 31, 2018. There was approximately $3.7 million of restricted cash as of December 31,
2017.
2027 Asset-Backed Notes
On November 1, 2018, the Company completed a term debt securitization in connection with which an affiliate of the Company
made an offering of $200.0 million in aggregate principal amount of the 2027 Asset-Backed Notes. The 2027 Asset-Backed Notes
were rated A(sf) by KBRA.
The 2027 Asset-Backed Notes were issued by the 2018 Securitization Issuer pursuant to a note purchase agreement, dated as of
October 25, 2018, by and among the Company, the 2018 Trust Depositor, the 2018 Securitization Issuer, and Guggenheim Securities,
LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain portfolio companies of the Company and secured
by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has a reinvestment period
with a scheduled termination date of October 20, 2020 during which time principal collections may be reinvested into additional
eligible loans. Interest on the 2027 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.605% per
annum. The 2027 Asset-Backed Notes have a stated maturity of November 22, 2027.
157
At December 31, 2018, the 2027 Asset-Backed Notes had an outstanding principal balance of $200.0 million. There is no
outstanding principal balance for the 2027 Asset-Backed Notes at December 31, 2017.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the 2027 Asset-Backed Notes are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
1,509 $
44
1,553 $
1,254 $
— $
—
— $
— $
—
—
—
—
Under the terms of the 2027Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through
proceeds from the sale of the 2027 Asset-Backed Notes and through interest and principal collections from the underlying securitized
debt portfolio, which may be used to pay monthly interest and principal payments on the 2027 Asset-Backed Notes. The Company has
segregated these funds and classified them as restricted cash. There was approximately $11.6 million of restricted cash as of
December 31, 2018. There were no funds segregated as restricted cash related to the 2027 Asset-Backed Notes as of December 31,
2017.
Convertible Notes
2016 Convertible Notes
In April 2011, the Company issued $75.0 million in aggregate principal amount of 6.00% convertible notes due 2016 (the “2016
Convertible Notes”). The 2016 Convertible Notes were fully settled on or before their contractual maturity date of April 15, 2016.
Prior to the close of business on October 14, 2015, holders were able to convert their 2016 Convertible Notes only under certain
circumstances set forth in the indenture governing the 2016 Convertible Notes. On or after October 15, 2015 until the close of
business on the scheduled trading day immediately preceding the maturity date, holders were able to convert their 2016 Convertible
Notes at any time. Throughout the life of the 2016 Convertible Notes, holders of approximately $74.8 million of the 2016 Convertible
Notes exercised their conversion rights. These 2016 Convertible Notes were settled with a combination of cash equal to the
outstanding principal amount of the 2016 Convertible Notes and approximately 1.6 million shares of the Company’s common stock,
or $24.3 million.
The 2016 Convertible Notes were accounted for in accordance with ASC Subtopic 470-20 (“Debt Instruments with Conversion
and Other Options”). In accounting for the 2016 Convertible Notes, the Company estimated at the time of issuance that the values of
the debt and the embedded conversion feature of the 2016 Convertible Notes were approximately 92.8% and 7.2%, respectively. The
original issue discount of 7.2% attributable to the conversion feature of the 2016 Convertible Notes was recorded in “capital in excess
of par value” in the Consolidated Statement of Assets and Liabilities. As a result, the Company recorded interest expense comprised of
both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of
approximately 8.1%.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense, fees and cash paid for interest
expense for the 2016 Convertible Notes were as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Accretion of original issue discount
Total interest expense and fees
Cash paid for interest expense
$
$
$
2018
Year Ended December 31,
2017
2016
— $
—
—
— $
— $
— $
—
—
— $
— $
352
44
82
478
440
The estimated effective interest rate of the debt component of the 2016 Convertible Notes, equal to the stated interest of 6.0%
plus the accretion of the original issue discount, was approximately 8.1% for the year ended December 31, 2016.
158
2022 Convertible Notes
On January 25, 2017, the Company issued $230.0 million in aggregate principal amount of the 2022 Convertible Notes, which
amount includes the additional $30.0 million aggregate principal amount of 2022 Convertible Notes issued pursuant to the initial
purchaser’s exercise in full of its overallotment option. The 2022 Convertible Notes were issued pursuant to an Indenture, dated
January 25, 2017 (the “2022 Convertible Notes Indenture”), between the Company and U.S. Bank, National Association, as trustee
(the “2022 Trustee”). The sale of the 2022 Convertible Notes generated net proceeds of approximately $225.5 million, including $4.5
million of debt issuance costs.
The 2022 Convertible Notes mature on February 1, 2022, unless previously converted or repurchased in accordance with their
terms. The 2022 Convertible Notes bear interest at a rate of 4.375% per year payable semiannually in arrears on February 1 and
August 1 of each year, commencing on August 1, 2017.
The 2022 Convertible Notes are unsecured obligations of the Company and rank senior in right of payment to the Company’s
future indebtedness that is expressly subordinated in right of payment to the 2022 Convertible Notes; equal in right of payment to the
Company’s existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of the
Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the
assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by
the Company’s subsidiaries, financing vehicles or similar facilities.
Prior to the close of business on the business day immediately preceding August 1, 2021, holders may convert their 2022
Convertible Notes only under certain circumstances set forth in the 2022 Convertible Notes Indenture. On or after August 1, 2021
until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert their 2022
Convertible Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of
its common stock or a combination of cash and shares of its common stock. The conversion rate is initially 60.9366 shares of common
stock per $1,000 principal amount of 2022 Convertible Notes (equivalent to an initial conversion price of approximately $16.41 per
share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and
unpaid interest. In addition, if certain corporate events occur prior to the maturity date, the Company will increase the conversion rate
for a holder who elects to convert its 2022 Convertible Notes in connection with such a corporate event in certain circumstances. As of
December 31, 2018, the conversion rate was 60.9366 shares of common stock per $1,000 principal amount of Convertible Senior
Notes (equivalent to an adjusted conversion price of approximately $16.41 per share of common stock).
The Company may not redeem the 2022 Convertible Notes at its option prior to maturity. No sinking fund is provided for the
2022 Convertible Notes. In addition, if certain corporate events occur, holders of the 2022 Convertible Notes may require the
Company to repurchase for cash all or part of their 2022 Convertible Notes at a repurchase price equal to 100% of the principal
amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required
repurchase date.
The 2022 Convertible Notes Indenture contains certain covenants, including covenants requiring the Company to comply with
Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the
holders of the 2022 Convertible Notes and the 2022 Trustee if the Company ceases to be subject to the reporting requirements of the
Exchange Act. These covenants are subject to important limitations and exceptions that are described in the 2022 Convertible Notes
Indenture. The Company offered and sold the 2022 Convertible Notes to the initial purchaser in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act, for resale by the initial purchaser to qualified institutional buyers (as
defined in the Securities Act) pursuant to the exemption from registration provided by Rule 144A under the Securities Act. The
Company relied on these exemptions from registration based in part on representations made by the initial purchaser in connection
with the sale of the 2022 Convertible Notes.
The 2022 Convertible Notes are accounted for in accordance with ASC Subtopic 470-20 (“Debt Instruments with Conversion
and Other Options”). In accounting for the 2022 Convertible Notes, the Company estimated at the time of issuance that the values of
the debt and the embedded conversion feature of the 2022 Convertible Notes were approximately 98.5% and 1.5%, respectively. The
original issue discount of 1.5% or $3.4 million, attributable to the conversion feature of the 2022 Convertible Notes was recorded in
“capital in excess of par value” in the Consolidated Statement of Assets and Liabilities. As a result, the Company records interest
expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective
interest rate of approximately 4.76%.
159
As of December 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Convertible Notes were as
follows:
(in thousands)
Principal amount of debt
Unamortized debt issuance cost
Original issue discount, net of accretion
Carrying value of 2022 Convertible Notes
December 31, 2018 December 31, 2017
230,000
$
(3,715 )
(2,797 )
223,488
230,000 $
(2,823 )
(2,126 )
225,051 $
$
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense, fees and cash paid for interest
expense for the 2022 Convertible Notes were as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Accretion of original issue discount
Total interest expense and fees
Cash paid for interest expense
2018
Year Ended December 31,
2017
2016
$
$
$
10,063 $
892
671
11,626 $
10,062 $
9,392 $
781
615
10,788 $
5,199 $
—
—
—
—
—
As of December 31, 2018, the Company was in compliance with the terms of the indentures governing the 2022 Convertible Notes.
Credit Facilities
As of December 31, 2018 and December 31, 2017, the Company has two available credit facilities, the Wells Facility and the
Union Bank Facility.
Wells Facility
On June 29, 2015, the Company, through a special purpose wholly-owned subsidiary, Hercules Funding II LLC (“Hercules
Funding II”), entered into an Amended and Restated Loan and Security Agreement with Wells Fargo Capital Finance, LLC, as a
lender and as the arranger and the administrative agent, and the lenders party thereto from time to time.
As of December 31, 2018, the maturity date of the Wells Facility was August 2, 2019, unless terminated sooner in accordance
with its terms. On January 11, 2019, the Company entered into the Seventh Amendment to the Wells Facility, which extended the
maturity date to January 12, 2023.
Under the Wells Facility, Wells Fargo Capital Finance, LLC made commitments of $75.0 million. Alostar Bank of Commerce
made commitments of $20.0 million, and Everbank Commercial Finance Inc. made commitments of $25.0 million. On July 31, 2018,
the Company entered into a further amendment to the Wells Facility to extend the maturity date and fully repay the pro-rata portion of
outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc., thereby resigning both as lenders and
terminating their commitments thereunder.
The Wells Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of
$300.0 million, funded by additional lenders and with the agreement of Wells Fargo and subject to other customary conditions. The
Company expects to continue discussions with various other potential lenders to join the facility; however, there can be no assurances
that additional lenders will join the Wells Facility. Borrowings under the Wells Facility generally bear interest at a rate per annum
equal to LIBOR plus 3.25%, and the Wells Facility has an advance rate of 50% against eligible debt investments. The Wells Facility is
secured by all of the assets of Hercules Funding II. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50%
depending on the average monthly outstanding balance under the facility relative to the maximum amount of commitments at such
time. For the years ended December 31, 2018 and 2017, this non-use fee was approximately $397,000 and $604,000, respectively.
The Wells Facility also includes various financial and other covenants applicable to the Company and the Company’s
subsidiaries, in addition to those applicable to Hercules Funding II, including covenants relating to certain changes of control of the
Company and Hercules Funding II. Among other things, these covenants also require the Company to maintain certain financial ratios,
including a maximum debt to worth ratio, minimum interest coverage ratio, minimum portfolio funding liquidity, and a minimum
tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $500.0 million plus 90% of
the cumulative amount of equity raised after June 30, 2014.
160
As of December 31, 2018, the minimum tangible net worth covenant has increased to $870.8 million as a result of the public
offering of 18.2 million shares of common stock for total gross proceeds of approximately $242.8 million under the Prior Equity
Distribution Agreement through February 2017, and the Equity Distribution Agreement for the issuance of 1.6 million shares for gross
proceeds of $20.5 million during 2017, and the issuance of 12.0 million shares for gross proceeds of $148.7 million during the year
ended December 31, 2018. See “Note 6 – Stockholder’s Equity.”
The Wells Facility provides for customary events of default, including, without limitation, with respect to payment defaults,
breach of representations and covenants, certain key person provisions, cross acceleration provisions to certain other debt, lien and
judgment limitations, and bankruptcy.
On June 20, 2011 the Company paid $1.1 million in structuring fees in connection with the original Wells Facility. In
connection with an amendment to the original Wells Facility in August 2014, and subsequent amendments in December 2015 and July
2018, the Company paid an additional $750,000, $188,000, and $47,000 in structuring fees, respectively. These fees are being
amortized through the end of the term of the Wells Facility.
The Company had aggregate draws of $188.5 million on the available facility during the year ended December 31, 2018 offset
by repayments of $175.4 million. As of December 31, 2018, the Company has borrowings outstanding of $13.1 million on the facility.
There were no borrowings outstanding on the facility at December 31, 2017.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the Wells Facility are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
2018
Year Ended December 31,
2017
2016
$
$
$
1,181 $
178
1,359 $
1,181 $
2 $
324
326 $
41 $
539
492
1,031
577
Union Bank Facility
On May 5, 2016, the Company, through a special purpose wholly owned subsidiary, Hercules Funding III LLC (“Hercules
Funding III”), as borrower, entered into the Union Bank Facility with Union Bank, as the arranger and administrative agent, and the
lenders party to the Union Bank Facility from time to time. The Union Bank Facility replaced the Prior Union Bank Facility. Any
references to amounts related to the Union Bank Facility prior to May 5, 2016 were incurred and relate to the Prior Union Bank
Facility.
On July 18, 2016, the Company entered into the First Amendment to the Loan and Security Agreement, dated as of May 5, 2016
with Union Bank. The Amendment amends certain definitions relating to borrowings which accrue interest based on the London
Interbank Offered Rate (“LIBOR Loans”) and (ii) the method(s) for calculating interest on and the paying of certain fees related to
such LIBOR Loans.
The Union Bank Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of
$200.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions. There
can be no assurances that additional lenders will join the Union Bank Facility to increase available borrowings. Borrowings under the
Union Bank Facility generally bear interest at either (i) if such borrowing is a base rate loan, a base rate per annum equal to the federal
funds rate plus 1.00%, LIBOR plus 1.00% or Union Bank’s prime rate, in each case, plus a margin of 1.25% or (ii) if such borrowing
is a LIBOR loan, a rate per annum equal to LIBOR plus 3.25%, and the Union Bank Facility generally has an advance rate of 50%
against eligible debt investments. The Union Bank Facility is secured by all of the assets of Hercules Funding III.
The Company paid a one-time $562,500 structuring fee in connection with the Union Bank Facility. The Union Bank Facility
requires payment of a non-use fee during the revolving credit availability period on a scale of 0.25% to 0.50% depending on the
average monthly outstanding balance under the facility relative to the maximum amount of commitments at such time. For the years
ended December 31, 2018 and 2017, the Company incurred non-use fees under the Union Bank Facility and Prior Union Bank Facility
of approximately $298,000 and $380,000, respectively.
The Union Bank Facility also includes various financial and other covenants applicable to the Company and the Company’s
subsidiaries, in addition to those applicable to Hercules Funding III, including covenants relating to certain changes of control of the
Company and Hercules Funding III. Among other things, these covenants also require the Company to maintain certain financial
ratios, including a maximum debt to worth ratio, minimum interest coverage ratio, minimum portfolio funding liquidity, and a
161
minimum tangible net worth in an amount that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after
June 30, 2014.
On May 25, 2018, the Company entered into the Second Amendment to the Union Bank Facility with Union Bank, as the
arranger and administrative agent, and the lenders party thereto from time to time. The amendment amends certain provisions of the
Union Bank Facility to increase Union Bank’s commitments thereunder from $75.0 million to $100.0 million.
As of December 31, 2018, the minimum tangible net worth covenant increased to $914.1 million as a result of the public
offering of 18.2 million shares of common stock for a total net proceeds of approximately $239.8 million under the Prior Equity
Distribution Agreement through February 2017, and the Equity Distribution Agreement for the issuance of 1.6 million shares for net
proceeds of $20.0 million during 2017, and the issuance of 12.0 million shares for net proceeds of $144.7 million during the year
ended December 31, 2018. See “Note 6 – Stockholder’s Equity.”
The Union Bank Facility provides for customary events of default, including with respect to payment defaults, breach of
representations and covenants, servicer defaults, certain key person provisions, cross default provisions to certain other debt, lien and
judgment limitations, and bankruptcy.
The Union Bank Facility matures on May 5, 2020, unless terminated sooner in accordance with its terms.
In connection with the Union Bank Facility, the Company and Hercules Funding III also entered into the Sale Agreement, by
and among Hercules Funding III, as borrower, the Company, as originator and servicer, and Union Bank, as agent. Under the Sale
Agreement, the Company agrees to (i) sell or transfer certain loans to Hercules Funding III under the Union Bank Facility and (ii) act
as servicer for the loans sold or transferred.
The Company had aggregate draws of $165.0 million on the available facility during the year ended December 31, 2018, offset
by repayments of $125.2 million. As of December 31, 2018, the Company has borrowings outstanding of $39.8 million on the facility.
There were no borrowings outstanding on the Facility at December 31, 2017.
For the years ended December 31, 2018, 2017 and 2016, the components of interest expense and related fees and cash paid for
interest expense for the previous and current Union Bank Facility are as follows:
(in thousands)
Interest expense
Amortization of debt issuance cost (loan fees)
Total interest expense and fees
Cash paid for interest expense
2018
Year Ended December 31,
2017
2016
$
$
$
1,667 $
338
2,005 $
1,629 $
— $
388
388 $
80 $
189
356
545
38
5. Income Taxes
The Company intends to operate so as to qualify to be subject to tax as a RIC under Subchapter M of the Code and, as such, will
not be subject to U.S. federal income tax on the portion of taxable income (including gains) distributed as dividends for U.S. federal
income tax purposes to stockholders. Taxable income includes the Company’s taxable interest, dividend and fee income, reduced by
certain deductions, as well as taxable net realized securities gains. Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net
unrealized appreciation or depreciation, as such gains or losses are not included in taxable income until they are realized.
To qualify and be subject to tax as a RIC, the Company is required to meet certain income and asset diversification tests in
addition to distributing dividends of an amount generally at least equal to 90% of its investment company taxable income, as defined
by the Code and determined without regard to any deduction for distributions paid, to its stockholders. The amount to be paid out as a
distribution is determined by the Board of Directors each quarter and is based upon the annual earnings estimated by the management
of the Company. To the extent that the Company’s earnings fall below the amount of dividend distributions declared, however, a
portion of the total amount of the Company’s distributions for the fiscal year may be deemed a return of capital for tax purposes to the
Company’s stockholders.
162
Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions
in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting
purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the
financial statements to reflect their appropriate tax character. Permanent differences may also result from the change in the
classification of short-term gains as ordinary income for tax purposes. Temporary differences arise when certain items of income,
expense, gain or loss are recognized at some time in the future. Also, recent tax legislation requires that income be recognized for tax
purposes no later than when recognized for financial reporting purposes.
During the year ended December 31, 2018 and 2017, the Company reclassified for book purposes amounts arising from
permanent book/tax differences primarily related to accelerated revenue recognition for income tax purposes, respectively, as follows:
(in thousands)
Undistributed net investment income (distributions in excess of investment income) $
Accumulated realized gains
Additional paid-in capital
Year Ended December 31,
2018
2017
3,675 $
9,317
(12,992 )
1,347
6,916
(8,263 )
For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital
gains or a combination thereof. The tax character of distributions paid for the year ended December 31, 2018 was ordinary income in
the amount of $114.2 million with no distributions made from long-term capital gain. The tax character of distributions paid for the
year ended December 31, 2017 was ordinary income in the amount of $89.3 million.
The aggregate gross unrealized appreciation of the Company’s investments over cost for U.S. federal income tax purposes was
$39.6 million and $32.5 million as of December 31, 2018 and 2017, respectively. The aggregate gross unrealized depreciation of the
Company’s investments under cost for U.S. federal income tax purposes was $158.7 million and $119.7 million as of December 31,
2018 and 2017, respectively. The net unrealized depreciation over cost for U.S. federal income tax purposes was $119.1 million and
$87.2 million as December 31, 2018 and 2017, respectively. The aggregate cost of securities for U.S. federal income tax purposes was
$2.0 billion and $1.6 billion as of December 31, 2018 and 2017, respectively.
At December 31, 2018 and 2017, the components of distributable earnings on a tax basis detailed below differ from the amounts
reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary book or tax differences primarily arising
from the treatment of loan related yield enhancements.
(in thousands)
Accumulated Capital Gains
Other Temporary Differences
Undistributed Ordinary Income
Unrealized Depreciation
Components of Distributable Earnings
Year Ended December 31,
2018
2017
$
$
3,200 $
(6,875 )
30,669
(119,853 )
(92,859 ) $
(4,435 )
(563 )
23,010
(85,631 )
(67,619 )
As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the
Company makes distributions treated as dividends for U.S. federal income tax purposes in a timely manner to its stockholders in
respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. The Company will not be subject
to this excise tax on any amount on which the Company incurred U.S. federal corporate income tax (such as the tax imposed on a
RIC’s retained net capital gains).
Depending on the level of taxable income earned in a taxable year, the Company may choose to carry over taxable income in
excess of current taxable year distributions from such taxable income into the next taxable year and incur a 4% excise tax on such
taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next
taxable year under the Code is the total amount of distributions paid in the following taxable year, subject to certain declaration and
payment guidelines. To the extent the Company chooses to carry over taxable income into the next taxable year, distributions declared
and paid by the Company in a taxable year may differ from the Company’s taxable income for that taxable year as such distributions
may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over
into and distributed in the current taxable year, or returns of capital.
The Company has taxable subsidiaries which hold certain portfolio investments in an effort to limit potential legal liability
and/or comply with source-income type requirements contained in the RIC tax provisions of the Code. These taxable subsidiaries are
consolidated for U.S. GAAP and the portfolio investments held by the taxable subsidiaries are included in the Company’s
163
consolidated financial statements and are recorded at fair value. These taxable subsidiaries are not consolidated with the Company for
income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities as a result of their ownership of
certain portfolio investments. Any income generated by these taxable subsidiaries generally would be subject to tax taxed at normal
corporate tax rates based on its taxable income.
For the year ended December 31, 2018, the Company paid approximately $713,000 of income tax and had $345,000 accrued but
unpaid income tax as of the balance sheet. For the year ended December 31, 2017, the Company paid approximately $1.1 million of
income tax and had no accrued but unpaid tax expense as of the balance sheet date.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax
positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the
more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s
policy to recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income
taxes.
Based on an analysis of the Company’s tax position, there are no uncertain tax positions that met the recognition or
measurement criteria. The Company is currently not undergoing any tax examinations. The Company does not anticipate any
significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2015- 2017 federal tax years for the
Company remain subject to examination by the Internal Revenue Service. The 2014-2017 state tax years for the Company remain
subject to examination by the state taxing authorities.
6. Stockholders’ Equity
On August 16, 2013, the Company entered into the Prior Equity Distribution Agreement. On March 7, 2016, the Company
renewed the Prior Equity Distribution Agreement and on December 21, 2016, the Company further amended the agreement to increase
the total shares available under the program. The Prior Equity Distribution Agreement, as amended, provided that the Company may
offer and sell up to 12.0 million shares of its common stock from time to time through JMP, as its sales agent.
On September 7, 2017, the Company terminated the Prior Equity Distribution Agreement and entered into the new Equity
Distribution Agreement. As a result, the remaining shares that were available under the Prior Equity Distribution agreement are no
longer available for issuance. The Equity Distribution Agreement provides that the Company may offer and sell up to 12.0 million
shares of its common stock from time to time through JMP, as its sales agent. Sales of the Company’s common stock, if any, may be
made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act,
including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an
exchange, at prices related to the prevailing market prices or at negotiated prices.
During the year ended December 31, 2018, the Company sold 5.1 million shares of common stock for total accumulated net
proceeds of approximately $63.3 million, including $1.5 of offering expenses under the Equity Distribution Agreement. During the
year ended December 31, 2017, the Company sold 4.9 million shares of common stock, of which 3.3 million shares and 1.6 million
were issued under the Prior Equity Distribution Agreement and the Equity Distribution Agreement, respectively. During the year
ended December 31, 2017, the Company received total accumulated net proceeds of approximately $66.9 million, including $962,000
of offering expenses, from these sales, of which $46.9 million, including offering expenses of $532,000, was received under the Prior
Equity Distribution Agreement and $20.0 million, including offering expenses of $430,000, was received under the Equity
Distribution Agreement, respectively.
The Company generally uses net proceeds from these offerings to make investments, to repurchase or pay down liabilities and
for general corporate purposes. As of December 31, 2018, approximately 5.3 million shares remain available for issuance and sale
under the Equity Distribution Agreement.
On June 14, 2018, the Company closed the June 2018 Equity Offering. The offering generated net proceeds, before expenses, of
$81.3 million, including the underwriting discount and commissions of $2.6 million.
On December 17, 2018, the Company’s Board of Directors authorized a stock repurchase plan permitting us to repurchase up to
$25.0 million of our common stock. We may repurchase shares of our common stock in the open market, including block purchases,
at prices that may be above or below the net asset value as reported in the most recently published financial statements, in accordance
with the guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act. We expect that the share repurchase program will
be in effect until June 18, 2019, or until the approved dollar amount has been used to repurchase shares. During the year ended
December 31, 2018, we repurchased 376,466 shares of our common stock at an average price per share of $10.77 and a total cost of
164
approximately $4.1 million. As of December 31, 2018, approximately $20.9 million of common stock remains eligible for repurchase
under the stock repurchase plan.
The Company has issued stock options for common stock subject to future issuance, of which 481,032 and 590,525 were
outstanding at December 31, 2018 and December 31, 2017, respectively.
7. Equity Incentive Plans
The Company and its stockholders authorized and adopted the 2004 Plan for purposes of attracting and retaining the services of
its executive officers and key employees.
The Company and its stockholders have authorized and adopted the 2006 Plan for purposes of attracting and retaining the
services of its Board of Directors. On June 21, 2017, the 2006 Plan expired in accordance with its terms and no additional awards may
be granted under the 2006 Plan.
On June 21, 2007, the stockholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of
restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to
10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock
issued or delivered by the Company during the terms of the Plans. The amendments further specify that no one person shall be granted
awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of
voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with
any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities,
except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants,
options and rights issued to the Company’s directors, officers and employees, together with any restricted stock issued pursuant to the
Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result
from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the
time of issuance shall not exceed 20% of the Company’s outstanding voting securities.
During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short
and long-term awards. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 continue to vest on a monthly basis
following their one-year anniversary over the succeeding 36 months. Under the 2004 Plan, restricted stock awarded subsequent to
March 3, 2013 vests subject to continued employment based on two vesting schedules: short-term awards vest one-half on the one
year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the
one year anniversary of the date of grant and quarterly over the succeeding 36 months. No restricted stock was granted pursuant to the
2004 Plan prior to 2009.
On December 29, 2016, the Board of Directors approved an amendment and restatement of the 2004 Plan. The amended plan
provides, in addition to the preexisting types of awards available for grant thereunder and among other things, (1) for the grant of
restricted stock units; (2) for the deferral of the receipt of the shares of the Company’s common stock underlying vested restricted
stock units; (3) that grantees may receive up to 10% of the value of the tentative restricted stock unit grants proposed for any grantee
in the form of an option to acquire shares of the Company’s common stock; (4) that awards of restricted stock units may include
performance vesting conditions; (5) that awards may require that all or a portion of the shares of the Company’s common stock
delivered in respect of any vested restricted stock unit award be subject to a specified post-delivery holding period; and (6) that
restricted stock unit awards may accrue distribution equivalents in respect of the Company’s common stock underlying any restricted
stock unit award payable in the form of cash or additional shares of the Company’s common stock to the extent, and in respect of, any
vested restricted stock units.
On May 2, 2018, the Company granted long-term Retention Performance Stock Unit awards (the “Retention PSUs”) and
separate cash bonus awards with similar terms (the “Cash Awards”) to senior personnel under its 2004 Equity Incentive Plan. The
awards are designed to provide incentives that increase along with the total shareholder return (“TSR”). On May 2, 2018, the target
number of Retention PSUs granted to senior personnel was 1,299,757 in the aggregate and the target amount of the Cash Awards
granted to senior personnel was $4.0 million in the aggregate. As of December 31, 2018, there were 1.3 million Retention PSUs
outstanding and the target amount of the Cash Awards was $3.0 million in the aggregate.
The Retention PSUs and Cash Awards do not vest until the fourth anniversary “cliff vest” of the grant date (or a change in
control of the Company, if earlier) and the Retention PSUs must generally be held and not disposed of until the fifth anniversary of the
grant date, except in the event of death, disability or a change in control (the “Performance Period”). No Retention PSUs or Cash
Awards will vest if the Company’s TSR relative to certain specified publicly traded business development companies (BDCs) is not at
or above the 25th percentile level of such BDCs. 50% of the target Cash Award and target number of Retention PSUs will vest if the
Company’s TSR performance relative to such BDCs is at the 25th percentile level. 100% of the target Cash Award and target number
165
of Retention PSUs will vest if the Company’s TSR performance relative to such BDCs is at the 50th percentile level. 200% of the
target Cash Award and target number of Retention PSUs will vest if the Company’s TSR performance relative to such BDCs is at the
90th percentile level. If the Company’s TSR performance is between the 25th percentile and the 50th percentile, or between the 50th
percentile and the 90th percentile, of such BDCs, the amount of the Cash Awards vested and payable and the number of vested and
payable Retention PSUs will be determined by linear interpolation between the foregoing metrics. Dividend equivalents will accrue in
respect only of the Retention PSUs in the form of additional Retention PSUs, but will not be paid unless the Retention PSUs to which
such dividend equivalents relate actually vest. The Cash Awards are not eligible to accrue dividend equivalents.
The Company follows ASC Topic 718 (“Compensation – Stock Compensation”) to account for the Retention PSUs and Cash
Awards granted. Under ASC Topic 718, compensation cost associated with Retention PSUs is measured at the grant date based on the
fair value of the award and is recognized over the Performance Period. As the Cash Awards are settled in cash, the award is expensed
as a liability, and will be re-measured at each reporting period until the Performance Period is complete. The compensation expense
for these awards is based on the per unit grant date valuation using a Monte-Carlo simulation multiplied by the target payout level.
The payout level is calculated based the Company’s TSR relative to specified BDCs during the performance period.
As of December 31, 2018, all of Retention PSUs and Cash Awards were unvested and there was approximately $15.2 million of
total unrecognized compensation costs related to the Retention PSUs. These costs are expected to be recognized over a weighted
average remaining vesting period of 3.34 years. As of December 31, 2018, there was approximately $554,000 of total compensation
expense related to the Cash Awards. The accumulated expense related to the Cash Awards is included within the Consolidated
Statement of Assets and Liabilities.
On May 13, 2018, the Board of Directors further amended and restated the 2004 Plan and renamed it the Hercules Capital, Inc.
Amended and Restated 2018 Equity Incentive Plan. Under the 2004 Plan, prior to the amendment and restatement, the Company was
authorized to issue 12.0 million shares of common stock. The 2018 Equity Incentive Plan, among other things, increased the number
of shares available for issuance to eligible participants by an additional 6.7 million shares. Unless sooner terminated by the Board, the
2018 Equity Incentive Plan will terminate on the day before the tenth anniversary of the date the 2018 Equity Incentive Plan was
initially adopted in 2018 by the Board. On May 13, 2018, the Board of Directors adopted the Director Plan. The Director Plan
provides equity compensation in the form of restricted stock to the Company’s non-employee directors. Subject to certain adjustments,
the maximum aggregate number of shares of stock that may be authorized for issuance as restricted stock awards granted under the
Director Plan is 300,000 shares. Unless sooner terminated by the Board, the Director Plan will terminate on the day before the tenth
anniversary of the date the Director Plan was initially adopted in 2018 by the Board. The 2018 Equity Incentive Plan and the Director
Plan were each approved by stockholders on June 28, 2018. For further information, please see our Proxy Statement filed with the
SEC on May 29, 2018 in connection with our 2018 Annual Meeting of Stockholders.
Additionally, on May 29, 2018, the Company filed an exemptive application with the SEC and an amendment to the application
on September 27, 2018, with respect to the 2018 Equity Incentive Plan and the Director Plan for an exemptive order from certain
provisions of the 1940 Act. On January 30, 2019, the Company received approval from the SEC on its request for exemptive relief
that permits it to issue restricted stock to non-employee directors under the Director Plan and restricted stock and restricted stock units
to certain of its employees, officers, and directors (excluding non-employee directors) under the 2018 Equity Incentive Plan. The
exemptive order also allows participants in the Director Plan and the 2018 Equity Incentive Plan to (i) elect to have the Company
withhold shares of its common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance
exercise”) and/or (ii) permit the holders of restricted stock to elect to have it withhold shares of its stock to pay the applicable taxes
due on restricted stock at the time of vesting. Each individual would be able to make a cash payment at the time of option exercise or
to pay taxes on restricted stock.
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The following table summarizes the common stock options activities for each of the three periods ended December 31, 2018,
2017, and 2016:
Shares Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Shares Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Expired
Shares Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Expired
Shares Outstanding at December 31, 2018
Shares Expected to Vest at December 31, 2018
Common Stock
Options
Weighted Average
Exercise Price
622,171 $
230,000 $
(36,500 ) $
(82,895 ) $
(64,605 ) $
668,171 $
115,000 $
(29,921 ) $
(39,394 ) $
(123,331 ) $
590,525 $
114,000 $
(63,769 ) $
(53,438 ) $
(106,286 ) $
481,032 $
157,516 $
14.25
12.16
11.05
13.41
15.05
13.73
14.24
11.31
13.98
15.36
13.60
12.55
11.05
13.27
15.08
13.40
13.67
Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be
exercised for a period ending seven years after the date of grant. At December 31, 2018, options for approximately 481,032 shares
were outstanding at a weighted average exercise price of approximately $13.40 per share with weighted average of remaining
contractual term of 4.79 years and an aggregate intrinsic value of $8,000. At December 31, 2018, options for approximately 323,516
shares were exercisable at a weighted average exercise price of approximately $13.67 per share with weighted average of remaining
contractual term of 4.07 years and an aggregate intrinsic value of $7,500.
The Company determined that the fair value of options granted under the Plans during the years ended December 31, 2018,
2017, and 2016 was approximately $57,000, $79,000 and $837,000, respectively. During the years ended December 31, 2018, 2017,
and 2016, approximately $54,000, $73,000 and $169,000 of share-based cost due to stock option grants was expensed, respectively.
As of December 31, 2018, there was approximately $75,000 of total unrecognized compensation costs related to stock options. These
costs are expected to be recognized over a weighted average period of 2.08 years.
The Company follows ASC Topic 718 (“Compensation – Stock Compensation”) to account for stock options granted. Under
ASC Topic 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value
of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of
stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rate and expected option
life. The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table
for each of the three periods ended December 31, 2018, 2017, and 2016 is as follows:
Expected Volatility
Expected Dividends
Expected term (in years)
Risk-free rate
2018
Year Ended December 31,
2017
2016
21.19 %
10 %
4.5
23.07 %
10 %
4.5
23.73 %
10 %
4.5
2.19% - 3.08 %
1.57% - 2.20 %
0.87% - 1.98 %
In 2018, 2017, and 2016, the Company granted approximately 334,995, 10,111 and 555,547 shares, respectively, of restricted
stock awards pursuant to the Plans. The Company determined that the fair values, based on grant date close price, of restricted stock
awards granted under the Plans during the years ended December 31, 2018, 2017, and 2016 were approximately $4.4 million,
$150,000 and $6.7 million. As of December 31, 2018, there was approximately $3.1 million of total unrecognized compensation cost
related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 1.97 years.
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The following table summarizes the activities for the Company’s unvested restricted stock awards for each of the three periods
ended, December 31, 2018, 2017, and 2016:
Unvested Restricted Stock Awards
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2017
Granted
Vested
Forfeited
Unvested at December 31, 2018
Restricted
Stock Awards
Weighted Average
Grant Date Fair Value
13.59
12.02
13.58
12.70
12.54
14.83
12.69
11.91
12.43
13.04
12.47
11.70
12.95
850,072 $
555,547 $
(569,118 ) $
(36,943 ) $
799,558 $
10,111 $
(511,749 ) $
(36,675 ) $
261,245 $
334,995 $
(212,285 ) $
(3,085 ) $
380,870 $
In 2018 and 2017, the Company granted approximately 411,689 and 600,461 shares, respectively, of restricted stock units
pursuant to the Plans. The Company determined that the fair values, based on grant date close price, of restricted stock units granted
under the Plans during the years ended December 31, 2018 and 2017 were approximately $6.8 million and $13.0 million. As of
December 31, 2018 there was approximately $6.2 million of total unrecognized compensation cost related to restricted stock units.
These costs are expected to be recognized over a weighted average period of 1.61 years.
The following table summarizes the activities for the Company’s unvested restricted stock units for the year ended December
31, 2018 and 2017:
Unvested Restricted Stock Units
Unvested at December 31, 2016
Granted
Distribution Equivalent Unit Granted
Vested
Forfeited
Unvested at December 31, 2017
Granted
Distribution Equivalent Unit Granted
Vested (1)
Forfeited
Unvested at December 31, 2018
Restricted
Stock Units
Weighted Average
Grant Date Fair Value
—
14.21
13.02
—
13.40
12.99
13.04
—
14.21
13.38
13.50
— $
600,461 $
54,674 $
— $
(60,813 ) $
594,322 $
411,689 $
103,774 $
(362,630 ) $
(14,622 ) $
732,533 $
(1) Pursuant to the December 29, 2016 amendment and restatement of the 2004 plan, receipt of the shares of the Company’s common stock underlying vested
restricted stock units will be deferred for 4 years from grant date unless certain conditions are met. As such, vested restricted stock units will not be issued as
common stock upon vesting until the completion of the deferral period.
During the years ended December 31, 2018, 2017, and 2016 the Company expensed approximately $8.2 million, $7.2 million
and $7.0 million of compensation expense related to restricted stock awards and restricted stock units, respectively.
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8. Earnings Per Share
Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:
(in thousands, except per share data)
Numerator
Net increase in net assets resulting from operations
Less: Distributions declared-common and restricted shares
Undistributed earnings
Undistributed earnings-common shares
Add: Distributions declared-common shares
$
Numerator for basic and diluted change in net assets per common share
$
Denominator
Basic weighted average common shares outstanding
Common shares issuable
Weighted average common shares outstanding assuming dilution
Change in net assets per common share
Basic
Diluted
2018
Year Ended December 31,
2017
2016
76,496 $
(114,728 )
(38,232 )
(38,232 )
114,153
75,921 $
78,998 $
(103,087 )
(24,089 )
(24,089 )
102,516
78,427 $
68,703
(92,333 )
(23,630 )
(23,630 )
91,065
67,435
90,929
128
91,057
82,519
121
82,640
73,753
22
73,775
$
$
0.83 $
0.83 $
0.95 $
0.95 $
0.91
0.91
In the table above, unvested share-based payment awards that have non-forfeitable rights to distributions or distribution
equivalents are treated as participating securities for calculating earnings per share. Unvested common stock options and restricted
stock units are also considered for the purpose of calculating diluted earnings per share.
For the years ended December 31, 2018 and 2017, the effect of the 2022 Convertible Notes under the treasury stock method
were anti-dilutive and, accordingly, were excluded from the calculation of diluted earnings per share. The 2016 Convertible Notes
were fully settled on or before their contractual maturity date of April 15, 2016, as such there was no potential additional dilutive
effect for the year ended December 31, 2016.
The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti-
dilutive shares. For the year ended December 31, 2018, the number of anti-dilutive shares, as calculated based on the weighted
average closing price of the Company’s common stock for the periods, consisted of 4.2 million shares of 2022 Convertible Notes,
62,462 shares of unvested common stock options, no shares of unvested restricted stock units and 13,444 shares of unvested Retention
PSUs. For the year ended December 31, 2017, the number of anti-dilutive shares consisted of 2.8 million shares of 2022 Convertible
Notes, 46,831 shares of unvested common stock options, and no shares of unvested restricted stock units. For the year ended
December 31, 2016, the number of anti-dilutive shares related to unvested common stock options was 676,133 shares.
At December 31, 2018 and 2017, the Company was authorized to issue 200.0 million shares of common stock with a par value
of $0.001. Each share of common stock entitles the holder to one vote.
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9. Financial Highlights
Following is a schedule of financial highlights for the five years ended December 31, 2018, 2017, 2016, 2015, and 2014:
$
$
$
Per share data (1):
Net asset value at beginning of period
Net investment income
Net realized gain (loss) on investments
Net unrealized appreciation (depreciation) on
investments
Total from investment operations
Net increase (decrease) in net assets from capital share
transactions (1)
Distributions of net investment income (6)
Distributions of capital gains (6)
Stock-based compensation expense included in
investment income (2)
Net asset value at end of period
Ratios and supplemental data:
Per share market value at end of period
Total return (3)
Shares outstanding at end of period
Weighted average number of common shares outstanding
Net assets at end of period
Ratio of total expense to average net assets (4)
Ratio of net investment income before investment gains and
losses to average net assets (4)
Portfolio turnover rate (5)
Weighted average debt outstanding
2018
9.96
1.20
(0.12 )
(0.23 )
0.85
0.23
(1.26 )
—
Year Ended December 31,
2016
2015
2017
$
9.90 $
1.17
(0.32 )
9.94 $
1.36
0.06
$
10.18
1.06
0.07
0.11
0.96
(0.49 )
0.93
0.26
(1.07 )
(0.18 )
0.18
(1.14 )
(0.11 )
(0.51 )
0.62
0.26
(1.04 )
(0.22 )
2014
10.51
1.16
0.32
(0.33 )
1.15
(0.37 )
(1.27 )
—
0.12
9.90
$
0.09
9.96 $
0.10
9.90 $
0.14
9.94
$
0.16
10.18
12.19
$
(9.70 %)
14.88
(1.75 %)
11.05
$
(7.56 %)
13.12 $
1.47 %
84,424
82,519
14.11 $
26.87 %
79,555
73,753
96,501
90,929
$ 955,444
72,118
69,479
$ 840,967 $ 787,944 $ 717,134
64,715
61,862
$ 658,864
10.73 %
11.37 %
11.25 %
11.55 %
10.97 %
11.78 %
38.76 %
11.61 %
49.03 %
13.65 %
36.22 %
10.15 %
46.34 %
10.94 %
56.15 %
$ 826,931
$ 784,455 $ 635,365 $ 615,198
$ 535,127
Weighted average debt per common share
$
9.09
$
9.51 $
8.61 $
8.85
$
8.65
(1)
(2)
(3)
(4)
(5)
All per share activity is calculated based on the weighted average shares outstanding for the relevant period, except net increase (decrease) in net assets from
capital share transactions, which is based on the common shares outstanding as of the relevant balance sheet date.
Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC Topic 718, net investment income includes the expense
associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.
The total return for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 equals the change in the ending market value over the beginning of the
period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the
distribution. As such, the total return is not annualized. The total return does not reflect any sales load that must be paid by investors.
The ratios are calculated based on weighted average net assets for the relevant period and are annualized.
The portfolio turnover rate for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 equals the lesser of investment portfolio purchases or sales
during the period, divided by the average investment portfolio value during the period. As such, portfolio turnover rate is not annualized.
(6)
Includes distributions on unvested restricted stock awards.
170
10. Commitments and Contingencies
The Company’s commitments and contingencies consist primarily of unused commitments to extend credit in the form of loans
to the Company’s portfolio companies. A portion of these unfunded contractual commitments as of December 31, 2018 are dependent
upon the portfolio company reaching certain milestones before the debt commitment becomes available. Furthermore, the Company’s
credit agreements contain customary lending provisions which allow the Company relief from funding obligations for previously
made commitments in instances where the underlying company experiences materially adverse events that affect the financial
condition or business outlook for the Company. Since a portion of these commitments may expire without being drawn, unfunded
contractual commitments do not necessarily represent future cash requirements. As such, the Company’s disclosure of unfunded
contractual commitments includes only those which are available at the request of the portfolio company and unencumbered by
milestones.
At December 31, 2018, the Company had approximately $139.0 million of unfunded commitments, including undrawn
revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones.
The Company also had approximately $55.5 million of non-binding term sheets outstanding at December 31, 2018. Non-binding
outstanding term sheets are subject to completion of the Company’s due diligence and final investment committee approval process,
as well as the negotiation of definitive documentation with the prospective portfolio companies. These non-binding term sheets
generally convert to contractual commitments in approximately 90 days from signing. Not all non-binding term sheets are expected
to close and do not necessarily represent future cash requirements.
The fair value of the Company’s unfunded commitments is considered to be immaterial as the yield determined at the time of
underwriting is expected to be materially consistent with the yield upon funding, given that interest rates are generally pegged to
market indices and given the existence of milestones, conditions and/or obligations imbedded in the borrowing agreements.
As of December 31, 2018, the Company’s unfunded contractual commitments available at the request of the portfolio company,
including undrawn revolving facilities, and unencumbered by milestones are as follows:
(in thousands)
Portfolio Company
Thumbtack, Inc.
Couchbase, Inc.
Impossible Foods, Inc.
Postmates, Inc.
Businessolver.com, Inc.
DocuTAP, Inc.
Achronix Semiconductor Corporation
Clarabridge, Inc.
Evernote Corporation
PH Group Holdings
Xometry, Inc.
Lithium Technologies, Inc.
Fastly, Inc.
Intent Media, Inc.
Emma, Inc.
Convercent, Inc.
Credible Behavioral Health, Inc.
Greenphire, Inc.
Insurance Technologies Corporation
Salsa Labs, Inc.
Total
Unfunded
Commitments (1)
25,000
20,000
20,000
15,000
9,563
6,000
5,000
5,000
5,000
5,000
4,000
3,623
3,333
3,000
2,963
2,500
2,500
500
500
500
138,982
$
$
(1) Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes
unfunded commitments which are unavailable due to the borrower having not met certain milestones.
171
Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense
amounted to approximately $2.1 million, $1.8 million and $1.7 million, during the years ended December 31, 2018, 2017 and 2016,
respectively. The Company’s contractual obligations as of December 31, 2018 include:
Contractual Obligations (1)
Borrowings (2)(3)(5)
Operating Lease Obligations (4)
Total
$
$
Total
Less than 1 year
Payments due by period (in thousands)
1 - 3 years
3 - 5 years
After 5 years
980,466 $
15,915
996,381 $
96,617 $
3,217
99,834 $
103,599 $
5,766
109,365 $
465,250 $
5,420
470,670 $
315,000
1,512
316,512
(1)
(2)
(3)
(4)
(5)
Excludes commitments to extend credit to the Company’s portfolio companies.
Includes $149.0 million in principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $83.5 million of the 2024 Notes, 75.0 million of
the 2025 Notes, $40.0 million of the 2033 Notes, $230.0 million of the 2022 Convertible Notes, $200.0 million of the 2027 Asset-Backed Notes, $13.1 million
under the Wells Facility, and $39.8 million under the Union Credit Facility as of December 31, 2018.
Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to the Company’s consolidated financial statements.
Facility leases and licenses.
Reflects announced redemption of a portion of the 2024 Notes in December 2018. See “Note 14– Subsequent Events.”
The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or
otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its
portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company
does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there
can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition
or results of operations in any future reporting period.
11. Indemnification
The Company has entered into indemnification agreements with our directors and executive officers. The indemnification
agreements are intended to provide our directors and executive officers the maximum indemnification permitted under Maryland law
and the 1940 Act. Each indemnification agreement provides that we shall indemnify the director or executive officer who is a party to
the agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the
Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the
maximum extent permitted by Maryland law and the 1940 Act.
The Company and its executives and directors are covered by Directors and Officers Insurance, with the directors and officers
being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
12. Concentrations of Credit Risk
The Company’s customers are primarily privately held companies and public companies which are active in the drug discovery
& development, software, internet consumer & business services, media/content/info, sustainable and renewable technology, medical
devices & equipment, drug delivery, healthcare services, specialty pharmaceuticals, information services, consumer & business
products, surgical devices, semiconductors, electronics & computer hardware, communications & networking, biotechnology tools,
diversified financial services and diagnostic industry sectors. These sectors are characterized by high margins, high growth rates,
consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets
and intellectual property.
Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees,
and recognition of gains on equity and warrant or other equity-related interests, can fluctuate materially when a loan is paid off or a
related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio
companies.
For the years ended December 31, 2018 and December 31, 2017, the Company’s ten largest portfolio companies represented
approximately 28.2% and 34.6% of the total fair value of the Company’s investments in portfolio companies, respectively. At both
December 31, 2018 and December 31, 2017, the Company had seven portfolio companies that represented 5% or more of the
Company’s net assets. At December 31, 2018, the Company had five equity investments representing approximately 53.0% of the
total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity
investments. At December 31, 2017, the Company had nine equity investments which represented approximately 67.1% of the total
fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments.
172
13. Selected Quarterly Data (Unaudited)
The following tables set forth certain quarterly financial information for each of the last eight quarters ended December 31,
2018. This information was derived from the Company’s unaudited consolidated financial statements. Results for any quarter are not
necessarily indicative of results for the full year or for any further quarter.
Quarter Ended
(in thousands, except per share data)
Total investment income
Net investment income
Net increase (decrease)
in net assets resulting from operations
Change in net assets resulting from operations per
common share (basic)
Total investment income
Net investment income
Net increase (decrease)
in net assets resulting from operations
Change in net assets resulting from operations per
common share (basic)
14. Subsequent Events
Distribution Declaration
March 31, 2018
$
June 30, 2018
$
48,700
26,063
December 31, 2018
September 30, 2018
56,889
$
52,602
$
49,562
30,590
29,302
22,774
5,946
52,060
35,629
(17,139 )
$
0.07 $
0.59
$
0.37 $
(0.18 )
Quarter Ended
March 31, 2017
$
46,365
22,678
$
June 30, 2017
September 30, 2017 December 31, 2017
50,198
24,518
45,865
23,973
$
$
48,452
25,275
(5,588 )
33,149
33,072
18,365
$
(0.07 ) $
0.40 $
0.40 $
0.22
On February 13, 2019 the Company’s Board of Directors declared a cash distribution of $0.31 per share to be paid on March 11,
2019 to shareholders of record as of March 4, 2019. This distribution represents the Company’s fifty-fourth consecutive distribution
since the Company’s IPO, bringing the total cumulative distribution to date to $15.28 per share.
Restricted Stock Unit Grants
On January 31, 2019, the Company granted 922,494 restricted stock units pursuant to the amended 2004 Plan.
ATM Equity Program Issuances
Subsequent to December 31, 2018 and as of February 15, 2019, the Company did not sell any shares of common under the
Equity Distribution Agreement with JMP. As of February 15, 2019 approximately 5.3 million shares remain available for issuance and
sale under the equity distribution agreement.
Share Repurchase Program
Subsequent to December 31, 2018 and as of February 15, 2019, the Company did not repurchase any shares of its common
stock. As of February 15, 2019, approximately $20.9 million of common stock remains eligible for repurchase under the stock
repurchase plan.
Redemption of 2024 Notes
On December 7, 2018, the Company’s 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.
Wells Fargo Facility
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.
173
Union Bank Facility
On February 20, 2019, the Company, through a special purpose wholly-owned subsidiary, Hercules Funding IV LLC, as
borrower, entered into the 2019 Union Bank Credit Facility with Union Bank, as the arranger and administrative agent, and the lenders
party thereto from time to time. Under the 2019 Union Bank Credit Facility, the lenders have made commitments of $200.0 million
and the facility contains an uncommitted accordion feature, in which the Company can increase the credit line up to an aggregate of
$300.0 million. Borrowings under the 2019 Union Bank Credit Facility will generally bear interest at a rate per annum equal to
LIBOR plus 2.70%, and the facility will generally have an advance rate of 55% against eligible debt investments. The 2019 Union
Bank Credit Facility matures on February 20, 2022, plus a 12-month amortization period, unless sooner terminated in accordance with
its terms.
Election of Directors
On January 11, 2019, the Board of Directors elected Carol L. Foster as a director of the Company. Ms. Foster will be entitled to
the applicable annual retainer and restricted stock awards pursuant to the Company’s director compensation arrangements. Ms. Foster
will also be entitled to enter into an indemnification agreement with the Company. Ms. Foster will hold office as a Class I director for
a term expiring in 2020 and does not currently serve on any committees of the Company.
On February 4, 2019, the Board of Directors elected Gayle Crowell as our director. Ms. Crowell will be entitled to the
applicable annual retainer and restricted stock awards pursuant to our director compensation arrangements. Ms. Crowell will also be
entitled to enter into an indemnification agreement with us. Ms. Crowell will hold office as a Class II director for a term expiring in
2021 and does not currently serve on any committees.
2028 Asset-Backed Notes
On January 22, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company
made an offering of $250,000,000 in aggregate principal amount of the 2028 Asset-Backed Notes, which were rated A(sf) KBRA. The
Notes were issued by the 2019 Securitization Issuer pursuant to an indenture, dated as of January 22, 2019, by and between U.S. Bank
National Association, as indenture trustee, and the 2019 Securitization Issuer, were offered pursuant to a note purchase agreement,
dated as of January 14, 2019, by and among the Company, the 2019 Trust Depositor, the 2019 Securitization Issuer, Guggenheim
Securities, LLC, as Initial Purchaser, MUFG Securities Americas Inc., as a co-manager, and Wells Fargo Securities, LLC, as a co-
manager, and are backed by a pool of senior loans made to certain portfolio companies of the Company and secured by certain assets
of those portfolio companies and are to be serviced by the Company. The outstanding principal balance of the pool of loans as of
December 31, 2018 was approximately $357,179,128. 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.
Portfolio Company Developments
As of February 15, 2019, we held warrants or equity positions in five companies that have filed registration statements on Form
S-1 with the SEC in contemplation of potential initial public offerings. Four companies filed confidentially under the JOBS Act and
one company filed a preliminary prospectus in connection with a proposed public offering on the Toronto Stock Exchange (TSX).
There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition,
subsequent to December 31, 2018, the Company’s portfolio companies announced or completed the following events:
1.
2.
3.
4.
In December 2018, the Company’s portfolio company, Art.com, Inc., one of the largest online sellers of art and wall décor
globally, entered into a definitive agreement to be acquired by Walmart (NYSE: WMT), a multinational retail corporation
that operates a chain of hypermarket, discount department stores and grocery stores. The deal was completed in February
2019. Terms of the acquisition were not disclosed.
In January 2018, the Company’s portfolio company, Labcyte, Inc., a global biotechnology tools company developing
acoustic liquid handling, was acquired by Beckman Coulter Life Sciences, a developer and manufacturer of products that
simplify, automate and innovate complex biomedical testing. Labcyte will transition into Beckman Coulter Life Sciences
under the larger Danaher Life Sciences platform of companies. Terms of the acquisition were not disclosed.
In February 2019, the Company’s portfolio company Stealth Bio Therapeutics Corp., (NASDAQ: MITO), a clinical-stage
biopharmaceutical company developing therapeutics to treat mitochondrial dysfunction, completed its IPO offering 6.5
million American Depositary Shares, at an initial public offering price of $12.00 per ADS.
In February 2019, the Company’s portfolio company Avedro, Inc. (NASDAQ: AVDR), a leading commercial-stage
ophthalmic medical technology company focused on treating corneal ectatic disorders and improving vision to reduce
dependency on eyeglasses or contact lenses, completed its IPO offering 5.0 million shares at an initial public offering price of
$14.00 per share
174
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A.
Controls and Procedures
1. Disclosure Controls and Procedures
The Company’s chief executive and chief financial officers, under the supervision and with the participation of the Company’s
management, conducted an evaluation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-
15(e) under the Exchange Act. As of the end of the period covered by this Annual Report, the Company’s chief executive and chief
financial officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including the Company’s chief executive and chief financial officers, as appropriate to allow timely
decisions regarding required disclosure.
2. Internal Control Over Financial Reporting
a. Management’s Annual Report on Internal Control over Financial Reporting
The Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial
reporting is a process designed under the supervision of the Company’s principal executive and principal financial and accounting
officer, approved and monitored by the Company’s Board of Directors, and implemented by management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with U.S. GAAP.
The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s
assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2018 based on criteria established in Internal Control— Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Based on this assessment,
management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.
Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm who also audited the Company’s consolidated
financial statements, as stated in their report, which is included in this Annual Report on Form 10K.
Changes in Internal Control over Financial Reporting in 2018
There have been no changes in the Company’s internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-
15(f) of the Exchange Act, which occurred during the Company’s most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Other Information
None.
175
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Information in response to this Item is incorporated herein by reference to the information provided in the Company’s definitive
Proxy Statement for the Company’s 2019 Annual Meeting of Shareholders, or the 2019 Proxy Statement, to be filed with the SEC
pursuant to Regulation 14A under the Exchange Act under the headings “Proposal I: Election Of Directors,” “Information About
Executive Officers Who Are Not Directors” and “Certain Relationships And Transactions.”
The Company has adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of
business conduct and ethics is available on the Company’s website at http//www.htgc.com. The Company will report any amendments
to or waivers of a required provision of the code of business conduct and ethics on the Company’s website or in a Form 8-K.
Item 11.
Executive Compensation
The information with respect to compensation of executives and directors is contained under the caption “Executive
Compensation” in the Company’s 2019 Proxy Statement and is incorporated in this Annual Report by reference in response to this
item.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information with respect to security ownership of certain beneficial owners and management is contained under the
captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” in the Company’s
2019 Proxy Statement and is incorporated in this Annual Report by reference in response to this item.
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information with respect to certain relationships and related transactions is contained under the caption “Certain
Relationships and Transactions” and the caption “Proposal I: Election of Directors” in the Company’s 2019 Proxy Statement and is
incorporated in this Annual Report by reference in response to this item.
Item 14.
Principal Accountant Fees and Services
The information with respect to principal accountant fees and services is contained under the captions “Principal Accountant
Fees and Services” and “Proposal II: Ratification of Selection of Independent Registered Public Accountants” in the Company’s 2019
Proxy Statement and is incorporated in this Annual Report by reference to this item.
176
Item 15.
Exhibits and Financial Statement Schedules
1.
Financial Statements
PART IV
The following financial statements of Hercules Capital, Inc. (formerly Hercules Technology Growth
Capital, Inc.; the “Company” or the “Registrant”) are filed herewith:
AUDITED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of December 31, 2018 and December 31, 2017 ......
98
Consolidated Statements of Operations for the three years ended December 31, 2018 ............................. 100
Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2018 ............ 101
Consolidated Statements of Cash Flows for the three years ended December 31, 2018 ............................ 102
Consolidated Schedule of Investments as of December 31, 2018 .............................................................. 104
Consolidated Schedule of Investments as of December 31, 2017 .............................................................. 119
Notes to Consolidated Financial Statements .............................................................................................. 134
2.
The following financial statement schedule is filed herewith:
Consolidated Schedule of Investments In and Advances to Affiliates as of December 31, 2018 .............. 178
3.
Exhibits required to be filed by Item 601 of Regulation S-K.
Item 16.
Form 10-K Summary
Not applicable.
177
HERCULES CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of and for the year ended December 31, 2018
(in thousands)
Schedule 12-14
Portfolio Company
Control Investments
Majority Owned Control Investments
Amount of
Interest
Credited to Realized
As of
December 31,
2017
Gross
Gross
Net Change in
Unrealized
Appreciation/
As of
December 31,
2018
Investment(1) Income(2) Gain (Loss) Fair Value Additions (3) Reductions (4) (Depreciation) Fair Value
Achilles Technology Management Co II, Inc. Common Stock $
Gibraltar Business Capital, LLC (8)
Unsecured Debt
Preferred Stock
Common Stock
— $
1,508
—
—
(2,900 ) $
—
—
—
242 $
—
—
—
— $
14,729
26,122
1,884
(3,100 ) $
—
—
—
2,858 $
(328 )
(2,720 )
(196 )
—
14,401
23,402
1,688
Total Majority Owned Control
Investments
Other Control Investments
Second Time Around (Simplify Holdings,
LLC) (7)
Tectura Corporation (5)
Total Other Control Investments
Total Control Investments
Affiliate Investments
Optiscan BioMedical, Corp.
Solar Spectrum Holdings LLC (p.k.a.
Sungevity, Inc.) (6)
Stion Corporation
Total Affiliate Investments
Total Control and Affiliate Investments
$
1,508 $
(2,900 ) $
242 $
42,735 $
(3,100 ) $
(386 ) $
39,491
$
Senior Debt
Senior Debt
Preferred Stock
Common Stock
$
$
— $
1,883
—
—
1,883 $
3,391 $
(1,743 ) $
335
—
—
(1,408 ) $
(4,308 ) $
— $
19,219
—
—
19,219 $
19,461 $
— $
961
—
900
1,861 $
44,596 $
(1,781 ) $
(335 )
—
—
(2,116 ) $
(5,216 ) $
Preferred
Warrants
$
Preferred Stock
Senior Debt
Common Stock
Preferred
Warrants
$
$
— $
—
(680 ) $
—
86 $
6,205
— $
1,301
(680 ) $
—
2,058
—
—
2,058 $
5,449 $
—
—
13,604
11,400
1,800
—
(4,000 )
—
(1,378 )
(2,058 ) $
(6,366 ) $
—
31,295 $
50,756 $
—
3,101 $
47,697 $
(1,378 )
(6,058 ) $
(11,274 ) $
1,781 $
(1,717 )
—
(900 )
(836 ) $
(1,222 ) $
772 $
(707 )
—
(8,285 )
1,378
(6,842 ) $
(8,064 ) $
—
18,128
—
—
18,128
57,619
178
6,799
11,404
3,115
—
21,496
79,115
(1) Stock and warrants are generally non-income producing and restricted.
(2) Represents the total amount of interest or dividends credited to income for the period an investment was an affiliate or control investment.
(3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of
discounts and closing fees and the exchange of one or more existing securities for one or more new securities.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities
for one or more new securities. Gross reductions also include previously recognized depreciation on investments that become control or affiliate investments during
the period.
(5) As of March 31, 2017, the Company's investment in Tectura Corporation became classified as a control investment as of result of obtaining more than 50%
representation on the portfolio company's board. In May 2018, the Company purchased common shares, thereby obtaining greater than 25% of voting securities of
Tectura as of June 30, 2018.
(6) As of September 30, 2017, the Company's investment in Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) became classified as an affiliate investment due to a
reduction in equity ownership. Note that this investment was classified as a control investment as of June 30, 2017 after the Company obtained a controlling
financial interest.
(7) As of February 2018, the Company’s investments in Second Time Around (Simplify Holdings, LLC) were deemed wholly worthless and written off for a realized
loss.
(8) As of March 31, 2018, the Company's investment in Gibraltar Business Capital, LLC became classified as a control investment as a result of obtaining a controlling
financial interest.
178
HERCULES CAPITAL, INC.
Schedule 12-14
CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of and for the year ended December 31, 2018
(in thousands)
Maturity
Date
Type of
Investment (1)
Interest Rate and Floor
Industry
Portfolio Company
Principal
or Shares Cost
Value (2)
$
15,000 $ 14,729 $ 14,401
10,602,752 26,122 23,402
830,000
1,884 1,688
$ 42,735 $ 39,491
$ 42,735 $ 39,491
$
$
20,924 $ 20,924 $ 18,128
10,680
240 —
1,000,000
— —
414,994,863
900 —
$ 22,064 $ 18,128
$ 22,064 $ 18,128
$ 64,799 $ 57,619
61,855 $ 3,000 $
393
19,273
655
111
551,038
5,257 3,524
311,989
2,609 2,771
74,424
573
178
$ 12,094 $ 6,977
10,000 $ 10,151 $ 10,151
649
650
650
603
603
603
380 61,502 3,115
0.69
— —
$ 72,906 $ 14,519
$ 85,000 $ 21,496
$ 149,799 $ 79,115
Control Investments
Majority Owned Control Investments
Gibraltar Business Capital, LLC
Diversified Financial
Services
Diversified Financial
Services
Diversified Financial
Services
Total Gibraltar Business Capital, LLC
Total Majority Owned Control Investments (4.13%)*
Other Control Investments
Unsecured Debt
March 2023
Interest rate FIXED 14.50%
Preferred Stock
Common Stock
Tectura Corporation
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Internet Consumer &
Business Services
Senior Secured
Debt
Senior Secured
Debt
Preferred Series
BB Equity
Common Stock
June 2021
June 2021
Interest rate FIXED 6.00%,
PIK Interest 3.00%
PIK Interest 8.00%
Total Tectura Corporation
Total Other Control Investments (1.90%)*
Total Control Investments (6.03%)*
Affiliate Investments
Optiscan BioMedical, Corp.
Medical Devices &
Equipment
Medical Devices &
Equipment
Medical Devices &
Equipment
Medical Devices &
Equipment
Medical Devices &
Equipment
Preferred Series
B Equity
Preferred Series
C Equity
Preferred Series
D Equity
Preferred Series E
Equity
Preferred Series E
Warrants
Total Optiscan BioMedical, Corp.
Solar Spectrum Holdings LLC
(p.k.a. Sungevity, Inc.)
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Sustainable and
Renewable Technology
Senior Secured
Debt
Senior Secured
Debt
Senior Secured
Debt
Common Stock
Common
Warrants
August 2019
Interest rate PRIME + 8.70% or Floor
rate of 12.95%, 5.00% Exit Fee
February 2019 PIK Interest 10.00%
$
$
February 2019
Interest rate PRIME + 10.70% or Floor
rate of 15.70%, PIK Interest 2.00%
$
Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)
Total Affiliate Investments (2.25%)*
Total Control and Affliate Investments (8.28%)*
* Value as a percent of net assets
(1) Stock and warrants are generally non-income producing and restricted.
(2) All of the Company’s control and affiliate investments are Level 3 investments valued using significant unobservable inputs.
179
3. Exhibits
Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms
and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The
agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for
the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were
made or at any other time.
Exhibit
Number
Description
3(a)
3(b)
3(c)
3(d)
3(e)
3(f)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
Articles of Amendment and Restatement.(3)
Articles of Amendment, dated March 6, 2007.(7)
Articles of Amendment, dated April 5, 2011.(22)
Articles of Amendment, dated April 3, 2015.(43)
Articles of Amendment, dated February 23, 2016.(49)
Amended and Restated Bylaws.(49)
Specimen certificate of the Company’s common stock, par value $.001 per share. (60)
Form of Dividend Reinvestment Plan.(1)
Indenture between Hercules Funding Trust I and U.S. Bank National Association, dated as of August 1, 2005.(2)
Indenture between Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of April 15,
2011.(23)
Form of 6.00% Convertible Senior Note due 2016, dated as of April 15, 2011 (included as part of Exhibit 4(d)).(23)
Indenture between the Registrant and U.S. Bank National Association, dated as of March 6, 2012.(26)
First Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of April 17, 2012.(26)
Second Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of September 24,
2012.(29)
Third Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of July 14, 2014.(39)
Form of 7.00% Senior Note due 2019, dated as of April 17, 2012 (Existing April 2019 Note) (included as part of Exhibit
4(g)).(26)
Form of 7.00% Senior Note due 2019, dated as of July 6, 2012 (Additional April 2019 Note).(27)
Form of 7.00% Senior Note due 2019, dated as of July 12, 2012 (Over-Allotment April 2019 Note).(28)
Form of 7.00% Senior Note due 2019, dated as of September 24, 2012 (September 2019 Note) (included as part of
Exhibit 4(h)).(29)
Form of 7.00% Senior Note due 2019, dated as of October 2, 2012 (Over-Allotment September 2019 Note).(30)
Form of 7.00% Senior Note due 2019, dated as of October 17, 2012 (Over-Allotment II September 2019 Note).(31)
Form of 6.25% Note due 2024, dated as of July 14, 2014 (July 2024 Note) (included as part of Exhibit 4(i)).(39)
Form of 6.25% Note due 2024, dated as of August 11, 2014 (Over-Allotment July 2024 Note).(40)
Form of 6.25% Note due 2024, dated as of May 2, 2016 (Additional July 2024 Note).(52)
Form of 6.25% Note due 2024, dated as of June 27, 2016 (Additional July 2024 Note).(53)
Form of 6.25% Note due 2024, dated as of July 5, 2016 (Additional July 2024 Note).(54)
Form of 6.25% Note due 2024, dated as of October 11, 2016 (Additional July 2024 Note).(56)
Indenture, dated January 25, 2017, between Hercules Capital, Inc. and U.S. Bank National Association, as Trustee.(57)
180
Exhibit
Number
4(w)
4(x)
4(y)
Description
Form of 4.375% Convertible Senior Note Due 2022, dated as of January 25, 2017 (included as part of Exhibit 4(v)).(57)
Statement of Eligibility of Trustee on Form T-1.(62)
Fourth Supplemental Indenture, dated as of October 23, 2017, between the Registrant and U.S. Bank National
Association.(63)
4(z)
Form of 4.625% Note due 2022, dated as of October 23, 2017 (included as part of Exhibit 4(y)).(63)
4(aa)
4(bb)
4(cc)
4(dd)
4(ee)
4(ff)
4(gg)
4(hh)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
Fifth Supplemental Indenture, dated as of April 26, 2018, between the Registrant and U.S. Bank National Association.(66)
Form of 5.25% Note due 2025, dated as of April 23, 2018 (included as part of Exhibit 4(aa)).(66)
Sixth Supplemental Indenture, dated as of September 24, 2018, between the Registrant and U.S. Bank National
Association.(69)
Form of 6.25% Note due 2033, dated September 24, 2018 (included as part of Exhibit 4(cc)).(69)
Indenture, dated as of November 1, 2018, between Hercules Capital Funding Trust 2018-1, as Issuer, and U.S. Bank
National Association, as Trustee.(71)
Amended and Restated Trust Agreement, dated as of November 1, 2018, between Hercules Capital Funding 2018-1
LLC, as Trust Depositor, and Wilmington Trust, National Association, as Owner Trustee.(71)
Indenture, dated as of January 22, 2019, between Hercules Capital Funding Trust 2019-1, as Issuer, and U.S. Bank
National Association, as Trustee.(73)
Amended and Restated Trust Agreement, dated as of January 22, 2019, between Hercules Capital Funding 2019-1 LLC,
as Trust Depositor, and Wilmington Trust, National Association, as Owner Trustee.(73)
Credit Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of
April 12, 2005.(3)
Pledge and Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated
as of April 12, 2005.(3)
First Amendment to Credit Agreement and Pledge and Security Agreement between Hercules Technology Growth
Capital, Inc. and Alcmene Funding L.L.C., dated as of August 1, 2005.(2)
Second Amendment to Credit Agreement by and among Hercules Technology Growth Capital, Inc. and Alcmene
Funding, L.L.C., as lender and administrative agent for the lenders, dated as of March 6, 2006.(12)
Loan Sale Agreement between Hercules Funding I LLC and Hercules Technology Growth Capital, Inc., dated as of
August 1, 2005.(2)
Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth
Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc., dated as of August 1, 2005.(2)
Note Purchase Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology Growth
Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of August 1, 2005.(2)
10(h)
Hercules Capital, Inc. Amended and Restated 2004 Equity Incentive Plan.(10)
10(i)
10(j)
10(k)
10(l)
Hercules Technology Growth Capital, Inc. 2006 Non-Employee Director Plan (2007 Amendment and Restatement).(11)
Form of Custodian Agreement between the Company and Union Bank of California, N.A..(3)
Form of Restricted Stock Unit Award Agreement.(10)
Subscription Agreement by and among the Company and the subscribers named therein, dated as of March 2, 2006.(17)
10(m)
Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan.(3)
181
Exhibit
Number
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
10(v)
10(w)
10(x)
10(y)
10(z)
10(aa)
10(bb)
10(cc)
10(dd)
10(ee)
10(ff)
10(gg)
Description
Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan.(3)
Form of Transfer Agency and Registrar Services Agreement between the Company and American Stock Transfer &
Trust Company.(3)
Warrant Agreement, dated as of June 22, 2004, between the Company and American Stock Transfer & Trust Company,
as warrant agent.(9)
Subscription Agreement, dated as of February 2, 2004, between the Company and the subscribers named therein.(3)
Lease Agreement, dated as of June 13, 2006, between the Company and 400 Hamilton Associates.(4)
Third Amendment to Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules
Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc., and Citigroup Global
Markets Realty Corp., dated as of July 28, 2006.(5)
Second Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I LLC, Hercules Technology
Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets
Realty Corp., dated as of December 6, 2006.(6)
Fifth Amendment to Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I, LLC,
Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup
Global Markets Realty Corp., dated as of March 30, 2007.(13)
Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC,
the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Realty Corp.,
and Deutsche Bank AG, New York Branch, dated as of May 2, 2007.(14)
Fourth Amendment to the Warrant Participation Agreement by and among Hercules Technology Growth Capital, Inc.
and Citigroup Global Markets Realty Corp., dated as of May 2, 2007.(15)
Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules
Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 2, 2007.(15)
First Amendment to Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding
Trust I, Hercules Funding I LLC, and Citigroup Global Markets Realty Corp., dated as of May 7, 2008.(16)
Second Amendment to Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I,
Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global
Markets Realty Corp., and Deutsche Bank AG, New York Branch, dated as of May 7, 2008.(16)
Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC, dated as of
August 25, 2008.(18)
Sale and Servicing Agreement among Hercules Funding II LLC, the Company, Lyon Financial Services, Inc., and Wells
Fargo Foothill, LLC, dated as of August 25, 2008.(18)
Form of SBA Debenture.(19)
First Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Foothill,
LLC, dated as of April 30, 2009.(20)
Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of
February 10, 2010.(21)
Amended and Restated Loan and Security Agreement between the Company and Union Bank, N.A., dated as of
November 2, 2011.(25)
Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital
Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24)
182
Exhibit
Number
10(hh)
10(ii)
10(jj)
10(kk)
10(ll)
Description
First Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth
Capital, Inc. and Union Bank, N.A., dated as of March 30, 2012.(32)
Third Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital
Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 1, 2012.(33)
Second Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology
Growth Capital, Inc. and Union Bank, N.A., dated as of September 17, 2012.(34)
Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology
Growth Capital, Inc. and Union Bank, N.A., dated as of December 17, 2012.(36)
First Omnibus Amendment by and among Hercules Funding Trust I, Hercules Funding I, LLC, Hercules Technology
Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and Citigroup Global Markets
Realty Corp., dated as of March 6, 2006.(12)
10(mm)
Intercreditor and Lien Subordination Agreement among Hercules Technology Growth Capital, Inc., Alcmene Funding,
L.L.C. and Citigroup Global Markets Realty Corp., dated as of March 6, 2006.(12)
10(nn)
10(oo)
10(pp)
10(qq)
10(rr)
10(ss)
10(tt)
10(uu)
10(vv)
Warrant Participation Agreement between the Company and Citigroup Global Markets Realty Corp., dated as of
August 1, 2005.(35)
Indenture by and between Hercules Capital Funding Trust 2012-1 and U.S. Bank National Association, dated as of
December 19, 2012.(36)
Amended and Restated Trust Agreement by and between Hercules Capital Funding 2012-1 LLC and Wilmington Trust,
National Association, dated as of December 19, 2012.(36)
Sale and Servicing Agreement by and among Hercules Capital Funding 2012-1 LLC, Hercules Capital Funding Trust 2012-
1, Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of December 19, 2012.(36)
Sale and Contribution Agreement by and between Hercules Technology Growth Capital, Inc. and Hercules Capital
Funding 2012-1 LLC, dated as of December 19, 2012.(36)
Note Purchase Agreement among the Hercules Technology Growth Capital, Inc., Hercules Capital Funding 2012-1 LLC,
as Trust Depositor, Hercules Capital Funding Trust 2012-1, as Issuer, and Guggenheim Securities, LLC, as Initial
Purchaser, dated as of December 12, 2012.(36)
Administration Agreement between Hercules Capital Funding Trust 2012-1, Hercules Technology Growth Capital, Inc.,
Wilmington Trust, National Association, and U.S. Bank National Association, dated as of December 19, 2012.(36)
Fourth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology
Growth Capital, Inc. and Union Bank, N.A., dated as of December 2, 2013.(37)
Fifth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth
Capital, Inc. and Union Bank, N.A., dated as of January 31, 2014.(37)
10(ww)
Sixth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology
Growth Capital, Inc. and MUFG Union Bank, N.A. (f/k/a Union Bank, N.A.), dated as of July 8, 2014.(38)
10(xx)
10(yy)
Second Amended and Restated Loan and Security Agreement by and among Hercules Technology Growth Capital, Inc.
and MUFG Union Bank, N.A., dated as of August 14, 2014.(41)
Fifth Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Capital
Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 8, 2014.(42)
10(zz)
Form of Amended and Restated Indemnification Agreement.(59)
10(aaa)
10(bbb)
Seventh Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital,
LLC (f/k/a Wells Fargo Foothill, LLC), dated as of May 6, 2015.(44)
Amended and Restated Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital
Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 29, 2015.(45)
183
Exhibit
Number
10(ccc)
10(ddd)
10(eee)
10(fff)
10(ggg)
10(hhh)
10(iii)
10(jjj)
Description
Amended and Restated Sale and Servicing Agreement by and among Hercules Funding II LLC, Hercules Technology
Growth Capital, Inc., and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 29,
2015.(45)
First Amendment and Waiver to Second Amended and Restated Loan and Security Agreement by and among Hercules
Technology Growth Capital, Inc. and MUFG Union Bank, N.A., dated as of November 3, 2015.(47)
First Amendment to Amended and Restated Loan and Security Agreement by and among Hercules Funding II LLC and
Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of December 16, 2015.(48)
Second Amendment to Amended and Restated Loan and Security Agreement by and among Hercules Funding II LLC
and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of March 8, 2016. (58)
Third Amendment to Amended and Restated Loan and Security Agreement by and among Hercules Funding II LLC and
Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of April 7, 2016.(50)
Fourth Amendment to the Amended and Restated Loan and Security Agreement, dated as of April 3, 2017, by and
among Hercules Funding II LLC as borrower, Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), as
Administrative Agent, and the Lenders party thereto from time to time.(61)
Fifth Amendment to the Amended and Restated Loan and Security Agreement, dated as of July 31, 2018, by and among
Hercules Funding II LLC as borrower, Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), as
Administrative Agent, and the Lenders party thereto from time to time.(70)
Sixth Amendment to the Amended and Restated Loan and Security Agreement, dated as of October 26, 2018, by and
among Hercules Funding II LLC as borrower, Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), as
Administrative Agent, and the Lenders party thereto from time to time.(70)
10(kkk)
Seventh Amendment to the Amended and Restated Loan and Security Agreement, dated as of January 11, 2019, by and
among Hercules Funding II LLC as borrower, Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), as
Administrative Agent, and the Lenders party thereto from time to time.(72)
10(lll)
Loan and Security Agreement by and among Hercules Funding III, LLC, as borrower, MUFG Union Bank, N.A., as the
arranger and administrative agent, and the lenders party thereto from time to time, dated as of May 5, 2016.(51)
10(mmm)
Sale and Servicing Agreement by and among Hercules Funding III LLC, as borrower, Hercules Capital, Inc., as
originator and servicer, and MUFG Union Bank, N.A., as agent, dated as of May 5, 2016.(51)
10(nnn)
10(ooo)
First Amendment to Loan and Security Agreement by and among Hercules Funding III LLC, as borrower, MUFG Union
Bank, N.A., as the arranger and administrative agent, and the lenders party thereto from time to time, dated as of July 14,
2016.(55)
Second Amendment to the Loan and Security Agreement, dated as of May 25, 2018, by and among Hercules Funding
III, LLC, as borrower, MUFG Union Bank, N.A., as the arranger and administrative agent, and the lenders party
thereto.(68)
10(ppp)
Form of Performance Restricted Stock Unit Award Agreement.(10)
10(qqq)
Retention Agreement, dated as of October 26, 2017, by and between Hercules Capital, Inc. and Manuel A. Henriquez.(64)
10(rrr)
Retention Agreement, dated as of October 26, 2017, by and between Hercules Capital, Inc. and Mark R. Harris.(64)
10(sss)
Retention Agreement, dated as of October 26, 2017, by and between Hercules Capital, Inc. and Scott Bluestein.(64)
10(ttt)
Asset Purchase Agreement, dated as of November 1, 2017 by and between Ares Capital Corporation, a Maryland
corporation and, together with each Seller Designee permitted pursuant to the Agreement, and Bearcub Acquisitions
LLC, a Delaware limited liability company.(65)
10(uuu)
Separation Agreement, dated as of November 2, 2017, by and between Hercules Capital, Inc. and Mark Harris.(8)
184
Exhibit
Number
10(vvv)
Description
Form of Retention Performance Stock Unit Award Agreement.(67)
10(www)
Form of Cash Retention Bonus Award Agreement.(67)
10(xxx)
Sale and Servicing Agreement, dated as of November 1, 2018, by and among Hercules Capital Funding Trust 2018-1, as
Issuer, Hercules Capital, Inc., as Seller and Servicer, Hercules Capital Funding 2018-1 LLC, as Trust Depositor, and
U.S. Bank National Association, as Trustee, Backup Servicer, Custodian and Paying Agent.(71)
10(yyy)
Sale and Contribution Agreement, dated as of November 1, 2018, between Hercules Capital, Inc., as Seller, and Hercules
Capital Funding 2018-1 LLC, as Trust Depositor.(71)
10(zzz)
10(aaaa)
Note Purchase Agreement, dated as of October 25, 2018, by and among Hercules Capital, Inc., as Originator and
Servicer, Hercules Capital Funding 2018-1 LLC, as Trust Depositor, Hercules Capital Funding Trust 2018-1, as Issuer,
and Guggenheim Securities, LLC, as Initial Purchaser.(71)
Administration Agreement, dated November 1, 2018, by and among Hercules Capital, Inc., as Administrator, Hercules
Capital Funding Trust 2018-1, as Issuer, Wilmington Trust, National Association, as Owner Trustee, and U.S. Bank
National Association, as Trustee.(71)
10(bbbb)
Sale and Servicing Agreement, dated as of January 22, 2019, by and among Hercules Capital Funding Trust 2019-1, as
Issuer, Hercules Capital, Inc., as Seller and Servicer, Hercules Capital Funding 2019-1 LLC, as Trust Depositor, and
U.S. Bank National Association, as Trustee, Backup Servicer, Custodian and Paying Agent.(73)
10(cccc)
Sale and Contribution Agreement, dated as of January 22, 2019, between Hercules Capital, Inc., as Seller, and Hercules
Capital Funding 2019-1 LLC, as Trust Depositor.(73)
10(dddd)
10(eeee)
Note Purchase Agreement, dated as of January 14, 2019, by and among Hercules Capital, Inc., as Originator and
Servicer, Hercules Capital Funding 2019-1 LLC, as Trust Depositor, Hercules Capital Funding Trust 2019-1, as Issuer,
and Guggenheim Securities, LLC, as Initial Purchaser.(73)
Administration Agreement, dated January 22, 2019, by and among Hercules Capital, Inc., as Administrator, Hercules
Capital Funding Trust 2019-1, as Issuer, Wilmington Trust, National Association, as Owner Trustee, and U.S. Bank
National Association, as Trustee.(73)
10(ffff)
Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan.(74)
10(gggg)
Hercules Capital, Inc. 2018 Non-Employee Director Plan.(74)
10(hhhh)
Form of Restricted Stock Unit Award Agreement.(74)
10(iiii)
Form of Restricted Stock Award Agreement (2018 Equity Incentive Plan).(74)
10(jjjj)
Form of Restricted Stock Award Agreement (Director Plan).(74)
10(kkkk)
Form of Nonstatutory Stock Option Award Agreement.(74)
10(llll)
Form of Incentive Stock Option Award Agreement.(74)
10(mmmm) Loan and Security Agreement, dated as of February 20, 2019, by and among Hercules Funding IV LLC, as borrower,
MUFG Union Bank, N.A., as the arranger and administrative agent, and the lenders party thereto from time to time.(75)
10(nnnn)
Sale and Servicing Agreement, dated as of February 20, 2019, by and among Hercules Funding IV LLC, as borrower,
Hercules Capital, Inc., as originator and servicer, and MUFG Union Bank, N.A., as agent.(75)
14.1*
Code of Ethics.
14.2
Code of Business Conduct and Ethics.(46)
21.1*
List of Subsidiaries.
185
Exhibit
Number
23.1*
31.1*
31.2*
32.1*
32.2*
Description
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), as amended.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), as amended.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 8, 2005 (File No. 333-122950), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 5, 2005.
Previously filed as part of Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950) to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 1, 2006.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 3, 2006.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 6, 2006.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 9, 2007.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 2, 2017.
Previously filed as part of the Registration Statement on Form N-2 of the Company (File No. 333-122950), as filed on February 22, 2005.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on January 5, 2017.
Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on October 2, 2007.
Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of
the Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 3, 2007.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 4, 2007.
Previously filed as part of the Pre-Effective Amendment No. 1, as filed on May 15, 2007 (File No. 333-141828), to the Registration Statement on Form N-2 of
the Company.
Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 5, 2008 (File No. 333-150403), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of
the Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 27, 2008.
Previously filed as part of the Annual Report on Form 10-K of the Company, as filed on March 16, 2009.
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 11, 2009.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 17, 2010.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2011.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 18, 2011.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 24, 2011.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 4, 2011.
Previously filed as part of Post-Effective Amendment No. 1, as filed on April 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 2, as filed on July 6, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 3, as filed on July 12, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 5, as filed on September 24, 2012 (File No. 333-179431), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of Post-Effective Amendment No. 7, as filed on October 2, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of
the Company.
Previously filed as part of Post-Effective Amendment No. 8, as filed on October 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of
the Company.
186
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 8, 2012.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 2, 2012.
Previously filed as part of Post-Effective Amendment No. 4, as filed on September 19, 2012 (File No. 333-179431), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of the Pre-Effective Amendment No. 1, as filed on October 17, 2006 (File No. 333-136918), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 20, 2012.
Previously filed as part of the Annual report on Form 10-K of the Company, as filed on February 27, 2014.
Previously filed as part of Post-Effective Amendment No. 4, as filed on July 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 5, as filed on July 14, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of the
Company.
(40) Previously filed as part of Post-Effective Amendment No. 6, as filed on August 11, 2014 (File No. 333-187447), to the Registration Statement on Form N-2 of
the Company.
(41)
(42)
(43)
(44)
(45)
(46)
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 19, 2014.
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on November 6, 2014.
Previously filed as part of the Registration Statement on Form N-2 of the Company (File No. 333-203511), as filed on April 20, 2015.
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 7, 2015.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 30, 2015.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 13, 2015.
(47) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 13, 2015.
(48)
(49)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
(57)
(58)
(59)
(60)
(61)
(62)
(63)
(64)
(65)
(66)
(67)
(68)
(69)
(70)
(71)
(72)
(73)
(74)
(75)
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 18, 2015.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 25, 2016.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2016.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 10, 2016.
Previously filed as part of Post-Effective Amendment No. 3, as filed on May 2, 2016 (File No. 333-203511), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 6, as filed on June 27, 2016 (File No. 333-203511), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of Post-Effective Amendment No. 7, as filed on July 5, 2016 (File No. 333-203511), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 19, 2016.
Previously filed as part of the Post-Effective Amendment No. 10, as filed on October 14, 2016 (File No. 333-203511), to the Registration Statement on Form N-
2 of the Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on January 25, 2017.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 8, 2016.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 22, 2016.
Previously filed as part of the Annual Report on Form 10-K of the Company, as filed on February 25, 2016.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 7, 2017.
Previously filed as part of the Pre-Effective Amendment No. 2, as filed on September 5, 2017 (File No. 333-214767), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of the Post-Effective Amendment No. 2, as filed on October 25, 2017 (File No. 333-214767), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on October 26, 2017.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 2, 2017.
Previously filed as part of Post-Effective Amendment No. 4, as filed on April 26, 2018 (File No. 333-214767), to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 3, 2018.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 1, 2018.
Previously filed as part of Post-Effective Amendment No. 2, as filed on September 24, 2018 (File No. 333-224281), to the Registration Statement on Form N-2
of the Company.
Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on November 1, 2018.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 2, 2018.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on January 17, 2019.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on January 22, 2019.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on January 31, 2019.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 21, 2019.
*
Filed herewith
187
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
HERCULES CAPITAL, INC.
Date: February 21, 2019
By:
/S/ Manuel A. Henriquez
Manuel A. Henriquez
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the following capacities on February 21, 2019.
Signature
Title
/S/ Manuel A. Henriquez
Manuel A. Henriquez
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
/S/ David Lund
David Lund
/S/ Robert P. Badavas
Robert P. Badavas
/S/ Thomas Fallon
Thomas Fallon
/S/ Joseph F. Hoffman
Joseph F. Hoffman
/S/ Brad Koenig
Brad Koenig
/S/ Jorge Titinger
Jorge Titinger
/S/ Doreen Woo Ho
Doreen Woo Ho
Carol L. Foster
/S/ Gayle Crowell
Gayle Crowell
Interim Chief Financial Officer, and
Interim Chief Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Date
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
188
Exhibit 14.1
CODE OF ETHICS
This Code of Ethics (the “Code”) has been adopted by the Board of Directors (the “Board”) of Hercules Capital,
Inc. (the “Company”) in accordance with Rule 17j-l(c) under the Investment Company Act of 1940, as amended (the
“1940 Act”). Rule 17j-1 generally describes fraudulent or manipulative practices with respect to purchases or sales of
securities held or to be acquired by business development companies if affected by access persons of such companies.
The purpose of this Code is to reflect the following:
(1)
the duty at all times to place the interests of shareholders first;
the requirement that all personal securities transactions be conducted consistent with the Code and in such a
(2)
manner as to avoid any actual or potential conflict of interest or any abuse of an individual’s position of trust and
responsibility; and
(3)
advantage of their positions.
the fundamental standard that business development company personnel should not take inappropriate
SECTION I: STATEMENT OF PURPOSE AND APPLICABILITY
(A)
Statement of Purpose
It is the policy of the Company that no affiliated person of the Company will, in connection with the purchase or sale,
directly or indirectly, by such person of any security held or to be acquired by the Company,
(1)
Employ any device, scheme or artifice to defraud the Company;
(2)
Make to the Company any untrue statement of a material fact or omit to state to the Company a material fact
necessary in order to make the statement made, in light of the circumstances under which it is made, not misleading;
(3)
the Company; or
Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon
(4)
Engage in any manipulative practice with respect to the Company.
(B)
Scope of the Code
In order to prevent Access Persons, as defined in Section II, paragraph (A) below, of the Company from engaging in
any of these prohibited acts, practices or courses of business, the Board has adopted this Code.
SECTION II: DEFINITIONS
(A)
Access Person. “Access Person” means any director, officer, or “Advisory Person” of the Company.
(B)
Advisory Person. “Advisory Person” of the Company means: (i) any director, officer or employee of the
Company or of any company in a control relationship to the Company, who, in connection with his or her regular
functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a Covered Security
by the Company, or whose functions relate to the making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to the Company who obtains information concerning
recommendations made to the Company with regard to the purchase or sale of a “Covered Security.”
(C)
Beneficial Interest. “Beneficial Interest” includes any entity, person, trust, or account with respect to which an
Access Person exercises investment discretion or provides investment advice. A beneficial interest will be presumed to
include all accounts in the name of or for the benefit of the Access Person, his or her spouse, dependent children, or
any person living with him or her or to whom he or she contributes economic support.
Beneficial Ownership. “Beneficial Ownership” will be determined in accordance with Rule 16a-1(a)(2) under
(D)
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except that the determination of direct or
indirect Beneficial Ownership will apply to all securities, and not just equity securities, that an Access Person holds or
acquires. Rule 16a1(a)(2) provides that the term “beneficial owner” means any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise, has or shares a direct or indirect
pecuniary interest in any equity security. Therefore, an Access Person may be deemed to have Beneficial Ownership
of securities held by members of his or her immediate family sharing the same household, or by certain partnerships,
trusts, corporations, or other arrangements.
(E)
Control. “Control” will have the meaning set forth in Section 2(a)(9) of the 1940 Act.
Covered Security. “Covered Security” means a security as defined in Section 2(a)(36) of the 1940 Act, except
(F)
that it does not include (i): direct obligations of the Government of the United States; (ii) banker’s acceptances, bank
certificates of deposit, commercial paper and high quality short-term debt instruments including repurchase
agreements; and (iii) shares issued by registered open-end investment companies (i.e., mutual funds); however,
exchange traded funds structured as unit investment trusts or open-end funds are considered “Covered Securities.”
(G)
Company. The “Company” means Hercules Capital, Inc., a Maryland corporation.
Designated Officer. “Designated Officer” means the officer of the Company designated by the Board from
(H)
time to time to be responsible for management of compliance with this Code and/or any person or persons designated
by such officer to perform such functions on his or her behalf.
(I)
person” of the Company within the meaning of Section 2(a)(19) of the 1940 Act.
Disinterested Director. “Disinterested Director” means a director of the Company who is not an “interested
(J)
Initial Public Offering. “Initial Public Offering” means an offering of securities registered under the
Securities Act of 1933, as amended (the “Securities Act”), the issuer of which, immediately before the registration,
was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act.
Investment Personnel. “Investment Personnel” means: (i) any employee of the Company (or of any company
(K)
in a control relationship to the Company) who, in connection with his or her regular functions or duties, makes or
participates in making recommendations regarding the purchase or sale of securities by the Company; and (ii) any
natural person who controls the Company and who obtains information concerning recommendations regarding the
purchase or sale of securities by the Company.
(L)
Limited Offering. “Limited Offering” means an offering that is exempt from registration under the Securities
Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505 or Rule 506 under the Securities Act.
Purchase or Sale of a Covered Security. “Purchase or Sale of a Covered Security” is broad and includes,
(M)
among other things, the writing of an option to purchase or sell a Covered Security, or the use of a derivative product
to take a position in a Covered Security.
SECTION III: STANDARDS OF CONDUCT
(A)
General Standards
(1)
profit that is inconsistent with the best interests of the Company or its shareholders.
No Access Person will engage, directly or indirectly, in any business transaction or arrangement for personal
(2)
No Access Person will make use of any confidential information gained by reason of his or her employment
by or affiliation with the Company or affiliates thereof in order to derive a personal profit for himself or herself or for
any Beneficial Interest, in violation of the fiduciary duty owed to the Company or its shareholders.
(3)
No Access Person will recommend or authorize the purchase or sale of a Covered Security by the Company
or its affiliates without having disclosed, at the time of such recommendation or authorization, any Beneficial Interest
in, or Beneficial Ownership of, such Covered Security or the issuer thereof.
No Access Person will disclose any confidential information concerning securities holdings or securities
(4)
transactions of the Company to persons outside the Company, without obtaining prior written approval from the
Designated Officer, or such person or persons designated to act on his or her behalf. Notwithstanding the preceding
sentence, such Access Person may dispense such information without obtaining prior written approval:
(a)
(b)
prevent conflicts of interest between the Company and its affiliates;
when there is a public report containing the same information;
when such information is dispensed in accordance with compliance procedures established to
(c)
(d)
when such information is reported to directors of the Company; or
in the ordinary course of his or her duties on behalf of the Company.
All personal securities transactions should be conducted consistent with this Code and in such a manner as to
(5)
avoid actual or potential conflicts of interest, the appearance of a conflict of interest, or any abuse of an individual’s
position of trust and responsibility within the Company.
(B)
Requirement to Obtain Preclearance
Preclearance is Required before Trading. Preclearance of trades helps to prevent personal trading from
(1)
conflicting with Company transactions. No Access Person will be able to purchase or sell, directly or indirectly, any
Covered Security in which he or she has, or by reason of such transaction acquires, any direct or indirect Beneficial
Ownership unless that Access Person has obtained preclearance prior to engaging in such transaction.
(2)
information into the ComplySci Preclearance System
How to Obtain Preclearance. Prior to conducting a trade, all Access Persons must enter transaction
(“ComplySci”) and follow the instructions to receive approval. If preclearance is granted, it will be valid for 5 business
days from the day that approval was granted and the trade must take place within those days. If Preclearance approval
is not granted, Access Persons will not be permitted to engage in the proposed transaction and may direct further
inquiries to the CCO.
(3)
preclearance.
Certain Transactions May be Denied Preclearance. The following transactions will generally be denied
(a)
Company is currently considering for purchase or sale will generally be denied.
Company Considering Purchase or Sale. Requests for preclearance regarding any securities that the
Company Same Day Purchase or Sale. Requests for preclearance regarding any securities that the
(b)
Company has purchased or sold on the same business day as the preclearance request will generally be
denied.
(c)
Restricted Security List will generally be denied.
Restricted Security List. Requests for preclearance regarding any security listed on the Company’s
(d)
any Initial Public Offering or in any Limited Offering will generally be denied.
Initial Public Offering or Limited Public Offering. Requests for preclearance regarding securities in
(e)
within a “blackout” period will generally be denied.
Blackouts for Investment Personnel. Requests from Investment Personnel for preclearance that fall
(4)
Access Persons. The Chief Executive Officer or Chief Financial Officer will approve such transactions.
Approval of CCO’s Transaction. The CCO will conduct transactions in the manner described herein for all
(5)
preclearance requirement.
Exclusions from Preclearance Requirement. The following transactions will generally be exempt from the
(a)
Fund amounts to greater than 5% of the Exchange Traded Fund’s holdings.
Exchange Traded Fund transactions where no constituent security held by the Exchange Traded
(6)
Other Restrictions
Company Acquisition of Shares in Companies that Investment Personnel Hold Through Limited Offerings.
a.
Investment Personnel who have been authorized to acquire securities in a Limited Offering must disclose that
investment to the Designated Officer when they are involved in the Company’s subsequent consideration of an
investment in the issuer, and the Company’s decision to purchase such securities must be independently reviewed by
Investment Personnel with no personal interest in that issuer.
b.
Gifts. No Access Person may accept, directly or indirectly, any gift, favor, or service or other consideration of
more than a de minimis value (e.g., $250) from any person or entity that does business or proposes to do business with
the Company, and/or with whom he or she transacts business on behalf of the Company, under circumstances when to
do so would conflict with the Company’s best interests or would impair the ability of such person to be completely
disinterested when required, in the course of business, to make judgments and/or recommendations on behalf of the
Company. An Access Person must pre-clear gifts over $250 in ComplySci.
Service as Director. No Access Person will serve on the board of directors of a portfolio company of the
c.
Company unless (i) such board service is consistent with the interests of the Company and its shareholders and (ii)
such Access Person has obtained prior written approval from the Designated Officer for such service.
SECTION IV: PROCEDURES TO IMPLEMENT CODE OF ETHICS
The following reporting procedures have been established to assist Access Persons in avoiding a violation of this
Code, and to assist the Company in preventing, detecting, and imposing sanctions for violations of this Code. Every
Access Person must follow these procedures. Questions regarding these procedures should be directed to the
Designated Officer.
(A)
Applicability
All Access Persons are subject to the reporting requirements set forth in Section except:
(1)
Person has no direct or indirect influence or control;
with respect to transactions effected for, and Covered Securities held in, any account over which the Access
a Disinterested Director, who would be required to make a report solely by reason of being a Director, need
(2)
not make: (1) an initial holdings or an annual holdings report; and (2) a quarterly transaction report, unless the
Disinterested Director knew or, in the ordinary course of fulfilling his or her official duties as a Director, should have
known that during the 15-day period immediately before or after such Disinterested Director’s transaction in a
Covered Security, the Company purchased or sold the Covered Security, or the Company considered purchasing or
selling the Covered Security.
an Access Person need not make a quarterly transaction report if the report would duplicate information
(3)
contained in broker trade confirmations or account statements received by the Company with respect to the Access
Person in the time required by subsection (B)(2) of this Section IV, if all of the information required by subsection
(B)(2) of this Section IV is contained in the broker trade confirmations or account statements, or in the records of the
Company, as specified in subsection (B)(4) of this Section IV.
(B)
Report Types
(1)
days after that person became an Access Person.
Initial Holdings Report. An Access Person must file an initial report in ComplySci not later than 10 calendar
(2)
later than 30 calendar days after the end of a calendar quarter.
Quarterly Transaction Report. An Access Person must file a quarterly transaction report in ComplySci not
(3)
than 30 calendar days after the end of a fiscal year.
Annual Holdings Report. An Access Person must file an annual holdings report in ComplySci not later
Account Statements. In lieu of providing a quarterly transaction report, an Access Person may direct his or
(4)
her broker to provide to the Designated Officer copies of periodic statements for all investment accounts in which they
have Beneficial Ownership that provide the information required in quarterly transaction reports, as set forth above.
(5)
must consider, a written report that:
Company Reports. No less frequently than annually, the Company must furnish to the Board, and the Board
describes any issues arising under the Code or procedures since the last report to the Board,
(a)
including but not limited to, information about material violations of the Code or procedures and sanctions
imposed in response to the material violations; and
(b)
Persons from violating the Code.
certifies that the Company has adopted procedures reasonably necessary to prevent Access
Disclaimer of Beneficial Ownership. Any report required under this Section IV may contain a statement that
(C)
the report will not be construed as an admission by the person making such report that he or she has any direct or
indirect beneficial ownership in the Covered Security to which the report relates.
Review of Reports. The reports required to be submitted under this Section IV will be delivered to the
(D)
Designated Officer. The Designated Officer will review such reports to determine whether any transactions recorded
therein constitute a violation of the Code. The Designated Officer will maintain copies of the reports as required by
Rule 17j-1(f).
(E)
Designated Officer Investigation. The Designated Officer may conduct such investigation as he or she
considers necessary to determine if proposed trades comply with this Code, including post-transaction monitoring. The
Designated Officer may impose additional measures to avoid perceived or actual conflicts of interest or to address any
transactions that require additional review.
Acknowledgment and Certification. Upon becoming an Access Person and annually thereafter, all Access
(F)
Persons will sign an acknowledgment and certification of their receipt of and intent to comply with this Code in
ComplySci. Each Access Person must also certify annually that he or she has read and understands the Code and
recognizes that he or she is subject to the Code. In addition, each access person must certify annually that he or she has
complied with the requirements of the Code and that he or she has disclosed or reported all personal securities
transactions required to be disclosed or reported pursuant to the requirements of the Code.
Records. The Company will maintain records with respect to this Code in the manner and to the extent set
(G)
forth below, which records may be maintained on microfilm or electronic storage media under the conditions
described in Rule 31a-2(f) under the 1940 Act and will be available for examination by representatives of the
Securities and Exchange Commission (the “SEC”):
(1)
years has been, in effect will be maintained in an easily accessible place;
A copy of this Code and any other code of ethics of the Company that is, or at any time within the past seven
A record of any violation of this Code and of any action taken as a result of such violation will be maintained
(2)
in an easily accessible place for a period of not less than seven years following the end of the fiscal year in which the
violation occurs;
(3)
A copy of each report made by an Access Person or duplicate account statement received pursuant to this
Code, including any information provided in lieu of the reports under subsection (A)(3) of this Section IV will be
maintained for a period of not less than seven years from the end of the fiscal year in which it is made or the
information is provided, the first two years in an easily accessible place;
A record of all persons who are, or within the past seven years have been, required to make reports pursuant
(4)
to this Code, or who are or were responsible for reviewing these reports, will be maintained in an easily accessible
place;
(5)
seven years after the end of the fiscal year in which it is made, the first two years in an easily accessible place; and
A copy of each report required under subsection (B)(5) of this Section IV will be maintained for at least
(6)
by an Access Person of beneficial ownership in any securities in an Initial Public Offering or
A record of any decision, and the reasons supporting the decision, to approve the direct or indirect acquisition
(7)
approval is granted.
Limited Offering will be maintained for at least seven years after the end of the fiscal year in which the
Obligation to Report a Violation. Every Access Person who becomes aware of a possible violation of this
(8)
Code by any person must report it to the Designated Officer, who will report it to appropriate management personnel.
The management personnel will take such action that they consider appropriate under the circumstances. In the case of
officers or other employees of the Company, such action may include removal from office. The Board will be notified,
in a timely manner, of remedial action taken with respect to violations of the Code.
Confidentiality. All reports of Covered Securities transactions, duplicate confirmations, account statements
(9)
and other information filed with the Company or furnished to any person pursuant to this Code will be treated as
confidential, but are subject to review as provided herein and by representatives of the Securities and Exchange
Commission or otherwise to comply with applicable law or the order of a court of competent jurisdiction.
(10) Waivers. The Designated Officer has the authority to exempt any employee or investment transaction from
any or all of the provisions of this Code if the Designated Officer determines that such exemption would not be against
the interests of any shareholders and is consistent with applicable laws and regulations, including Rule 204A-1 under
the Advisers Act and Rule 17j-1 under the Investment Company Act. The Designated Officer will prepare and file a
written memorandum of any exemption granted, describing the circumstances and reasons for the exemption.
SECTION V: SANCTIONS
Upon determination that a violation of this Code has occurred, management personnel of the Company may
impose such sanctions as they deem appropriate, including, among other things, disgorgement of profits, a letter of
censure or suspension or termination of the employment of the violator. All violations of this Code and any sanctions
imposed with respect thereto will be reported in a timely manner to the Board.
SECTION VI: AMENDMENTS
This Code may be amended from time to time by resolution of the Board, or without a resolution of the Board
to the extent the approval of such amendment is not required under the 1940 Act.
Amended and restated on July 7, 2015; Further amended and restated on October 12, 2016, November 30, 2016 and
November 13, 2017
List of Subsidiaries
Exhibit 21.1
Achilles Technology Management Co I, Inc.
Achilles Technology Management Co II, Inc. (1)
Achilles Technology Management Co., Inc.
Bearcub Acquisitions LLC
Gibraltar Acquisition LLC (1)
Gibraltar Business Capital LLC (1)
HercGBC LLC (1)
Hercules Capital Funding 2014-1 LLC
Hercules Capital Funding 2018-1 LLC
Hercules Capital Funding 2019-1 LLC
Hercules Capital Funding Trust 2014-1
Hercules Capital Funding Trust 2018-1
Hercules Capital Funding Trust 2019-1
Hercules Capital, Inc.
Hercules Funding II, LLC
Hercules Funding III, LLC
Hercules Technology II, L.P.
Hercules Technology III, LP
Hercules Capital IV, L.P. (fka Hercules Technology IV, L.P.)
Hercules Technology Management Co II, Inc.
Hercules Technology SBIC Management, LLC
(1)
Subsidiary is not consolidated for financial reporting purposes. The Company’s investments are carried on the consolidated statement of assets and liabilities at
fair value and are classified as control investments.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-144002, 333-146445, 333-
189474, 333-206633 and 333-229435) of Hercules Capital, Inc. of our report dated February 21, 2019 relating to the financial
statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form
10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 21, 2019
CERTIFICATION PURSUANT TO
RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
Exhibit 31.1
I, Manuel A. Henriquez, Chairman, and President, Chief Executive Officer and Director of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Hercules Capital, Inc. (the “registrant”) for the year ended December 31,
2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2019
By:
/S/ MANUEL A. HENRIQUEZ
Manuel A. Henriquez
Chairman, President, and Chief Executive Officer
CERTIFICATION PURSUANT TO
RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
Exhibit 31.2
I, David Lund, Interim Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Hercules Capital, Inc. (the “registrant”) for the year ended December 31,
2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2019
By:
/S/ DAVID LUND
David Lund
Interim Chief Financial Officer, and
Interim Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of Hercules Capital, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2018 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, Manuel A.
Henriquez, Chairman, and President, Chief Executive Officer and Director of the Company, certify, to the best of my knowledge,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 21, 2019
By:
/S/ MANUEL A. HENRIQUEZ
Manuel A. Henriquez
Chairman, President, and Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the accompanying Annual Report of Hercules Capital, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2018 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, I, David Lund,
Interim Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 21, 2019
By:
/S/ DAVID LUND
David Lund
Interim Chief Financial Officer, and
Interim Chief Accounting Officer
BR427096-0419-10K