497
Table of Contents
Index to Financial Statements

Filed Pursuant to Rule 497
Registration No. 333-224281

 

PROSPECTUS SUPPLEMENT

(To prospectus dated June 5, 2018)

 

 

LOGO

$40,000,000

6.25% Notes due 2033

 

 

We are an internally-managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments.

We are offering $40,000,000 in aggregate principal amount of 6.25% notes due 2033, or the “Notes.” The Notes will mature on October 30, 2033. We will pay interest quarterly on the Notes on January 30, April 30, July 30 and October 30 of each year, beginning on October 30, 2018. We may redeem the Notes in whole or in part at any time or from time to time, at the redemption price set forth under “Specific Terms of the Notes and the Offering—Optional Redemption” in this prospectus supplement. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by Hercules Capital, Inc.

We intend to apply to list the Notes on the New York Stock Exchange, or the NYSE, and we expect trading in the Notes on the NYSE to begin within 30 days of the original issue date under the symbol “HCXY.” The Notes are expected to trade “flat,” which means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not reflected in the trading price. Currently, there is no public market for the Notes.

 

 

An investment in the Notes involves risks that are described in the “Supplementary Risk Factors” section beginning on page S-14 in this prospectus supplement and the “Risk Factors” section beginning on page 14 of the accompanying prospectus.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in the Notes. Please read this prospectus supplement and the accompanying prospectus before investing and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or the SEC. This information is available free of charge by contacting us at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, or by telephone by calling collect at (650) 289-3060 or on our website at www.htgc.com. The information on the websites referred to herein is not incorporated by reference into this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains information about us.

 

     Per Note      Total  

Public offering price

   $ 25.0000      $ 40,000,000  

Sales load (underwriting discounts and commissions)(1)

   $ 0.7808      $ 1,249,250  

Proceeds to us (before expenses)(2)

   $ 24.2192      $ 38,750,750  

 

(1)

Reflects an underwriting discount that may vary between sales to retail investors and sales to institutional investors.

(2)

Before deducting expenses payable by us related to this offering, estimated at $375,000. See “Underwriting” in this prospectus supplement for complete details of underwriters’ compensation.

The underwriters may also purchase up to an additional $6,000,000 total aggregate principal amount of Notes offered hereby, solely to cover overallotments, if any, within 30 days of the date of this prospectus supplement. If the underwriters exercise this option in full, the total public offering price will be $46,000,000, the total sales load (underwriting discounts and commissions) paid by us will be $1,438,250, and total proceeds, before expenses, will be $44,561,750.

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Delivery of the Notes in book-entry form only through The Depository Trust Company will be made on or about September 24, 2018.

Joint Book-Running Managers

 

Keefe, Bruyette & Woods,

A Stifel Company

  Morgan Stanley   UBS Investment Bank

Lead Manager

Janney Montgomery Scott

Co-Managers

 

BB&T Capital Markets   B. Riley FBR   Ladenburg Thalmann   Compass Point   Wedbush Securities

The date of this prospectus supplement is September 19, 2018.


Table of Contents
Index to Financial Statements

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus supplement and the accompanying prospectus is accurate only as of the date on the front cover of this prospectus supplement or such prospectus, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.

This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the heading, “Available Information” before investing in our Notes.

TABLE OF CONTENTS

Prospectus Supplement

 

     Page  

Prospectus Supplement Summary

     S-1  

Specific Terms of the Notes and the Offering

     S-7  

Forward-Looking Statements

     S-12  

Industry and Market Data

     S-13  

Supplementary Risk Factors

     S-14  

Use of Proceeds

     S-22  

Selected Consolidated Financial Data

     S-23  

Capitalization

     S-25  

Senior Securities

     S-26  

Ratio of Earnings to Fixed Charges

     S-29  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     S-30  

Underwriting

     S-56  

Certain United States Federal Income Tax Considerations

     S-60  

Management

     S-65  

Legal Matters

     S-65  

Experts

     S-65  

Available Information

     S-65  

Index to Financial Statements

     S-66  

Prospectus

 

     Page  

Summary

     1  

Fees and Expenses

     10  

Selected Consolidated Financial Data

     12  

Risk Factors

     14  

Forward-Looking Statements

     63  

Use of Proceeds

     65  


Table of Contents
Index to Financial Statements
     Page  

Price Range of Common Stock and Distributions

     66  

Ratio of Earnings to Fixed Charges

     69  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Business

     113  

Portfolio Companies

     126  

Senior Securities

     149  

Management

     152  

Corporate Governance

     164  

Executive Compensation

     170  

Control Persons and Principal Stockholders

     192  

Certain Relationships and Related Transactions

     194  

Certain United States Federal Income Tax Considerations

     195  

Regulation

     205  

Determination of Net Asset Value

     211  

Sales of Common Stock Below Net Asset Value

     215  

Dividend Reinvestment Plan

     220  

Description of Capital Stock

     221  

Description of Our Preferred Stock

     228  

Description of Our Subscription Rights

     230  

Description of Warrants

     232  

Description of Our Debt Securities

     234  

Plan of Distribution

     247  

Brokerage Allocation and Other Practices

     249  

Custodian, Transfer and Dividend Paying Agent and Registrar

     249  

Legal Matters

     249  

Experts

     249  

Available Information

     250  

Index to Financial Statements

     F-1  


Table of Contents
Index to Financial Statements

PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information in this prospectus supplement and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus supplement and the accompanying prospectus and the documents that are referenced in this prospectus supplement and the accompanying prospectus, together with any accompanying supplements. In this prospectus supplement and the accompanying prospectus, unless the context otherwise requires, the “Company,” “Hercules,” “HTGC,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly-owned subsidiaries and its affiliated securitization trusts.

Our Company

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. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments. 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. 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.

As of June 30, 2018, our total assets were approximately $1.8 billion, of which our investments comprised $1.7 billion at fair value and $1.8 billion at cost. Since inception through June 30, 2018, we have made debt and equity commitments of more than $8.0 billion to our portfolio companies.

We also make investments in qualifying small businesses through our two wholly-owned small business investment companies, or SBICs. Our SBIC subsidiaries, Hercules Technology II, L.P., or HT II, and Hercules Technology III, L.P., or HT III, hold approximately $115.4 million and $294.8 million in assets, respectively, and accounted for approximately 5.2% and 13.4% of our total assets, respectively, prior to consolidation at June 30, 2018. At June 30, 2018, we have issued $190.2 million in Small Business Administration, or SBA, guaranteed debentures in our SBIC subsidiaries. See “Regulation—Small Business Administration Regulations” in the accompanying prospectus for additional information regarding our SBIC subsidiaries.

As of June 30, 2018, our investment professionals, including Manuel A. Henriquez, our co-founder, Chairman, President and Chief Executive Officer, are currently comprised of 35 professionals who have, on average, more than 15 years of experience in venture capital, structured finance, commercial lending or acquisition finance with the types of technology-related companies that we are targeting. We believe that we can leverage the experience and relationships of our management team to successfully identify attractive investment opportunities, underwrite prospective portfolio companies and structure customized financing solutions.



 

S-1


Table of Contents
Index to Financial Statements

Organizational Chart

The following chart summarizes our organizational structure as of September 13, 2018. This chart is provided for illustrative purposes only.

 

 

LOGO

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



 

S-2


Table of Contents
Index to Financial Statements

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.

Our Business Strategy

Our strategy to achieve our investment objective includes the following key elements:

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.

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



 

S-3


Table of Contents
Index to Financial Statements

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.

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.

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.

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.

Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured query language-based database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance.

Recent Developments

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, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act), 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, the minimum asset coverage ratio applicable to us will be reduced from 200% to 150%, effective as of September 4, 2019, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. Our Board of Directors also authorized the submission of a proposal for stockholders to accelerate the application of the 150% minimum asset coverage ratio to us at a special meeting of stockholders. As a result of our Board of Director’s approval, effective as of September 4, 2019 (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), we will be able to incur additional indebtedness and, therefore, your risk of an investment in us may increase. In connection with the change in minimum coverage ratio, S&P Global Ratings (“S&P”) lowered our rating to a non-investment grade rating, and we terminated our ratings agreement with S&P. On September 6, 2018, DBRS, Inc. assigned us an investment grade rating. Other 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 “Supplementary Risk Factors—Risks Related to the Notes—A downgrade, suspension or withdrawal of a credit rating assigned by a rating agency to us or our unsecured debt, if any, or change in the debt markets could cause



 

S-4


Table of Contents
Index to Financial Statements

the liquidity or market value of the Notes to decline significantly” in this prospectus supplement and “Risk Factors—Risks Related to Our 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” in the accompanying prospectus.

Distribution Declaration

On July 25, 2018, our Board of Directors declared a cash distribution of $0.31 per share, which was paid on August 20, 2018 to stockholders of record as of August 13, 2018. This distribution represents our fifty-second consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.64 per share.

Closed and Pending Commitments

As of September 13, 2018, we have:

 

   

Closed debt and equity commitments of approximately $169.8 million to new and existing portfolio companies and funded approximately $109.5 million subsequent to June 30, 2018.

 

   

Pending commitments (signed non-binding term sheets) of approximately $82.7 million.

The table below summarizes our year-to-date closed and pending commitments as follows:

 

Closed Commitments and Pending Commitments (in millions)

  

January 1—June 30, 2018 Closed Commitments

   $ 728.7  

July 1—September 13, 2018 Closed Commitments(a)

   $ 169.8  

Pending Commitments (as of September 13, 2018)(b)

   $ 82.7  

Closed and Pending Commitments as of September 13, 2018

   $ 981.2  

 

a.

Closed Commitments may include renewals of existing credit facilities. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close.

b.

Not all pending commitments (signed non-binding term sheets) are expected to close and they do not necessarily represent any future cash requirements.

ATM Equity Program Issuances

Subsequent to June 30, 2018 and as of September 13, 2018, we sold 2.2 million shares of common stock for total accumulated net proceeds of approximately $28.6 million, including $229,000 of offering expenses, under our at-the-market, or ATM, equity distribution agreement, dated September 8, 2017, or the Equity Distribution Agreement, with JMP Securities LLC, or JMP. As of September 13, 2018, approximately 5.6 million shares remain available for issuance and sale under the Equity Distribution Agreement.

Hercules Technology II Debentures Full Redemption

On July 13, 2018, we completed repayment of the $41.2 million of outstanding HT II debentures.

Amendment to Wells Facility

On July 31, 2018, we entered into a further amendment to the $120.0 million revolving senior credit facility with Wells Fargo Capital Finance, LLC (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.



 

S-5


Table of Contents
Index to Financial Statements

Departure of Officer

On August 16, 2018, Gerard R. Waldt, Jr., Controller and Interim Chief Accounting Officer, tendered his resignation from the Company. Mr. Waldt’s resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. David Lund, the Company’s current Interim Chief Financial Officer, assumed the duties of Interim Chief Accounting Officer effective as of August 23, 2018. The resignation of Mr. Waldt was effective on September 7, 2018.

Portfolio Company Developments

As of September 13, 2018, we held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both companies filed confidentially under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all. Subsequent to June 30, 2018 and as of September 13, 2018, there were two companies that announced or completed liquidity events.

 

  1.

In August 2018, our portfolio company NuGEN Technologies, Inc., a leading provider for innovative next-generation sequencing kits and genomic sample preparation solutions for the fastest growing field within the genomics area, was acquired by the Tecan Group (SIX Swiss Exchange: TECN), a leading global provider of laboratory instruments and solutions in biopharmaceuticals, forensics and clinical diagnostics. Terms of the acquisition were not disclosed.

 

  2.

In August 2018, our portfolio company Avnera Corporation, a fabless semiconductor firm making custom Analog System-on-Chip (ASoC) solutions for audio, voice, speech, sensor and artificial intelligence (AI) applications, was acquired by Skyworks Solutions, Inc. (NASDAQ: SWKS), an innovator of high-performance analog semiconductors connecting people, places and things. Skyworks paid $405.0 million in cash to Avnera equity holders at closing with up to an additional $20.0 million to be paid if certain performance targets are exceeded over a 12-month period post-closing period.

Corporate Information

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, Reston, VA, 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 SEC. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus.

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. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. 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.



 

S-6


Table of Contents
Index to Financial Statements

SPECIFIC TERMS OF THE NOTES AND THE OFFERING

This prospectus supplement sets forth certain terms of the Notes that we are offering pursuant to this prospectus supplement and supplements the accompanying prospectus that is attached to the back of this prospectus supplement. This section outlines the specific legal and financial terms of the Notes. You should read this section together with the more general description of the Notes in the accompanying prospectus under the heading “Description of Our Debt Securities” before investing in the Notes. Capitalized terms used in this prospectus supplement and not otherwise defined shall have the meanings ascribed to them in the accompanying prospectus or in the indenture governing the Notes (as amended from time to time, the “indenture”).

 

Issuer

Hercules Capital, Inc.

 

Title of the securities

6.25% Notes due 2033

 

Aggregate principal amount being offered

$40,000,000

 

Overallotment option

The underwriters may also purchase from us up to an additional $6,000,000 aggregate principal amount of Notes solely to cover overallotments, if any, within 30 days of the date of this prospectus supplement.

 

Initial public offering price

100% of the aggregate principal amount.

 

Principal payable at maturity

100% of the aggregate principal amount; the principal amount of each Note will be payable on its stated maturity date at the office of the Trustee in The City of New York or at such other office designated by the Trustee.

 

Type of Note

Fixed rate note

 

Listing

We intend to apply to list the Notes on the New York Stock Exchange within 30 days of the original issue date under the symbol “HCXY.”

 

Interest rate

6.25% per year

 

Day count basis

360-day year of twelve 30-day months

 

Original issue date of the Notes

September 24, 2018

 

Stated maturity date

October 30, 2033

 

Date interest starts accruing on the Notes

September 24, 2018

 

Interest payment dates for the Notes

Each January 30, April 30, July 30 and October 30, commencing October 30, 2018. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.


 

S-7


Table of Contents
Index to Financial Statements

Interest periods for the Notes

The initial interest period will be the period from and including September 24, 2018, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

 

Regular record dates for interest

Each January 15, April 15, July 15 and October 15.

 

Specified currency

U.S. Dollars

 

Place of payment

New York City or such other office designated by the Trustee

 

Ranking of Notes

The Notes will be our general unsecured obligations and will rank:

 

   

pari passu with our other outstanding and future unsecured indebtedness, including, without limitation, approximately $150.0 million in aggregate principal amount of 4.625% notes due 2022 (the “2022 Notes”), approximately $83.5 million in aggregate principal amount of 6.25% notes due 2024 (the “2024 Notes”), approximately $75.0 million in aggregate principal amount of 5.25% notes due 2025 (the “2025 Notes”), and approximately $230.0 million in aggregate principal amount of 4.375% convertible notes due 2022 (the “2022 Convertible Notes”), each as of June 30, 2018.

 

   

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes.

 

   

effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness.

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including, without limitation, the indebtedness of HT II and HT III, borrowings under the Wells Facility, borrowings under the $100.0 million revolving senior secured credit facility with MUFG Union Bank, N.A. (the “Union Bank Facility”, and together with the Wells Facility, the “Credit Facilities”), and approximately $31.1 million of fixed rate asset-backed notes (the “2021 Asset-Backed Notes”), each as of June 30, 2018. Note that there were no borrowings outstanding under the Wells Facility and $58.3 million of borrowings outstanding on the Union Bank Facility as of June 30, 2018.

 

Denominations

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

 

Business day

Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City, or in such other place of payment designated by the Trustee, are authorized or required by law or executive order to close.


 

S-8


Table of Contents
Index to Financial Statements

Optional redemption

We may redeem in whole or in part at any time, or from time to time, at our option on or after October 30, 2023 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.

 

  You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the indenture and the 1940 Act.

 

  If we redeem only some of the Notes, the Trustee or The Depository Trust Company, or DTC, as applicable, will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture and the 1940 Act, in each case, to the extent applicable. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

 

Sinking fund

The Notes will not be subject to any sinking fund.

 

Repayment at option of Holders

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

 

Defeasance and covenant defeasance

The Notes are subject to defeasance by us.

 

  The Notes are subject to covenant defeasance by us.

 

Form of Notes

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. Except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations which are participants in DTC.

 

Trustee, Paying Agent and Security Registrar

U.S. Bank National Association

 

Other covenants

In addition to the covenants described in the prospectus attached to this prospectus supplement, the following covenants shall apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions,



 

S-9


Table of Contents
Index to Financial Statements
 

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 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) after such borrowings. See “Risk Factors—Risks Related to our Business Structure—Recently passed legislation may allow us to incur additional leverage” in the accompanying prospectus.

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate 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 dividend or 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 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) 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. See “Risk Factors—Risks Related to our Business Structure—Recently passed legislation may allow us to incur additional leverage” in the accompanying prospectus.

 

   

If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the Trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles, as applicable (“U.S. GAAP”).



 

S-10


Table of Contents
Index to Financial Statements

Modifications to events of default

The following events of default, as described in the prospectus attached to this prospectus supplement:

 

   

We do not pay the principal of, or any premium on, a debt security of the series on its due date, and do not cure this default within five days.

 

   

On the last business day of each of 24 consecutive calendar months, we have an asset coverage of less than 100%.

 

  with respect to the Notes has been revised to read as follows:

 

   

We do not pay the principal of, or any premium on, any Note on its due date.

 

   

On the last business day of each of 24 consecutive calendar months, we have an asset coverage of less than 100%, giving effect to any exemptive relief granted to us by the SEC.

 

Global Clearance and Settlement Procedures

Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the issuer, the Trustee or the paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

Further issuances

We have the ability to issue additional debt securities under the indenture with terms different from the Notes and, without the consent of the holders thereof, to reopen the Notes and issue additional Notes.

 

Use of Proceeds

We estimate that the net proceeds we receive from the sale of the $40.0 million aggregate principal amount of Notes in this offering will be approximately $38.4 million after deducting the underwriting discount of approximately $1.2 million payable by us and estimated offering expenses of approximately $375,000 payable by us. We expect to use the net proceeds from this offering (i) to fund investments in debt and equity securities in accordance with our investment objective, (ii) to make acquisitions, (iii) to retire certain debt obligations (which may include the 2024 Notes), and (iv) for other general corporate purposes.

 

Governing Law

The Notes and the indenture are governed by and construed in accordance with the laws of the State of New York.


 

S-11


Table of Contents
Index to Financial Statements

FORWARD-LOOKING STATEMENTS

The matters discussed in this prospectus supplement and the accompanying prospectus, 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 prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus 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 prospectus supplement and the accompanying prospectus, please see the discussion under “Supplementary Risk Factors” in this prospectus supplement and “Risk Factors” in the accompanying prospectus.

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made and are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, or the Securities Act. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this prospectus supplement.

 

S-12


Table of Contents
Index to Financial Statements

INDUSTRY AND MARKET DATA

We have compiled certain industry estimates presented in this prospectus supplement and the accompanying prospectus from internally generated information and data. While we believe our estimates are reliable, they have not been verified by any independent sources. The estimates are based on a number of assumptions, including increasing investment in venture capital and private equity-backed companies. Actual results may differ from projections and estimates, and this market may not grow at the rates projected, or at all. If this market fails to grow at projected rates, our business and the market price of our securities, including the Notes, could be materially adversely affected.

 

S-13


Table of Contents
Index to Financial Statements

SUPPLEMENTARY RISK FACTORS

Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various risks, including those described below and those set forth in the accompanying prospectus. You should carefully consider these risk factors, together with all of the other information included in this prospectus supplement and the accompanying prospectus, before you decide whether to make an investment in our securities. The risks set out below and in the accompanying prospectus 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 events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected which could materially adversely affect our ability to repay principal and interest on the Notes. In addition, the market price of the Notes and our net asset value (“NAV”) could decline, and you may lose all or part of your investment. The risk factors described below, together with those set forth in the accompanying prospectus, are the principal risk factors associated with an investment in our securities, including the Notes, as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.

Risks Related to the Notes

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

The Notes will not be secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes 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 Notes. As of June 30, 2018, we had $58.3 million of borrowings outstanding under our Union Bank Facility, which is secured by debt investments in our portfolio companies and related assets, and no outstanding borrowings under our Wells Facility, which is secured by loans in the borrowing base for the Wells Facility.

The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes are obligations exclusively of Hercules Capital, Inc. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. A significant portion of the indebtedness required to be consolidated on our balance sheet is held through our SBIC subsidiaries. For example, at June 30, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. The assets of such subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” in this prospectus supplement for more detail on the SBA-guaranteed debentures.

Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors), 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 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 effectively 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. Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.

 

S-14


Table of Contents
Index to Financial Statements

As of June 30, 2018, we had no outstanding borrowings under our Wells Facility, $58.3 million of borrowings outstanding under our Union Bank Facility, and approximately $190.2 million of indebtedness outstanding incurred by our SBIC subsidiaries, HT II and HT III. All of such indebtedness would be structurally senior to the Notes. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which the Notes will be issued contains limited protection for holders of the Notes.

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the 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 your investment in the Notes. In particular, the terms of the indenture and the Notes will 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 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 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 is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the 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 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) 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 Notes, in each case other than dividends, 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 dividend or 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 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) 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;

 

   

create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

S-15


Table of Contents
Index to Financial Statements
   

make investments; or

 

   

create restrictions on the payment of distributions or other amounts to us from our subsidiaries.

In addition, the indenture will not require us to purchase the Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes 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.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Certain of our current debt instruments include more protections for their holders than the indenture and the Notes. See “Risk Factors—In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 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, 2022 Convertible Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions” in the accompanying prospectus. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 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 Notes.

Our amount of debt outstanding may increase as a result of this offering. Our current indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations under the Notes and our other debt.

The use of debt could have significant consequences on our future operations, including:

 

   

making it more difficult for us to meet our payment and other obligations under the Notes and our other outstanding debt;

 

   

resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our financing arrangements, which event of default could result in substantially all of our debt becoming immediately due and payable;

 

   

reducing the availability of our cash flow to fund investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

   

subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our financing arrangements; and

 

   

limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Notes and our other debt.

Our ability to meet our payment and other obligations under our financing arrangements depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic,

 

S-16


Table of Contents
Index to Financial Statements

financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under our financing arrangements or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the Notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt.

The optional redemption provision may materially adversely affect your return on the Notes.

The Notes will be redeemable in whole or in part upon certain conditions at any time, or from time to time, at our option on or after October 30, 2023. We may choose to redeem the Notes at times when prevailing interest rates are lower than the interest rate paid on the Notes. 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 the Notes being redeemed.

An active trading market for the Notes may not develop or be maintained, which could limit the market price of the Notes or your ability to sell them.

The Notes are a new issue of debt securities for which there currently is no trading market. We intend to apply to list the Notes on the NYSE within 30 days of the original issue date. Although we expect the Notes to be listed on the NYSE, we cannot provide any assurances that an active trading market will develop for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they 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. The underwriters have advised us that they intend to make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion. Accordingly, we cannot assure you that an active trading market will develop for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

A downgrade, suspension or withdrawal of a credit rating assigned by a rating agency to us or our unsecured debt, if any, or change in the debt markets could cause the liquidity or market value of the Notes 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 the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. 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 Notes of any changes in our credit ratings. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agencies if in their judgment future circumstances relating to the basis of the credit ratings, 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, which could have an adverse effect on the market prices of the Notes.

 

S-17


Table of Contents
Index to Financial Statements

If we Default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank Facility, the 2022 Notes, the 2024 Notes, the 2025 Notes, the 2022 Convertible Notes, and the 2021 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 the Notes and substantially decrease the market value of the 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, 2024 Notes, 2025 Notes, 2022 Convertible Notes, 2021 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, the 2022 Notes, the 2024 Notes, the 2025 Notes, the 2022 Convertible Notes, the 2021 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 or Union Bank Facility, the 2022 Notes, the 2024 Notes, the 2025 Notes, the 2022 Convertible Notes, the 2021 Asset-Backed Notes or other debt, as applicable, the 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 Notes, the Wells Facility, Union Bank Facility, the 2022 Notes, the 2024 Notes, the 2025 Notes, the 2022 Convertible Notes or the 2021 Asset-Backed Notes or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due. See “Specific Terms of the Notes and the Offering” in this prospectus supplement.

FATCA withholding may apply to payments to certain foreign entities.

Payments made under the Notes to a foreign financial institution or non-financial foreign entity (including such an institution or entity acting as an intermediary) may be subject to a U.S. withholding tax of 30% under U.S. Foreign Account Tax Compliance Act provisions of the Code (commonly referred to as “FATCA”). This U.S. withholding tax generally applies to payments of interest on the Notes as well as, after December 31, 2018, to any payments of gross proceeds (including principal payments) from the sale, redemption, retirement or other disposition of the Notes, unless the foreign financial institution or non-financial foreign entity complies with certain information reporting, withholding, identification, certification and related requirements imposed by FATCA. Depending upon the status of a holder and the status of an intermediary through which any Notes are held, the holder could be subject to this 30% U.S. withholding tax in respect of any interest paid on the Notes as well as any proceeds from the sale, redemption, retirement or other disposition of the Notes. Persons located in jurisdictions that have entered into an intergovernmental agreement with the United States to implement FATCA may be subject to different rules. You should consult your own tax advisors regarding FATCA and how it may affect your investment in the Notes. See “Certain United States Federal Income Tax Considerations—Taxation of Note Holders—FATCA” in this prospectus supplement for further information.

 

S-18


Table of Contents
Index to Financial Statements

Risks Related to our Business Structure

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 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 Credit Facilities, our 2022 Notes, our 2024 Notes, our 2025 Notes, our 2021 Asset-Backed Notes, and our 2022 Convertible Notes 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 June 30, 2018, we had no borrowings outstanding under the Wells Facility and $58.3 million of borrowings outstanding on the Union Bank Facility. In addition, as of June 30, 2018, we had approximately $190.2 million of indebtedness outstanding incurred by our SBIC subsidiaries, approximately $150.0 million in aggregate principal amount of 2022 Notes, approximately $83.5 million in aggregate principal amount of 2024 Notes, approximately $75.0 million in aggregate principal amount of 2025 Notes, approximately $31.1 million in aggregate principal amount of 2021 Asset-Backed Notes, and approximately $230.0 million in aggregate principal amount of 2022 Convertible Notes.

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.

As a business development company, under the 1940 Act, generally, we are 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). In addition, we may not be permitted to declare any cash 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 200% after deducting the amount of such distribution or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. 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, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act), approved the application to us of the 150% minimum asset coverage ratio set

 

S-19


Table of Contents
Index to Financial Statements

forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to us will be reduced from 200% to 150%, effective as of September 4, 2019, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. Our Board of Directors also authorized the submission of a proposal for stockholders to accelerate the application of the 150% minimum asset coverage ratio to us at a special meeting of stockholders. As a result of our Board of Director’s approval, effective as of September 4, 2019 (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), we will be able to incur additional indebtedness 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. See “—Risks Related to the Notes—A downgrade, suspension or withdrawal of a credit rating assigned by a rating agency to us or our unsecured debt, if any, or change in the debt markets could cause the liquidity or market value of the Notes to decline significantly” in this prospectus supplement and “Risk Factors—Risks Related to Our 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” in the accompanying prospectus.

As of June 30, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 252.7% 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 217.2% when including all SBA leverage.

Based on assumed leverage equal to 84.9% of our net assets as of June 30, 2018, our investment portfolio would have been required to experience an annual return of at least 2.7% 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 June 30, 2018, (2) a hypothetical asset coverage ratio of 200%, and (3) a hypothetical asset coverage ratio of 150%, each at various annual returns on our portfolio as of June 30, 2018, net of expenses. 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 June 30, 2018 (252.7%)(1)

     (23.57%)        (14.27%)        (4.97%)        4.34%        13.64%  

Corresponding return to common stockholder assuming 200% asset coverage(2)

     (29.09%)        (18.05%)        (7.00%)        4.04%        15.08%  

Corresponding return to common stockholder assuming 150% asset coverage(3)

     (44.94%)        (28.90%)        (12.85%)        3.19%        19.24%  

 

(1)

Assumes $1,792 million in total assets, $818 million in debt outstanding, $963.7 million in stockholders’ equity, and an average cost of funds of 5.85%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2021 Asset Backed Notes, 2022 Convertible Notes, Wells Facility, and Union Bank Facility for the period ended June 30, 2018. Actual interest payments may be different.

(2)

Assumes $2,128 million in total assets including debt issuance costs on a pro forma basis, $1,154 million in debt outstanding, $963.7 million in stockholders’ equity, and an average cost of funds of 5.85%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended June 30, 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.

 

S-20


Table of Contents
Index to Financial Statements
(3)

Assumes $3,092 million in total assets including debt issuance costs on a pro forma basis, $2,118 million in debt outstanding, $963.7 million in stockholders’ equity, and an average cost of funds of 5.85%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended June 30, 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.

 

S-21


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of the $40.0 million aggregate principal amount of Notes in this offering will be approximately $38.4 million (or approximately $44.2 million if the underwriters fully exercise their overallotment option) based on a public offering of 100% of par, after deducting the underwriting discount of approximately $1.2 million (or approximately $1.4 million if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $375,000 payable by us.

We expect to use the net proceeds from this offering (i) to fund investments in debt and equity securities in accordance with our investment objective, (ii) to make acquisitions, (iii) to retire certain debt obligations (which may include the 2024 Notes), and (iv) for other general corporate purposes.

As of June 30, 2018, the aggregate principal balance of the 2024 Notes was approximately $83.5 million. The 2024 Notes bear interest at a rate of 6.25% per year, payable quarterly and mature, unless earlier repurchased or redeemed, on July 30, 2024.

We intend to seek to invest the net proceeds received in this offering as promptly as practicable after receipt thereof consistent with our investment objective. We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within three to six months, depending on market conditions. We anticipate that the remainder will be used for working capital and general corporate purposes, including potential payments or distributions to shareholders. Pending such use, we will invest a portion of the net proceeds of this offering in short-term investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in accordance with our investment objective.

 

S-22


Table of Contents
Index to Financial Statements

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Senior Securities” and the consolidated financial statements and related notes included elsewhere herein. The selected balance sheet data as of the end of fiscal year 2017, 2016, 2015, 2014, and 2013 and the financial statement of operations data for fiscal years 2017, 2016, 2015, 2014, and 2013 has been derived from our audited financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, but not all of which are presented in this prospectus supplement. The historical data are not necessarily indicative of results to be expected for any future period. The selected financial and other data for the six-months ended June 30, 2018 and other quarterly financial information is derived from our unaudited financial statements, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results as of and for the six-months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

     For the Six-
Months Ended
June 30,

(unaudited)
    For the Year Ended December 31,  

(in thousands, except per share amounts)

   2018     2017     2017     2016     2015     2014     2013  

Investment income:

              

Interest

   $ 88,857     $ 83,367     $ 172,196     $ 158,727     $ 140,266     $ 126,618     $ 123,671  

Fees

     9,405       11,450       18,684       16,324       16,866       17,047       16,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     98,262       94,817       190,880       175,051       157,132       143,665       139,713  

Operating expenses:

              

Interest

     19,264       18,861       37,857       32,016       30,834       28,041       30,334  

Loan fees

     4,537       4,186       8,728       5,042       6,055       5,919       4,807  

General and administrative:

              

Legal expenses

     1,212       2,867       4,572       4,823       3,079       1,366       1,440  

Other expenses

     6,471       5,947       11,533       11,283       13,579       8,843       7,914  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

     7,683       8,814       16,105       16,106       16,658       10,209       9,354  

Employee Compensation:

              

Compensation and benefits

     12,775       11,262       24,555       22,500       20,713       16,604       16,179  

Stock-based compensation

     5,166       3,742       7,191       7,043       9,370       9,561       5,974  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     17,941       15,004       31,746       29,543       30,083       26,165       22,153  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     49,425       46,865       94,436       82,707       83,630       70,334       66,648  

Other income (loss)

     —         —         —         8,000       (1     (1,581     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     48,837       47,952       96,444       100,344       73,501       71,750       73,065  

Net realized gain (loss) on investments

     (13,831     (2,475     (26,711     4,576       5,147       20,112       14,836  

Net change in unrealized appreciation (depreciation) on investments

     23,000       (17,916     9,265       (36,217     (35,732     (20,674     11,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     9,169       (20,391     (17,446     (31,641     (30,585     (562     26,381  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 58,006     $ 27,561     $ 78,998     $ 68,703     $ 42,916     $ 71,188     $ 99,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share (basic)

   $ 0.67     $ 0.33     $ 0.95     $ 0.91     $ 0.60     $ 1.12     $ 1.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

   $ 0.62     $ 0.62     $ 1.24     $ 1.24     $ 1.24     $ 1.24     $ 1.11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

S-23


Table of Contents
Index to Financial Statements

(in thousands,

except per share amounts)

   For the Six-Months
Ended June 30,

(unaudited)
    For the Year Ended December 31,  
   2018     2017     2017     2016     2015     2014     2013  

Balance sheet data:

              

Investments, at value

   $ 1,701,936     $ 1,395,469     $ 1,542,214     $ 1,423,942     $ 1,200,638     $ 1,020,737     $ 910,295  

Cash and cash equivalents

     59,461       160,412       91,309       13,044       95,196       227,116       268,368  

Total assets

     1,792,597       1,588,709       1,654,715       1,464,204       1,334,761       1,299,223       1,221,715  

Total liabilities

     828,900       771,258       813,748       676,260       617,627       640,359       571,708  

Total net assets

     963,697       817,451       840,967       787,944       717,134       658,864       650,007  

Other Data:

              

Total return(3)

     1.24     (2.04 %)      1.47     26.87     (9.70 %)      (1.75 %)      58.49

Total debt investments, at value

     1,545,997       1,287,623       1,415,984       1,328,803       1,110,209       923,906       821,988  

Total warrant investments, at value

     34,430       32,530       36,869       27,485       22,987       25,098       35,637  

Total equity investments, at value

     121,509       75,316       89,361       67,654       67,442       71,733       52,670  

Unfunded Commitments(2)

     129,716       57,595       73,604       59,683       75,402       147,689       69,091  

Net asset value per share(1)

   $ 10.22     $ 9.87     $ 9.96     $ 9.90     $ 9.94     $ 10.18     $ 10.51  

 

(1)

Based on common shares outstanding at period end.

(2)

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.

(3)

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.

The following tables set forth certain quarterly financial information for each of the eight quarters up to and ending December 31, 2017 and the quarters ending March 31, 2018 and June 30, 2018. This information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

 

     Quarter Ended  

(in thousands, except per share data)

   March 31,
2018
     June 30,
2018
 

Total investment income

   $ 48,700      $ 49,562  

Net investment income

     26,063        22,774  

Net increase (decrease) in net assets resulting from operations

     5,946        52,060  

Change in net assets resulting from operations per common share (basic)

   $ 0.07      $ 0.59  

 

     Quarter Ended  

(in thousands, except per share data)

   March 31,
2017
    June 30,
2017
     September 30,
2017
     December 31,
2017
 

Total investment income

   $ 46,365     $ 48,452      $ 45,865      $ 50,198  

Net investment income

     22,678       25,275        23,973        24,518  

Net increase (decrease) in net assets resulting from operations

     (5,588     33,149        33,072        18,365  

Change in net assets resulting from operations per common share (basic)

   $ (0.07   $ 0.40      $ 0.40      $ 0.22  

 

     Quarter Ended  
     March 31,
2016
     June 30,
2016
     September 30,
2016
     December 31,
2016
 

Total investment income

   $ 38,939      $ 43,538      $ 45,102      $ 47,472  

Net investment income

     20,097        23,354        23,776        33,117  

Net increase in net assets resulting from operations

     14,295        9,475        30,812        14,121  

Change in net assets resulting from operations per common share (basic)

   $ 0.20      $ 0.13      $ 0.41      $ 0.18  

 

S-24


Table of Contents
Index to Financial Statements

CAPITALIZATION

The following table sets forth (i) our actual capitalization as of June 30, 2018, and (ii) our capitalization as adjusted to give effect to the sale of $40.0 million aggregate principal amount of Notes in this offering (assuming no exercise of the overallotment option), excluding accrued interest, after deducting the underwriting discounts and commissions of approximately $1.2 million payable by us and estimated offering expenses of approximately $375,000 payable by us. You should read this table together with the “Use of Proceeds” section and our statement of assets and liabilities included elsewhere in this prospectus supplement.

 

     As of June 30, 2018  
     Actual     As
Adjusted
 
     (in thousands)  

Investments at fair value

   $ 1,701,936     $ 1,701,936  

Cash and cash equivalents

   $ 59,461     $ 97,837  

Debt(1):

    

Accounts payable and accrued liabilities

   $ 25,115     $ 25,115  

Long-term SBA debentures

     188,457       188,457  

2022 Convertible Notes

     224,269       224,269  

2021 Asset-Backed Notes

     30,698       30,698  

2022 Notes

     147,728       147,728  

2024 Notes

     81,694       81,694  

2025 Notes

     72,616       72,616  

Credit Facilities

     58,323       58,323  

Notes offered herein

     —         38,376  
  

 

 

   

 

 

 

Total debt

   $ 828,900     $ 867,276  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, par value $0.001 per share; 200,000,000 shares authorized; 94,259,954 shares issued and outstanding

   $ 94     $ 94  

Capital in excess of par value

     1,026,313       1,026,313  

Unrealized depreciation on investments

     (56,760     (56,760

Accumulated realized gains (losses) on investments

     (34,205     (34,205

Distributions in excess of investment income

     28,255       28,255  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 963,697     $ 963,697  
  

 

 

   

 

 

 

Total capitalization

   $ 1,792,597     $ 1,830,973  
  

 

 

   

 

 

 

 

(1)

The above table reflects the principal amount of indebtedness outstanding net of the associated debt issuance costs as of June 30, 2018. As of September 13, 2018, indebtedness under the Wells Facility, the Union Bank Facility, the 2022 Notes, the 2022 Convertible Notes, the 2024 Notes, the 2025 Notes, and the 2021 Asset-Backed Notes was $39.9 million, $44.2 million, $150.0 million, $230.0 million, $83.5 million, $75.0 million, and $5.9 million, respectively. The net proceeds from the sale of the Notes in this offering are expected to be used to fund investments in debt and equity securities in accordance with our investment objective, to make acquisitions, to retire certain debt obligations (which may include the 2024 Notes), and for other general corporate purposes. See “Use of Proceeds.”

 

S-25


Table of Contents
Index to Financial Statements

SENIOR SECURITIES

Information about our senior securities is shown in the following table for the periods as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, and 2008. The information as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011 and 2010 has been derived from our audited financial statements for these periods, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The report of PricewaterhouseCoopers LLP on the senior securities table as of December 31, 2017 is attached as an exhibit to the registration statement of which this prospectus is a part. The “N/A” indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

Securitized Credit Facility with Wells Fargo Capital Finance

        

December 31, 2008

   $ 89,582,000      $ 6,689        N/A  

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011

   $ 10,186,830      $ 73,369        N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015

   $ 50,000,000      $ 26,352        N/A  

December 31, 2016

   $ 5,015,620      $ 290,234        N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of June 30, 2018, unaudited)(6)

     —          —          N/A  

Securitized Credit Facility with Union Bank, NA

        

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011(6)

     —          —          N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015(6)

     —          —          N/A  

December 31, 2016(6)

     —          —          N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 58,322,619      $ 30,498        N/A  

Small Business Administration Debentures (HT II)(4)

        

December 31, 2008

   $ 127,200,000      $ 4,711        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 150,000,000      $ 3,942        N/A  

December 31, 2011

   $ 125,000,000      $ 5,979        N/A  

December 31, 2012

   $ 76,000,000      $ 14,786        N/A  

December 31, 2013

   $ 76,000,000      $ 16,075        N/A  

December 31, 2014

   $ 41,200,000      $ 31,535        N/A  

December 31, 2015

   $ 41,200,000      $ 31,981        N/A  

December 31, 2016

   $ 41,200,000      $ 35,333        N/A  

December 31, 2017

   $ 41,200,000      $ 39,814        N/A  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 41,200,000      $ 43,172        N/A  

Small Business Administration Debentures (HT III)(5)

        

December 31, 2010

   $ 20,000,000      $ 29,564        N/A  

December 31, 2011

   $ 100,000,000      $ 7,474        N/A  

December 31, 2012

   $ 149,000,000      $ 7,542        N/A  

December 31, 2013

   $ 149,000,000      $ 8,199        N/A  

December 31, 2014

   $ 149,000,000      $ 8,720        N/A  

December 31, 2015

   $ 149,000,000      $ 8,843        N/A  

December 31, 2016

   $ 149,000,000      $ 9,770        N/A  

December 31, 2017

   $ 149,000,000      $ 11,009        N/A  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 149,000,000      $ 11,938        N/A  

 

S-26


Table of Contents
Index to Financial Statements

Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

2016 Convertible Notes

        

December 31, 2011

   $ 75,000,000      $ 10,623      $ 885  

December 31, 2012

   $ 75,000,000      $ 15,731      $ 1,038  

December 31, 2013

   $ 75,000,000      $ 16,847      $ 1,403  

December 31, 2014

   $ 17,674,000      $ 74,905      $ 1,290  

December 31, 2015

   $ 17,604,000      $ 74,847      $ 1,110  

December 31, 2016

     —          —          —    

April 2019 Notes

        

December 31, 2012

   $ 84,489,500      $ 13,300      $ 986  

December 31, 2013

   $ 84,489,500      $ 14,460      $ 1,021  

December 31, 2014

   $ 84,489,500      $ 15,377      $ 1,023  

December 31, 2015

   $ 64,489,500      $ 20,431      $ 1,017  

December 31, 2016

   $ 64,489,500      $ 22,573      $ 1,022  

December 31, 2017

     —          —          —    

September 2019 Notes

        

December 31, 2012

   $ 85,875,000      $ 13,086      $ 1,003  

December 31, 2013

   $ 85,875,000      $ 14,227      $ 1,016  

December 31, 2014

   $ 85,875,000      $ 15,129      $ 1,026  

December 31, 2015

   $ 45,875,000      $ 28,722      $ 1,009  

December 31, 2016

   $ 45,875,000      $ 31,732      $ 1,023  

December 31, 2017

     —          —          —    

2024 Notes

        

December 31, 2014

   $ 103,000,000      $ 12,614      $ 1,010  

December 31, 2015

   $ 103,000,000      $ 12,792      $ 1,014  

December 31, 2016

   $ 252,873,175      $ 5,757      $ 1,016  

December 31, 2017

   $ 183,509,600      $ 8,939      $ 1,025  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 83,509,600      $ 21,299      $ 1,011  

2025 Notes

        

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 75,000,000      $ 23,716      $ 993  

2017 Asset-Backed Notes

        

December 31, 2012

   $ 129,300,000      $ 8,691      $ 1,000  

December 31, 2013

   $ 89,556,972      $ 13,642      $ 1,004  

December 31, 2014

   $ 16,049,144      $ 80,953      $ 1,375  

December 31, 2015

     —          —          —    

2021 Asset-Backed Notes

        

December 31, 2014

   $ 129,300,000      $ 10,048      $ 1,000  

December 31, 2015

   $ 129,300,000      $ 10,190      $ 996  

December 31, 2016

   $ 109,205,263      $ 13,330      $ 1,002  

December 31, 2017

   $ 49,152,504      $ 33,372      $ 1,001  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 31,087,858      $ 57,215      $ 1,000  

2022 Convertible Notes

        

December 31, 2017

   $ 230,000,000      $ 7,132      $ 1,028  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 230,000,000      $ 7,733      $ 1,012  

2022 Notes

        

December 31, 2017

   $ 150,000,000      $ 10,935      $ 1,014  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 150,000,000      $ 11,858      $ 999  

Total Senior Securities(7)

        

December 31, 2008

   $ 216,782,000      $ 2,764        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 170,000,000      $ 3,478        N/A  

December 31, 2011

   $ 310,186,830      $ 2,409        N/A  

December 31, 2012

   $ 599,664,500      $ 1,874        N/A  

December 31, 2013

   $ 559,921,472      $ 2,182        N/A  

December 31, 2014

   $ 626,587,644      $ 2,073        N/A  

December 31, 2015

   $ 600,468,500      $ 2,194        N/A  

December 31, 2016

   $ 667,658,558      $ 2,180        N/A  

December 31, 2017

   $ 802,862,104      $ 2,043        N/A  

December 31, 2018 (as of June 30, 2018, unaudited)

   $ 818,120,077      $ 2,174        N/A  

 

S-27


Table of Contents
Index to Financial Statements

 

(1)

Total amount of each class of senior securities outstanding at the end of the period presented.

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, including senior securities not subject to asset coverage requirements under the 1940 Act due to exemptive relief from the SEC, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage per Unit.

(3)

Not applicable because senior securities are not registered for public trading.

(4)

Issued by HT II, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(5)

Issued by HT III, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(6)

The Company’s Wells Facility and Union Bank Facility had no borrowings outstanding during the periods noted above.

(7)

The total senior securities and Asset Coverage per Unit shown for those securities do not represent the asset coverage ratio requirement under the 1940 Act because the presentation includes senior securities not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC. As of June 30, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 253.0% excluding our SBA debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio.

 

S-28


Table of Contents
Index to Financial Statements

RATIO OF EARNINGS TO FIXED CHARGES

The following contains our ratio of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our consolidated financial statements, including the notes to those statements, included in this prospectus supplement:

 

    For the six-
months ended
June 30,
2018
    For the year
ended
December 31,
2017
    For the year
ended
December 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2014
    For the year
ended
December 31,
2013
 

Earnings to Fixed Charges(1)

    3.44       2.70       2.85       2.16       3.10       3.83  

 

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in stockholders’ equity resulting from operations plus fixed charges. Fixed charges include interest and credit facility fees expense and amortization of debt issuance costs.

 

(1)

Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

 

S-29


Table of Contents
Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus supplement and the accompanying prospectus. In addition to historical information, the following discussion and other parts of this prospectus supplement and the accompanying prospectus 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 “Supplementary Risk Factors” in this prospectus supplement and “Risk Factors,” and “Forward-Looking Statements” appearing elsewhere herein and the accompanying prospectus. Capitalized terms used and not otherwise defined herein have the meaning given in the accompanying prospectus.

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, Reston, VA, 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’s 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 our two wholly owned SBICs. Our SBIC subsidiaries, HT II and HT III, hold approximately $115.4 million and $294.8 million in assets, respectively, and accounted for approximately 5.2% and 13.4% of our total assets, respectively, prior to consolidation at June 30, 2018. In aggregate, at June 30, 2018, with our net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At June 30, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. On July 13, 2018, we fully redeemed the principal outstanding on our SBA HT II debenture. See “—Subsequent Events.”

 

S-30


Table of Contents
Index to Financial Statements

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 U.S. 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 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.

Portfolio and Investment Activity

The total fair value of our investment portfolio was approximately $1.7 billion at June 30, 2018 and $1.5 billion at December 31, 2017. The fair value of our debt investment portfolio at June 30, 2018 was approximately $1.5 billion, compared to a fair value of approximately $1.4 billion December 31, 2017. The fair value of the equity portfolio at June 30, 2018 was approximately $121.5 million, compared to a fair value of approximately $89.4 million at December 31, 2017. The fair value of the warrant portfolio at June 30, 2018 was approximately $34.4 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.

 

S-31


Table of Contents
Index to Financial Statements

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 six months ended June 30, 2018 and the year ended December 31, 2017 was comprised of the following:

 

(in millions)    June 30, 2018      December 31, 2017  

Debt Commitments(1)

     

New portfolio company

   $ 637.1      $ 773.2  

Existing portfolio company

     59.5        98.8  
  

 

 

    

 

 

 

Total

   $ 696.6      $ 872.0  
  

 

 

    

 

 

 

Funded and Restructured Debt Investments(2)

     

New portfolio company

   $ 412.6      $ 578.9  

Existing portfolio company

     118.7        175.9  
  

 

 

    

 

 

 

Total

   $ 531.3      $ 754.8  
  

 

 

    

 

 

 

Funded Equity Investments

     

New portfolio company

   $ 27.7        7.1  

Existing portfolio company

     4.7        2.9  
  

 

 

    

 

 

 

Total

   $ 32.4      $ 10.0  
  

 

 

    

 

 

 

Unfunded Contractual Commitments(3)

     

Total

   $ 129.7      $ 73.6  
  

 

 

    

 

 

 

Non-Binding Term Sheets

     

New portfolio company

   $ 70.0      $ 122.0  

Existing portfolio company

     10.0        —    
  

 

 

    

 

 

 

Total

   $ 80.0      $ 122.0  
  

 

 

    

 

 

 

 

(1)

Includes restructured loans and renewals in addition to new commitments.

(2)

Funded amounts include borrowings on revolving facilities.

(3)

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.

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 six months ended June 30, 2018, we received approximately $404.3 million in aggregate principal repayments. Of the approximately $404.3 million of aggregate principal repayments, approximately $46.5 million were scheduled principal payments and approximately $357.8 million were early principal repayments related to 26 portfolio companies. Of the approximately $357.8 million early principal repayments, approximately $38.5 million were early repayments due to merger and acquisition transactions for three portfolio companies.

 

S-32


Table of Contents
Index to Financial Statements

Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable, and escrow receivables) as of and for the six months ended June 30, 2018 and the year ended December 31, 2017 was as follows:

 

(in millions)    June 30,
2018
    December 31,
2017
 

Beginning portfolio

   $ 1,542.2     $ 1,423.9  

New fundings and restructures

     563.7       764.8  

Warrants not related to current period fundings

     0.2       0.6  

Principal payments received on investments

     (46.5     (119.5

Early payoffs

     (357.8     (505.6

Accretion of loan discounts and paid-in-kind principal

     16.9       36.5  

Net acceleration of loan discounts and loan fees due to early payoff or restructure

     (8.1     (8.1

New loan fees

     (7.0     (9.8

Sale of investments

     (1.6     (11.0

Loss on investments due to write offs

     (22.0     (39.6

Net change in unrealized appreciation (depreciation)

     21.9       10.0  
  

 

 

   

 

 

 

Ending portfolio

   $ 1,701.9     $ 1,542.2  
  

 

 

   

 

 

 

As of June 30, 2018, we held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both companies filed confidentially under the JOBS Act. There can be no assurance that companies that have yet to complete their initial public offerings 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 June 30, 2018, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from 6.0% to 14.5%. 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, payment-in-kind (“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 $33.7 million of unamortized fees at June 30, 2018, of which approximately $27.9 million was included as an offset to the cost basis of our current debt investments and approximately $5.8 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

 

S-33


Table of Contents
Index to Financial Statements

$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.

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 June 30, 2018, we had approximately $23.8 million in exit fees receivable, of which approximately $21.6 million was included as a component of the cost basis of our current debt investments and approximately $2.2 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 $2.3 million and $2.5 million in PIK income during the three months ended June 30, 2018 and 2017, respectively. We recorded approximately $4.6 million and $4.7 million in PIK income during the six months ended June 30, 2018 and 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 12.7% and 12.1% during the three months ended June 30, 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 13.5% and 14.9% for the three months ended June 30, 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 quarter, 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 11.8% and 12.8% during the three months ended June 30, 2018 and 2017, respectively. The total yield is derived by dividing total investment income by the weighted average investment portfolio assets outstanding during the quarter, including non-interest earning assets such as warrants and equity investments at amortized cost.

The total return for our investors was approximately 1.2% and -2.0% during the six months ended June 30, 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 dividend 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 prospectus supplement.

Portfolio Composition

Our portfolio companies are primarily privately held companies and public companies which are active in the software, drug discovery & development, internet consumer & business services, sustainable and renewable technology, drug delivery, healthcare services, medical devices & equipment, media/content/info, diversified financial services, information services, electronics & computer hardware, consumer & business products, surgical devices, communications & networking, biotechnology tools, semiconductors, diagnostic and specialty pharmaceuticals industry sectors. These sectors are characterized by high margins, high growth rates,

 

S-34


Table of Contents
Index to Financial Statements

consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property.

As of June 30, 2018, approximately 80.5% of the fair value of our portfolio was composed of investments in five industries: 26.3% investments in the drug discovery & development industry, 26.2% investments in the software industry, 15.1% investments in the internet consumer & business services industry, 7.1% investments in the sustainable and renewable technology industry, and 5.8% investments in the Medical Devices & Equipment industry.

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 six months ended June 30, 2018 and the year ended December 31, 2017, our ten largest portfolio companies represented approximately 27.4% and 34.6% of the total fair value of our investments in portfolio companies, respectively. At June 30, 2018 and December 31, 2017, we had five and seven investments, respectively, that represented 5% or more of our net assets. At June 30, 2018, we had six equity investments representing approximately 65.4% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. At December 31, 2017, we had nine equity investments which represented approximately 67.1% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments.

As of June 30, 2018, approximately 97.2% 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 the majority of 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 June 30, 2018, approximately 85.9% of our debt investments were in a senior secured first lien position, with 49.2% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 29.3% 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, 1.4% of our debt investments were senior secured by the equipment of the portfolio company, and 6.1% 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 13.5% of our debt investments were secured by a second priority security interest in all of the portfolio company’s assets, and 0.6% 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 original issue discount 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 June 30, 2018, we held warrants in 133 portfolio companies, with a fair value of approximately $34.4 million. The fair value of our warrant portfolio decreased by approximately $2.4 million, as compared to a fair value of $36.8 million at December 31, 2017 primarily related to the slight decrease in portfolio companies and valuation of the portfolio.

Our existing warrant holdings would require us to invest approximately $79.6 million to exercise such warrants as of June 30, 2018. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. Of the warrants that we have

 

S-35


Table of Contents
Index to Financial Statements

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. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of June 30, 2018 and December 31, 2017, respectively:

 

(in thousands)    June 30, 2018     December 31, 2017  

Investment Grading

   Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
    Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
 

1

     14      $ 247,542        16.0     12      $ 345,191        24.4

2

     43        791,931        51.2     32        583,017        41.2

3

     25        463,702        30.0     32        443,775        31.3

4

     4        41,960        2.7     4        41,744        2.9

5

     2        862        0.1     5        2,257        0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     88      $ 1,545,997        100.0     85      $ 1,415,984        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of June 30, 2018, our debt investments had a weighted average investment grading of 2.21 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 decline in weighted average investment grading at June 30, 2018 from December 31, 2017 is primarily due to the payoff of four positions with a credit rating 1 as well as the downgrade of three positions from a credit rating 2 to a credit rating 3. In addition, one position was downgraded to a credit rating 5, while four positions that were rated 5 as of December 31, 2017 were sold or liquidated during the period.

At June 30, 2018, we had two debt investments on non-accrual with a cumulative investment cost and fair value of approximately $2.8 million and $33,000, respectively. At December 31, 2017, we had five debt investments on non-accrual with cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cumulative cost of debt investments on non-accrual between June 30, 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 the three and six months ended June 30, 2018 and 2017

Investment Income

Interest Income

Total investment income for the three months ended June 30, 2018 was approximately $49.6 million as compared to approximately $48.5 million for the three months ended June 30, 2017. Total investment income for the six months ended June 30, 2018 was approximately $98.3 million as compared to approximately $94.8 million for the six months ended June 30, 2017.

 

S-36


Table of Contents
Index to Financial Statements

Interest income for the three months ended June 30, 2018 totaled approximately $45.9 million as compared to approximately $40.5 million for the three months ended June 30, 2017. Interest income for the six months ended June 30, 2018 totaled approximately $88.9 million as compared to approximately $83.4 million for the six months ended June 30, 2017. The increase in interest income for the three and six months ended June 30, 2018 as compared to the same periods ended June 30, 2017, is primarily attributable to an increase in recurring interest income and an increase in the weighted average principal outstanding of loans.

Of the $45.9 million in interest income for the three months ended June 30, 2018, approximately $45.0 million represents recurring income from the contractual servicing of our loan portfolio and approximately $911,000 represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $37.9 million and $2.6 million, respectively, of the $40.5 million interest income for the three months ended June 30, 2017.

Of the $88.9 million in interest income for the six months ended June 30, 2018, approximately $84.3 million represents recurring income from the contractual servicing of our loan portfolio and approximately $4.6 million represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $77.9 million and $5.5 million, respectively, of the $83.4 million interest income for the six months ended June 30, 2017.

The following table shows the PIK-related activity for the six months ended June 30, 2018 and 2017, at cost:

 

     Six Months Ended
June 30,
 
(in thousands)    2018      2017  

Beginning PIK interest receivable balance

   $ 15,487      $ 9,930  

PIK interest income during the period

     4,621        4,666  

PIK accrued (capitalized) to principal

     (1,153      —    

Payments received from PIK loans

     (9,107      (2,031

Realized gain (loss)

     —          —    
  

 

 

    

 

 

 

Ending PIK interest receivable balance

   $ 9,848      $ 12,565  
  

 

 

    

 

 

 

The slight decrease in PIK interest income during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 is due to a decrease in the weighted average principal outstanding of loans which bear PIK interest. This decrease is offset by an increase in the number of PIK loans which bear interest.

Fee Income

Fee income from commitment, facility and loan related fees for the three months ended June 30, 2018 totaled approximately $3.7 million as compared to approximately $7.9 million for the three months ended June 30, 2017. Fee income from commitment, facility and loan related fees for the six months ended June 30, 2018 totaled approximately $9.4 million as compared to approximately $11.5 million for the six months ended June 30, 2017. The decrease in fee income for both three and six months ended June 30, 2018 is primarily due to a decrease in the acceleration of unamortized fees and one-time fees due to early repayments.

Of the $3.7 million in fee income for the three months ended June 30, 2018, approximately $1.8 million represents income from recurring fee amortization and approximately $1.9 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $1.7 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $1.4 million and $6.5 million, respectively, of the $7.9 million in income for the three months ended June 30, 2017.

 

S-37


Table of Contents
Index to Financial Statements

Of the $9.4 million in fee income for the six months ended June 30, 2018, approximately $3.1 million represents income from recurring fee amortization and approximately $6.3 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $4.8 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $3.6 million and $7.9 million, respectively, of the $11.5 million in income for the six months ended June 30, 2017.

In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and six months ended June 30, 2018 or 2017.

Operating Expenses

Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Our operating expenses totaled approximately $26.8 million and $23.2 million during the three months ended June 30, 2018 and 2017, respectively. Our operating expenses totaled approximately $49.4 million and $46.9 million during the six months ended June 30, 2018 and 2017, respectively.

Interest and Fees on our Borrowings

Interest and fees on our borrowings totaled approximately $13.2 million and $10.6 million for the three months ended June 30, 2018 and 2017, respectively, and approximately $23.8 million and $23.0 million during the six months ended June 30, 2018 and 2017, respectively. Interest and fee expense during the three and six months ended June 30, 2018, as compared to the three and six months ended June 30, 2017, increased due to the issuance of our 2022 Notes in October 2017, 2025 Notes in April 2018 and interest related to our credit facilities, offset by the partial redemptions of our 2024 Notes and amortization of our 2021 Asset-Backed Notes.

We had a weighted average cost of debt, comprised of interest and fees, of approximately 6.4% and 5.5% for the three months ended June 30, 2018 and 2017, respectively, and a weighted average cost of debt of approximately 5.8% and 6.5% for the six months ended June 30, 2018 and 2017, respectively. The increase in the weighted average cost of debt for the three months ended June 30, 2018, as compared to the same period ended June 30, 2017 is attributable to the one-time non-cash acceleration of unamortized fees due to the partial redemption of our 2024 Notes in April 2018. The decrease in the weighted average cost of debt for the six months ended June 30, 2018 is primarily driven by a reduction in the weighted average principal outstanding on our higher yielding debt instruments compared to the prior period.

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 decreased to $3.7 million from $4.7 million for the three months ended June 30, 2018 and 2017. Our general and administrative expenses decreased to $7.7 million from $8.8 million for the six months ended June 30, 2018 and 2017. The decrease for both three and six months ended June 30, 2018 was primarily attributable to a reduction in corporate legal and other expenses.

Employee Compensation

Employee compensation and benefits totaled $7.0 million for the three months ended June 30, 2018 as compared to $5.9 million for the three months ended June 30, 2017, and $12.8 million for the six months ended June 30, 2018 as compared to $11.3 million for the six months ended June 30, 2017. The increase between the comparative periods was primarily due to increased salaries and changes in variable compensation expenses due to company performance objectives.

 

S-38


Table of Contents
Index to Financial Statements

Employee stock-based compensation totaled $2.9 million for the three months ended June 30, 2018 as compared to $1.9 million for the three months ended June 30, 2017, and $5.2 million for the six months ended June 30, 2018 as compared to $3.7 million for the six months ended June 30, 2017. The increase for the comparative periods was primarily related to restricted stock award vesting and retention rewards.

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 three and six months ended June 30, 2018 and 2017 is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended June 30,  
(in thousands)          2018                  2017                  2018                  2017        

Realized gains

   $ 6,880      $ 5,083      $ 7,988      $ 11,553  

Realized losses

     (15,791      (10,796      (21,819      (14,028
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ (8,911    $ (5,713    $ (13,831    $ (2,475
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and six months ended June 30, 2018 we recognized net realized losses of $8.9 million and $13.8 million, respectively. During the three months ended June 30, 2018, we recorded gross realized gains of $6.9 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $15.8 million primarily from the liquidation or write-off of our warrant and equity investments in seven portfolio companies and our debt investment in one portfolio company.

During the six months ended June 30, 2018, we recorded gross realized gains of $8.0 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $21.8 million primarily from the liquidation or write-off of our warrant and equity investments in thirteen portfolio companies and our debt investments in three portfolio companies

During the three and six months ended June 30, 2017, we recognized net realized losses of $5.7 million and $2.5 million respectively. During the three months ended June 30, 2017, we recorded gross realized gains of $5.1 million primarily from the sale of our holdings in one portfolio company. These gains were offset by gross realized losses of $10.8 million primarily from the liquidation or write-off of our warrant and equity investments in ten portfolio companies.

During the six months ended June 30, 2017, we recorded gross realized gains of $11.5 million primarily from the sale of our holdings in four portfolio companies. These gains were offset by gross realized losses of $14.0 million primarily from the liquidation or write-off of our warrant and equity investments in twelve portfolio companies and our debt investment in one portfolio company.

 

S-39


Table of Contents
Index to Financial Statements

The following table summarizes the change in net unrealized appreciation/depreciation of investments for the three and six months ended June 30, 2018 and 2017:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in thousands)    2018     2017     2018     2017  

Gross unrealized appreciation on portfolio investments

   $ 30,970     $ 68,389     $ 38,767     $ 87,867  

Gross unrealized depreciation on portfolio investments

     (14,819     (61,292     (44,367     (109,562

Reversal of prior period net unrealized appreciation (depreciation) upon a realization event

     20,925       6,015       27,591       3,610  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on debt, equity, and warrant investments

     37,076       13,112       21,991       (18,085

Other net unrealized appreciation (depreciation)

     1,121       475       1,009       169  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

   $ 38,197     $ 13,587     $ 23,000     $ (17,916
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended June 30, 2018, we recorded $38.2 million of net unrealized appreciation, of which $37.1 million was net unrealized depreciation from our debt, equity and warrant investments. We recorded $24.2 million of net unrealized appreciation on our debt investments which was attributable to $20.1 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon write-off of one portfolio company and loan repayments from three portfolio companies, along with $4.1 million of unrealized appreciation on the debt portfolio, including $1.8 million of unrealized appreciation on collateral-based impairments on one portfolio company.

We recorded $8.2 million of net unrealized appreciation on our equity investments and $4.7 million of net unrealized appreciation on our warrant investments during the three months ended June 30, 2018. This net unrealized appreciation of $12.9 million was primarily due to $12.1 million of unrealized appreciation on the equity and warrant portfolio investments.

During the six months ended June 30, 2018, we recorded $23.0 million of net unrealized appreciation, of which $22.0 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $15.9 million of net unrealized appreciation on our debt investments which was primarily related to $25.4 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon write-off of three portfolio companies and loan repayments from three portfolio companies. This unrealized appreciation was partially offset by $9.5 million of unrealized depreciation on the debt portfolio, including $8.3 million of unrealized depreciation on collateral-based impairments on four portfolio companies.

We recorded $4.1 million of net unrealized appreciation on our equity investments and $1.9 million of net unrealized appreciation on our warrant investments during the six months ended June 30, 2018. This net unrealized appreciation of $6.0 million was due to $3.9 million of unrealized appreciation on the equity and warrant portfolio and $2.1 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon being realized as a gain or loss due to the acquisition or liquidation of our equity and warrant investments.

During the three months ended June 30, 2017, we recorded $13.6 million of net unrealized appreciation, of which $13.2 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $50.9 million of net unrealized appreciation on our debt investments, which was primarily was attributed to the reversal of prior period collateral based impairments of $48.8 million unrealized depreciation for the prior period collateral-based impairments on two portfolio companies.

We recorded $42.9 million of net unrealized depreciation on our equity investments primarily due to the collateral-based impairment on one portfolio company, slightly offset by $6.8 million of unrealized appreciation

 

S-40


Table of Contents
Index to Financial Statements

for one portfolio company upon being realized as a gain. We also recorded $5.2 million of net unrealized appreciation on our warrant investments during the three months ended June 30, 2017.

During the six months ended June 30, 2017, we recorded $17.9 million of net unrealized depreciation, of which $18.0 million was net unrealized depreciation from our debt, equity and warrant investments. We recorded $19.7 million of net unrealized depreciation on our debt investments, which was primarily related to $38.5 million of unrealized depreciation for collateral-based impairments on seven portfolio companies offset by the reversal of $52.0 million unrealized depreciation for the prior period collateral-based impairments on three portfolio companies.

We recorded $45.7 million of net unrealized depreciation on our equity investments primarily due to $54.4 million of collateral based impairment on five portfolio companies and the reversal of approximately $2.1 million of unrealized appreciation for one portfolio company upon being realized as a gain. We also recorded $8.0 million of net unrealized appreciation on our warrant investments during six months ended June 30, 2017.

Income and Excise Taxes

We account for income taxes in accordance with the provisions of Topic 740 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”), “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, 2017 to our stockholders in 2018.

Net Change in Net Assets Resulting from Operations and Earnings Per Share

For the three months ended June 30, 2018, we had a net increase in net assets resulting from operations of approximately $52.1 million and for the three months ended June 30, 2017, we had a net increase in net assets resulting from operations of approximately $33.1 million. For the six months ended June 30, 2018, we had a net increase in net assets resulting from operations of approximately $58.0 million and for the six months ended June 30, 2017, we had a net increase in net assets resulting from operations of approximately $27.6 million.

Both the basic and fully diluted net change in net assets per common share were $0.59 per share for the three months ended June 30, 2018 and $0.67 per share for the six months ended June 30, 2018. Both the basic and fully diluted net change in net assets per common share were $0.40 per share and $0.33 per share for the three and six months ended June 30, 2017.

For the purpose of calculating diluted earnings per share for three and six months ended June 30, 2018 and 2017, the 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 three and six months ended June 30, 2018 and 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, 2021 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

 

S-41


Table of Contents
Index to Financial Statements

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, 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 with JMP (the “Prior Equity Distribution Agreement”). 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 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 the 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 six months ended June 30, 2018, we sold 2.6 million shares of common stock, which were issued under the Equity Distribution Agreement, for a total accumulated net proceeds of approximately $31.4 million, including $877,000 of offering expenses. As of June 30, 2018, approximately 7.8 million shares remain available for issuance and sale under the Equity Distribution Agreement. See “—Subsequent Events.”

Our 6.00% convertible notes due 2016 (the “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 LLC, as borrower, entered the Union Bank Facility. The Union Bank Facility replaced our credit facility (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., as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility 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

 

S-42


Table of Contents
Index to Financial Statements

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 the three months ended June 30, 2018. During the year ended December 31, 2017, we sold 225,457 notes for approximately $5.6 million in aggregate principal amount. As of June 30, 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 pursuant to an indenture, dated September 7, 2017, between us and U.S. Bank, National Association, as 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.

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.

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, between the Company and U.S. Bank, National Association, as trustee. The sale of the 2025 Notes generated net proceeds of approximately $72.6 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $2.4 million.

On May 25, 2018, we entered into the Second Amendment (the “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, we closed an 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. The offering generated net proceeds, before expenses, of $81.3 million, including the underwriting discount and commissions of $2.6 million.

At June 30, 2018, we had $190.2 million of SBA debentures, $150.0 million of 2022 Notes, $83.5 million of 2024 Notes, $75.0 million of 2025 Notes, $31.1 million of 2021 Asset-Backed Notes, and $230.0 million of 2022 Convertible Notes payable, and $58.3 million of borrowings outstanding on the Union Bank Facility. We had no borrowings outstanding under the Wells Facility.

At June 30, 2018, we had $221.2 million in available liquidity, including $59.5 million in cash and cash equivalents. We had available borrowing capacity of $120.0 million under the Wells Facility and $41.7 million under the Union Bank Facility, both subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts.

 

S-43


Table of Contents
Index to Financial Statements

At June 30, 2018, we had $118.5 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 investments of $44.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At June 30, 2018, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries. On July 13, 2018, we fully redeemed the principal outstanding on our SBA HT II debentures.

At June 30, 2018, we had approximately $15.9 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 2021 Asset-Backed Notes, based on current characteristics of the securitized debt investment portfolios, 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 six months ended June 30, 2018, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments.

During the six months ended June 30, 2018, our operating activities used $93.9 million of cash and cash equivalents, compared to $67.6 million provided during the six months ended June 30, 2017. This $161.5 million increase in cash used in operating activities is primarily related to an increase in investment purchases of $223.1 million, partially offset by an increase in investment repayments of $64.8 million.

During the six months ended June 30, 2018, our investing activities used approximately $116,000 of cash, compared to $89,000 used during the six months ended June 30, 2017.

During the six months ended June 30, 2018, our financing activities provided $74.3 million of cash, compared to $88.8 million provided during the six months ended June 30, 2017. $14.4 million decrease in cash provided by financing activities was primarily due to the repayment of $100.0 million of our 2024 Notes in April 2018, an increase of $63.3 million of net credit facilities repayments, offset by the increase in issuance of our common stock of $65.7 million and the issuance of $75.0 million of our 2025 Notes in April 2018.

As of June 30, 2018, net assets totaled $963.7 million, with a NAV per share of $10.22. 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.

As required by the 1940 Act, our asset coverage must be at least 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us) after each issuance of senior securities. As of June 30, 2018 our asset coverage ratio under our regulatory requirements as a business development company was 252.7% 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 200% through September 4, 2019 and 150% thereafter (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage ratio when including our SBA debentures was 217.2% at June 30, 2018.

 

S-44


Table of Contents
Index to Financial Statements

Outstanding Borrowings

At June 30, 2018 and December 31, 2017, we had the following available borrowings and outstanding amounts:

 

     June 30, 2018      December 31, 2017  
(in thousands)    Total
Available
     Principal      Carrying
Value(1)
     Total
Available
     Principal      Carrying
Value(1)
 

SBA Debentures(2)

   $ 190,200      $ 190,200      $ 188,457      $ 190,200      $ 190,200      $ 188,141  

2022 Notes

     150,000        150,000        147,728        150,000        150,000        147,572  

2024 Notes

     83,510        83,510        81,694        183,510        183,510        179,001  

2025 Notes

     75,000        75,000        72,616        —          —          —    

2021 Asset-Backed Notes

     31,088        31,088        30,698        49,153        49,153        48,650  

2022 Convertible Notes

     230,000        230,000        224,269        230,000        230,000        223,488  

Wells Facility(3)

     120,000        —          —          120,000        —          —    

Union Bank Facility(3)

     100,000        58,323        58,323        75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 979,798      $ 818,121      $ 803,785      $ 997,863      $ 802,863      $ 786,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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.

(2)

At both June 30, 2018 and 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.

(3)

Availability subject to us meeting the borrowing base requirements.

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 June 30, 2018 and December 31, 2017 were as follows:

 

(in thousands)    June 30, 2018      December 31, 2017  

SBA Debentures

   $ 1,743      $ 2,059  

2022 Notes

     1,559        1,633  

2024 Notes

     1,871        4,591  

2025 Notes

     416        —    

2021 Asset-Backed Notes

     390        503  

2022 Convertible Notes

     3,269        3,715  

Wells Facility(1)

     188        227  

Union Bank Facility(1)

     273        379  
  

 

 

    

 

 

 

Total

   $ 9,709      $ 13,107  
  

 

 

    

 

 

 

 

(1)

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 prospectus supplement for a discussion of the contract terms, interest expense, and fees associated with each outstanding borrowing as of and for the three and six months ended June 30, 2018.

 

S-45


Table of Contents
Index to Financial Statements

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 June 30, 2018, we had approximately $129.7 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 $80.0 million of non-binding term sheets outstanding to two new and one existing company, 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.

 

S-46


Table of Contents
Index to Financial Statements

As of June 30, 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

   Unfunded
Commitments(1)
 

ThumbTack, Inc.

   $ 25,000  

Tricida, Inc.

     25,000  

Contentful, Inc.

     15,000  

Impossible Foods, Inc.

     15,000  

Chemocentryx, Inc.

     10,000  

Proterra, Inc.

     10,000  

Evernote Corporation

     7,500  

Businessolver.com, Inc.

     6,375  

Achronix Semiconductor Corporation

     5,000  

Xometry, Inc.

     4,000  

Emma, Inc.

     2,963  

First Insight, Inc.

     1,500  

Lithium Technologies, Inc.

     878  

Greenphire, Inc.

     500  

Insurance Technologies Corporation

     500  

Salsa Labs, Inc.

     500  
  

 

 

 

Total

   $ 129,716  
  

 

 

 

 

(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.

Contractual Obligations

The following table shows our contractual obligations as of June 30, 2018:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less than
1 year
     1 - 3 years      3 - 5 years      After 5
years
 

Borrowings(2)(3)(5)

   $ 818,121      $ 72,288      $ 97,073      $ 490,250      $ 158,510  

Operating Lease Obligations(4)

     16,655        2,352        5,614        5,868        2,821  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 834,776      $ 74,640      $ 102,687      $ 496,118      $ 161,331  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to our portfolio companies.

(2)

Includes $190.2 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, $31.1 million of the 2021 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes and $58.3 million under the Union Bank Facility as of June 30, 2018.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to our consolidated financial statements appearing elsewhere in this prospectus supplement.

(4)

Facility leases and licenses.

(5)

Reflects our intention to repay the remaining outstanding debentures in HT II in Q3 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 $510,000 and $961,000 during the three and six months ended June 30, 2018. Total rent expense amounted to approximately $449,000 and $893,000 during the three and six months ended June 30, 2017.

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

 

S-47


Table of Contents
Index to Financial Statements

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

The following table summarizes our distributions declared and paid, to be paid, or reinvested on all shares, including restricted stock, to date:

 

Date Declared

   Record Date      Payment Date      Amount Per Share  

Cumulative distributions declared and paid prior to January 1, 2016

         $ 11.23  

February 17, 2016

     March 7, 2016        March 14, 2016        0.31  

April 27, 2016

     May 16, 2016        May 23, 2016        0.31  

July 27, 2016

     August 15, 2016        August 22, 2016        0.31  

October 26, 2016

     November 14, 2016        November 21, 2016        0.31  

February 16, 2017

     March 6, 2017        March 13, 2017        0.31  

April 26, 2017

     May 15, 2017        May 22, 2017        0.31  

July 26, 2017

     August 14, 2017        August 21, 2017        0.31  

October 25, 2017

     November 13, 2017        November 20, 2017        0.31  

February 14, 2018

     March 5, 2018        March 12, 2018        0.31  

April 25, 2018

     May 14, 2018        May 21, 2018        0.31  

July 25, 2018

     August 13, 2018        August 20, 2018        0.31  
        

 

 

 
         $ 14.64  
        

 

 

 

On July 25, 2018, the Board of Directors declared a cash distribution of $0.31 per share to be paid on August 20, 2018 to stockholders of record as of August 13, 2018. This distribution represents our fifty-second consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.64 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. As a result, any determination of the tax attributes of our

 

S-48


Table of Contents
Index to Financial Statements

distributions made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. Of the distributions declared during the year ended December 31, 2017, 100% were distributions derived from our current and accumulated earnings and profits.

During the three months ended June 30, 2018, we declared a distribution of $0.31 per share. If we had determined the tax attributes of our distributions year-to-date as of June 30, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2018 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.

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 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. 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

 

S-49


Table of Contents
Index to Financial Statements

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, which consists of ordinary income, from the year ended December 31, 2017 to our stockholders during 2018.

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.

Reclassification

Certain balances from prior years have been reclassified in order to conform to the current year presentation.

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 June 30, 2018, approximately 94.9% 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.

 

S-50


Table of Contents
Index to Financial Statements

We may from time to time engage an independent valuation firm 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.

Refer to “Note 2—Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement for a discussion of our valuation policies for the three and six months ended June 30, 2018.

Income Recognition

See “—Changes in Portfolio” for a discussion of our income recognition policies and results during the three and six months ended June 30, 2018. See “—Results of Operations” for a comparison of investment income for the three and six months ended June 30, 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 Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan and the Hercules Capital, Inc. 2018 Non-employee 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.

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. We have adopted this standard, which did not have a material impact, on our 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

 

S-51


Table of Contents
Index to Financial Statements

reporting periods, and the interim periods within those periods, beginning after December 15, 2018. Early adoption is permitted. We anticipate an increase in the recognition of right-of-use assets and lease liabilities, however, we do not believe that ASU 2016-02 will have a material impact on our consolidated financial statements and disclosures.

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. We have adopted this standard, which did not have a material impact, on our 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. We have adopted this standard, which did not have a material impact, on our 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. We do not believe that ASU 2018-07 will have a material impact on our consolidated financial statements and disclosures.

Subsequent Events

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, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act), 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, the minimum asset coverage ratio applicable to us will be reduced from 200% to 150%, effective as of September 4, 2019, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. Our Board of Directors also authorized the submission of a proposal for stockholders to accelerate the application of the 150% minimum asset coverage ratio to us at a special meeting of stockholders. As a result of our Board of Director’s approval, effective as of September 4, 2019 (or earlier if our stockholders approve the proposal to accelerate the application of the reduced asset coverage requirements to us), we will be able to incur additional indebtedness and, therefore, your risk of an investment in us may increase. In connection with the change in minimum coverage ratio, S&P lowered our rating to a non-investment grade rating, and we terminated our ratings agreement with S&P. On September 6, 2018, DBRS, Inc. assigned us an investment grade rating. Other 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

 

S-52


Table of Contents
Index to Financial Statements

affect our securities. See “Supplementary Risk Factors—Risks Related to the Notes—A downgrade, suspension or withdrawal of a credit rating assigned by a rating agency to us or our unsecured debt, if any, or change in the debt markets could cause the liquidity or market value of the Notes to decline significantly” in this prospectus supplement and “Risk Factors—Risks Related to Our 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” in the accompanying prospectus.

Distribution Declaration

On July 25, 2018, our Board of Directors declared a cash distribution of $0.31 per share, which was paid on August 20, 2018 to stockholders of record as of August 13, 2018. This distribution represents our fifty-second consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.64 per share.

ATM Equity Program Issuances

Subsequent to June 30, 2018 and as of September 13, 2018, we sold 2.2 million shares of common stock for total accumulated net proceeds of approximately $28.6 million, including $229,000 of offering expenses, under the Equity Distribution Agreement. As of September 13, 2018, approximately 5.6 million shares remain available for issuance and sale under the Equity Distribution Agreement.

Hercules Technology II Debentures Full Redemption

On July 13, 2018, we completed repayment of the $41.2 million of outstanding HT II debentures.

Amendment to Wells Facility

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.

Departure of Officer

On August 16, 2018, Gerard R. Waldt, Jr., Controller and Interim Chief Accounting Officer, tendered his resignation from the Company. Mr. Waldt’s resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. David Lund, the Company’s current Interim Chief Financial Officer, assumed the duties of Interim Chief Accounting Officer effective as of August 23, 2018. The resignation of Mr. Waldt was effective on September 7, 2018.

Portfolio Company Developments

As of September 13, 2018, we held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both companies filed confidentially under the JOBS Act. There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all. Subsequent to June 30, 2018 and as of September 13, 2018, there were two companies that announced or completed liquidity events.

 

  1.

In August 2018, our portfolio company NuGEN Technologies, Inc., a leading provider for innovative next-generation sequencing kits and genomic sample preparation solutions for the fastest growing field within the genomics area, was acquired by the Tecan Group (SIX Swiss Exchange: TECN), a leading global provider of laboratory instruments and solutions in biopharmaceuticals, forensics and clinical diagnostics. Terms of the acquisition were not disclosed.

 

S-53


Table of Contents
Index to Financial Statements
  2.

In August 2018, our portfolio company Avnera Corporation, a fabless semiconductor firm making custom Analog System-on-Chip (ASoC) solutions for audio, voice, speech, sensor and artificial intelligence (AI) applications, was acquired by Skyworks Solutions, Inc. (NASDAQ: SWKS), an innovator of high-performance analog semiconductors connecting people, places and things. Skyworks paid $405.0 million in cash to Avnera equity holders at closing with up to an additional $20.0 million to be paid if certain performance targets are exceeded over a 12-month period post-closing period.

Quantitative and Qualitative Disclosures 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 June 30, 2018, approximately 97.2% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. 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 June 30, 2018, the following table shows the approximate annualized increase (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

   Interest
Income
     Interest
Expense
     Net
Income
     EPS(1)  

25

   $ 3,489      $ 36      $ 3,453      $ 0.04  

50

   $ 7,061      $ 71      $ 6,990      $ 0.08  

75

   $ 10,632      $ 107      $ 10,525      $ 0.12  

100

   $ 14,353      $ 143      $ 14,210      $ 0.16  

200

   $ 28,988      $ 286      $ 28,702      $ 0.33  

300

   $ 43,172      $ 429      $ 42,743      $ 0.49  

 

(1)

Earnings per share impact calculated based on basic weighted average shares outstanding of 87,125.

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 six months ended June 30, 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, 2021 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

 

S-54


Table of Contents
Index to Financial Statements

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, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” and “Note 4—Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus supplement.

 

S-55


Table of Contents
Index to Financial Statements

UNDERWRITING

We are offering the Notes described in this prospectus supplement and the accompanying prospectus through a number of underwriters. Keefe, Bruyette & Woods, Inc., Morgan Stanley & Co. LLC and UBS Securities LLC are acting as representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally and not jointly agreed to purchase from us, the aggregate principal amount of Notes listed next to its name in the following table:

 

Underwriter

   Principal Amount  

Keefe, Bruyette & Woods, Inc.

   $ 9,000,000  

Morgan Stanley & Co. LLC

   $ 9,000,000  

UBS Securities LLC

   $ 9,000,000  

Janney Montgomery Scott LLC

   $ 4,200,000  

BB&T Capital Markets, a division of BB&T Securities, LLC

   $ 2,400,000  

B. Riley FBR, Inc.

   $ 2,400,000  

Ladenburg Thalmann & Co. Inc.

   $ 2,400,000  

Compass Point Research & Trading, LLC

   $ 800,000  

Wedbush Securities Inc.

   $ 800,000  
  

 

 

 

Total

   $ 40,000,000  
  

 

 

 

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the Notes sold under the underwriting agreement if any of these Notes are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the Notes, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

An underwriting discount of 3.12% per Note will be paid by us. An underwriting discount of 3.15% per Note will be paid by us for any Notes purchased pursuant to the overallotment option.

The following table shows the total underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.

 

     Per Note      Without
Option
     With Option  

Public offering price

   $ 25.0000      $ 40,000,000      $ 46,000,000  

Underwriting discount(1)

   $ 0.7808      $ 1,249,250      $ 1,438,250  

Proceeds, before expenses, to us(2)

   $ 24.2192      $ 38,750,750      $ 44,561,750  

 

(1)

Reflects an underwriting discount that may vary between sales to retail investors and sales to institutional investors.

(2)

Before deducting expenses payable by us related to this offering, estimated at $375,000

 

S-56


Table of Contents
Index to Financial Statements

The underwriters propose to offer some of the Notes to the public at the public offering price set forth on the cover page of this prospectus supplement and some of the Notes to certain other Financial Industry Regulatory Authority (FINRA) members at the public offering price less a concession not in excess of $0.50 per Note sold to retail investors and $0.15 per Note sold to institutional investors. The underwriters may allow, and the dealers may reallow, a discount not in excess of 1.20% of the aggregate principal amount of the Notes. After the initial offering of the Notes to the public, the public offering price and such concessions may be changed. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus supplement.

The expenses of the offering, including up to $10,000 in reimbursement of underwriters’ counsel fee, but not including the underwriting discount, are estimated at $375,000 and are payable by us.

Overallotment Option

We have granted an option to the underwriters to purchase up to an additional $6,000,000 aggregate principal amount of the Notes offered hereby at the public offering price within 30 days from the date of this prospectus supplement solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional Notes proportionate to that underwriter’s initial principal amount reflected in the above table.

No Sales of Similar Securities

We have agreed not to directly or indirectly sell, offer to sell, enter into any agreement to sell, or otherwise dispose of, any debt securities issued by the Company in minimum denominations of $25 for a period of 30 days after the date of this prospectus supplement without first obtaining the written consent of the representatives. This consent may be given at any time without public notice.

Listing

The Notes are a new issue of securities with no established trading market. We intend to apply to list the Notes on the NYSE. We expect trading in the Notes on the NYSE to begin within 30 days after the original issue date under the symbol “HCXY.” Currently there is no public market for the Notes.

We have been advised by certain of the underwriters that certain of the underwriters presently intend to make a market in the Notes after completion of this offering as permitted by applicable laws and regulations. Such underwriters are not obligated, however, to make a market in the Notes and any such market-making may be discontinued at any time in the sole discretion of such underwriters without any notice. Accordingly, no assurance can be given that an active and liquid public trading market for the Notes will develop or be maintained. If an active public trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected.

Price Stabilization, Short Positions

In connection with the offering, the underwriters may purchase and sell Notes in the open market. These transactions may include covering transactions and stabilizing transactions. Overallotment involves sales of securities in excess of the aggregate principal amount of securities to be purchased by the underwriters in the offering, which creates a short position for the underwriters. Covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of certain bids or purchases of securities made for the purpose of preventing or retarding a decline in the market price of the securities while the offering is in progress.

 

S-57


Table of Contents
Index to Financial Statements

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased Notes sold by or for the account of such underwriter in stabilizing or short covering transactions.

Any of these activities may cause the price of the Notes to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be affected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time without any notice relating thereto.

Electronic Offer, Sale and Distribution of Notes

The underwriters may make prospectuses available in electronic (PDF) format. A prospectus in electronic (PDF) format may be made available on a web site maintained by the underwriters, and the underwriters may distribute such prospectuses electronically. The underwriters may allocate a limited principal amount of the Notes for sale to their online brokerage customers.

Other Relationships

The underwriters and their affiliates have provided in the past and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking and other services to Hercules or our portfolio companies for which they have received or will be entitled to receive separate fees. In particular, the underwriters or their affiliates may execute transactions with Hercules or on behalf of Hercules or any of our portfolio companies.

The underwriters or their affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to us or any of our portfolio companies.

We may purchase securities of third parties from the underwriters or their affiliates after the offering. However, we have not entered into any agreement or arrangement regarding the acquisition of any such securities, and we may not purchase any such securities. We would only purchase any such securities if—among other things—we identified securities that satisfied our investment needs and completed our due diligence review of such securities.

After the date of this prospectus supplement, the underwriters and their affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the ordinary course of its business and not in connection with the offering of the Notes. In addition, after the offering period for the sale of the Notes, the underwriters or their affiliates may develop analyses or opinions related to Hercules or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding us to our noteholders or any other persons.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. Certain of the underwriters and their affiliates that have a lending relationship with us routinely hedge their credit exposure to us consistent with their customary risk management policies. Typically, such underwriters and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities, including potentially the

 

S-58


Table of Contents
Index to Financial Statements

Notes offered hereby. Any such short positions could adversely affect future trading prices of the Notes offered hereby. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The principal business address of Keefe, Bruyette & Woods, Inc. is 787 7th Avenue, Fourth Floor, New York, New York 10019. The principal business address of Morgan Stanley & Co. LLC is 1585 Broadway, New York, New York 10036. The principal business address of UBS Securities LLC is 1285 Avenue of the Americas, New York, New York 10019.

Other Jurisdictions

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the Notes offered by this prospectus supplement in any jurisdiction where action for that purpose is required. The Notes offered by this prospectus supplement may not be offered or sold, directly or indirectly, nor may this prospectus supplement or any other offering material or advertisements in connection with the offer and sale of any such Notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus supplement comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus supplement. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy the Notes offered by this prospectus supplement and the accompanying prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

Alternative Settlement Cycle

We expect that delivery of the Notes will be made to investors on or about September 24, 2018, which will be the third business day following the date hereof. Under Rule 15c6-1 under the Exchange Act, trades in the secondary market are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Notes prior to the delivery of the Notes hereunder will be required, by virtue of the fact that the Notes initially settle in T+ 3, to specify an alternate settlement arrangement at the time of any such trade to prevent a failed settlement. Purchasers of the Notes who wish to trade the Notes prior to their date of delivery should consult their advisors.

 

S-59


Table of Contents
Index to Financial Statements

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a general summary of the material U.S. federal income tax considerations (and, in the case of a non-U.S. holder (as defined below), the material U.S. federal estate tax consequences) applicable to an investment in the Notes. This summary deals only with Notes that are purchased for cash in this offering for a price equal to the “issue price” of the Notes (i.e., the first price at which a substantial amount of the notes is sold for money to investors, other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). This summary does not purport to be a complete description of the income and estate tax considerations applicable to such an investment. The discussion is based upon the Code, Treasury Regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement and all of which are subject to change, potentially with retroactive effect. No assurance can be given that the U.S. Internal Revenue Service (“IRS”) would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below. You should consult your own tax advisor with respect to tax considerations that pertain to your purchase of our Notes.

This discussion deals only with Notes held as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment purposes) and does not purport to deal with persons in special tax situations, such as financial institutions, insurance companies, regulated investment companies, dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the Notes as a hedge against currency risks or as a position in a “straddle,” “hedge,” “constructive sale transaction” or “conversion transaction” for tax purposes, entities that are tax-exempt for U.S. federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities, accrual method taxpayers for U.S. federal income tax purposes required to accelerate the recognition of any item of gross income with respect to the Notes as a result of such income being recognized on an applicable financial statement, or U.S. holders (as defined below) whose functional currency is not the U.S. dollar. In addition, this discussion does not deal with any tax consequences other than U.S. federal income tax consequences (and, in the case of a non-U.S. holder, U.S. federal estate tax consequences). If you are considering purchasing the Notes, you should consult your own tax advisor concerning the application of the U.S. federal income and estate tax laws to you in light of your particular situation, as well as any consequences to you of purchasing, owning and disposing of the Notes under the laws of any other taxing jurisdiction.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or of any state thereof or the District of Columbia, (iii) a trust (a) subject to the control of one or more U.S. persons and the primary supervision of a court in the United States, or (b) that existed on August 20, 1996 and has made a valid election (under applicable Treasury Regulations) to be treated as a domestic trust, or (iv) an estate the income of which is subject to U.S. federal income taxation regardless of its source. The term “non-U.S. holder” means a beneficial owner of a Note that is neither a U.S. holder nor a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes).

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Notes, the U.S. federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships holding Notes, and the persons holding interests in such partnerships, should consult their own tax advisors as to the consequences of investing in the Notes in their individual circumstances.

 

S-60


Table of Contents
Index to Financial Statements

Taxation of Note Holders

Taxation of U.S. Holders.

Payments or accruals of interest on a Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, which are treated as ordinary income to the extent not previously included in income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note generally will equal the U.S. holder’s initial investment in the Note. Capital gain or loss generally will be long-term capital gain or loss if the U.S. holder’s holding period in the Note was more than one year. Long-term capital gains generally are taxed at reduced rates for individuals and certain other non-corporate U.S. holders. The distinction between capital gain and loss and ordinary income and loss also is important for purposes of, among other things, the limitations imposed on a U.S. holder’s ability to offset capital losses against ordinary income.

Under applicable Treasury Regulations, if a U.S. holder recognizes a loss with respect to the Notes or shares of our common stock of $2 million or more for a non-corporate U.S. holder or $10 million or more for a corporate U.S. holder in any single taxable year (or a greater loss over a combination of taxable years), the U.S. holder may be required to file with the IRS a disclosure statement on IRS Form 8886. Direct U.S. holders of portfolio securities are in many cases excepted from this reporting requirement, but, under current guidance, U.S. holders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to U.S. holders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may also have a similar reporting requirement. U.S. holders of the Notes or our common stock should consult their own tax advisors to determine the applicability of these Treasury Regulations in light of their individual circumstances.

Taxation of Non-U.S. Holders. Except as provided below under “Information Reporting and Backup Withholding” and “FATCA,” a non-U.S. holder generally will not be subject to U.S. federal income or withholding taxes on payments of principal or interest on a Note provided that (i) income on the Note is not effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States, (ii) the non-U.S. holder is not a controlled foreign corporation related to the Company through stock ownership, (iii) the non-U.S. holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code, (iv) the non-U.S. holder does not own (directly or indirectly, actually or constructively) 10% or more of the total combined voting power of all classes of stock of the Company, and (v) the non-U.S. holder provides a valid certification on an IRS Form W-8BEN, Form W-8BEN-E, or other applicable U.S. nonresident withholding tax certification form, certifying its non-U.S. holder status to (A) the applicable withholding agent, or (B) a securities clearing organization, bank, or other financial institution that holds customer securities in the ordinary course of its trade or business (i.e., a “financial institution”) and holds the Note on the non-U.S. holder’s behalf and certifies to the applicable withholding agent (directly or through one or more similarly situated financial institutions) that it has received the required statement from the non-U.S. holder certifying that it is a non-U.S. person and furnishes the applicable withholding agent with a copy of the statement.

A non-U.S. holder that is not exempt from tax under these rules generally will be subject to U.S. federal income tax withholding on payments of interest on the Notes at a rate of 30% unless (i) the income is effectively connected with the conduct of a U.S. trade or business, so long as the non-U.S. holder has provided the applicable withholding agent with an IRS Form W-8ECI or substantially similar substitute U.S. nonresident withholding tax certification form stating that the interest on the Notes is effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S. in which case the interest will be subject to U.S. federal

 

S-61


Table of Contents
Index to Financial Statements

income tax on a net income basis as applicable to U.S. holders generally (unless an applicable income tax treaty provides otherwise), or (ii) an applicable income tax treaty or provision in the Code provides for a lower rate of, or exemption from, withholding tax, so long as the non-U.S. holder has provided the applicable withhold agent with an IRS Form W-8BEN or Form W-8BEN-E (or other applicable U.S. nonresident withholding tax certification form) signed under penalties of perjury, claiming such lower rate of, or exemption from, withholding tax under such income tax treaty. To claim the benefit of an income tax treaty or to claim exemption from withholding because income is effectively connected with a U.S. trade or business, the non-U.S. holder must timely provide the appropriate, properly executed IRS forms. These forms may be required to be updated periodically. Additionally, a non-U.S. holder who is claiming the benefits of an income tax treaty may be required to obtain a U.S. taxpayer identification number and provide certain documentary evidence issued by a non-U.S. governmental authority in order to prove residence in a foreign country.

In the case of a non-U.S. holder that is a corporation and that receives income that is effectively connected with the conduct of a U.S. trade or business, such income may also be subject to a branch profits tax (which is generally imposed on a non-U.S. corporation on the actual or deemed repatriation from the United States of earnings and profits attributable to a U.S. trade or business) at a 30% rate. The branch profits tax may not apply (or may apply at a reduced rate) if the non-U.S. holder is a qualified resident of a country with which the United States has an income tax treaty. To claim an exemption from withholding because interest on the Notes is effectively connected with a United States trade or business, a non-U.S. holder must timely provide the appropriate, properly executed U.S. nonresident withholding tax certification form (currently on IRS Form W-8ECI) to the applicable withholding agent.

Generally, a non-U.S. holder will not be subject to U.S. federal income or withholding taxes on any amount that constitutes capital gain upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, provided that the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. holder (and, if required by an applicable income tax treaty, is not attributable to a United States “permanent establishment” maintained by the non-U.S. holder). Non-U.S. holders should consult their own tax advisors with regard to whether taxes will be imposed on capital gain in their individual circumstances.

A Note that is held by an individual who, at the time of death, is not a citizen or resident of the United States (as specially defined for U.S. federal estate tax purposes) generally will not be subject to the U.S. federal estate tax, unless, at the time of death, (i) such individual directly or indirectly, actually or constructively, owns ten percent or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder or (ii) such individual’s interest in the Notes is effectively connected with the individual’s conduct of a U.S. trade or business.

Information Reporting and Backup Withholding. A U.S. holder (other than an “exempt recipient,” including a corporation and certain other persons who, when required, demonstrate their exempt status) may be subject to backup withholding on, and to information reporting requirements with respect to, payments of principal and interest on, and proceeds from the sale, exchange, redemption or retirement of, the Notes. In general, if a non-corporate U.S. holder subject to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup withholding requirements, backup withholding at the applicable rate (currently, 24%) may apply.

In addition, backup withholding tax and certain other information reporting requirements apply to payments of principal and interest on, and proceeds from the sale, exchange, redemption or retirement of, the Notes held by a non-U.S. holder, unless an exemption applies. Backup withholding and information reporting will not apply to payments we make to a non-U.S. holder if such non-U.S. holder has provided to the applicable withholding agent under penalties of perjury the required certification of their non-U.S. person status as discussed above (and the applicable withholding agent does not have actual knowledge or reason to know that they are a U.S. person) or if the non-U.S. holder is an exempt recipient.

 

S-62


Table of Contents
Index to Financial Statements

If a non-U.S. holder sells or redeems a Note through a U.S. broker or the U.S. office of a foreign broker, the proceeds from such sale or redemption will be subject to information reporting and backup withholding unless such non-U.S. holder provides a withholding certificate or other appropriate documentary evidence establishing that such non-U.S. holder is not a U.S. person to the broker and such broker does not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting and backup withholding. If a non-U.S. holder sells or redeems a Note through the foreign office of a broker who is a U.S. person or has certain enumerated connections with the United States, the proceeds from such sale or redemption will be subject to information reporting unless the non-U.S. holder provides to such broker a withholding certificate or other appropriate documentary evidence establishing that the non-U.S. holder is not a U.S. person and such broker does not have actual knowledge or reason to know that such evidence is false, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting. In circumstances where information reporting by the foreign office of such a broker is required, backup withholding will be required only if the broker has actual knowledge that the non-U.S. holder is a U.S. person.

You should consult your tax advisor regarding the qualification for an exemption from backup withholding and information reporting and the procedures for obtaining such an exemption, if applicable. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner generally would be allowed as a refund or a credit against such beneficial owner’s U.S. federal income tax provided the required information is timely furnished to the IRS.

Medicare Tax on “Net Investment Income.” A tax of 3.8% will be imposed on certain “net investment income” (or “undistributed net investment income”, in the case of estates and trusts) received by U.S. holders with modified adjusted gross income above certain threshold amounts. “Net investment income” as defined for U.S. federal Medicare contribution purposes generally includes interest payments and gain recognized from the sale or other disposition of the Notes. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the Notes.

FATCA. Certain provisions of the Code, known as FATCA, generally impose a withholding tax of 30% on certain payments to certain foreign entities (including financial intermediaries) unless various U.S. information reporting and diligence requirements (that are in addition to, the requirement to deliver an applicable IRS Form W-8, as discussed above) and certain other requirements have been satisfied. FATCA withholding generally applies to payments of interest and, after December 31, 2018, payments of gross proceeds (including principal payments) from the sale, redemption, retirement or other disposition of debt securities that can produce U.S. source interest (such as Notes) (collectively, “withholdable payments”) to certain non-U.S. entities (including, in some circumstances, where such an entity is acting as an intermediary) that fail to comply with certain certification, identification, withholding and information reporting requirements imposed by FATCA. FATCA withholding taxes generally apply to all withholdable payments without regard to whether the beneficial owner of the payment would otherwise be entitled to an exemption from withholding taxes pursuant to an applicable income tax treaty with the U.S. or under U.S. domestic law. If FATCA withholding taxes are imposed with respect to any payments of interest or proceeds made under the Notes, holders that are otherwise eligible for an exemption from, or reduction of, U.S. federal withholding taxes with respect to such interest or proceeds will be required to seek a credit or refund from the IRS in order to obtain the benefit of such exemption or reduction, if any. Beneficial owners of or prospective beneficial owners of the Notes may be required to provide additional information to enable the applicable withholding agent to determine whether withholding is required. Persons located in jurisdictions that have entered into an intergovernmental agreement with the U.S. to implement FATCA may be subject to different rules. Non-U.S. holders, and U.S. holders that expect to hold their Notes through non-U.S. entities should consult their own tax advisors regarding the effect, if any, of these withholding and reporting provisions.

 

S-63


Table of Contents
Index to Financial Statements

The preceding discussion of material U.S. federal income tax considerations is for general information only and is not tax advice. We urge you to consult your own tax advisor with respect to the particular tax consequences to you of an investment in the Notes, including the possible effect of any pending legislation or proposed regulations.

 

S-64


Table of Contents
Index to Financial Statements

MANAGEMENT

On August 16, 2018, Gerard R. Waldt, Jr., Controller and Interim Chief Accounting Officer, tendered his resignation from the Company. Mr. Waldt’s resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. David Lund, the Company’s current Interim Chief Financial Officer, assumed the duties of Interim Chief Accounting Officer effective as of August 23, 2018. The resignation of Mr. Waldt was effective on September 7, 2018.

LEGAL MATTERS

Certain legal matters in connection with the securities offered hereby will be passed upon for us by Dechert LLP, New York, NY. Certain legal matters in connection with the securities offered hereby will be passed upon for the underwriters by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY.

EXPERTS

The consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Annual Report on Internal Control over Financial Reporting) as of December 31, 2017 included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our securities offered by this prospectus supplement and the accompanying prospectus. The registration statement contains additional information about us and our securities being offered by this prospectus supplement and the accompanying prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus supplement and accompanying prospectus form a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at 202-551-8090. The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s Internet website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

 

S-65


Table of Contents
Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS

 

UNAUDITED FINANCIAL STATEMENTS

  

Consolidated Statements of Assets and Liabilities as of June  30, 2018 and December 31, 2017 (unaudited)

     S-67  

Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited)

     S-69  

Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2018 and 2017 (unaudited)

     S-70  

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)

     S-71  

Consolidated Schedule of Investments as of June  30, 2018 (unaudited)

     S-73  

Consolidated Schedule of Investments as of December  31, 2017 (unaudited)

     S-91  

Notes to Consolidated Financial Statements (unaudited)

     S-108  

Consolidated Schedule of Investments In and Advances to Affiliates as of June 30, 2018

     S-151  

 

S-66


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

     June 30, 2018     December 31, 2017  

Assets

    

Investments:

    

Non-control/Non-affiliate investments (cost of $1,614,160 and $1,506,454, respectively)

   $ 1,616,515     $ 1,491,458  

Control investments (cost of $59,337 and $25,419, respectively)

     56,716       19,461  

Affiliate investments (cost of $84,063 and $87,956, respectively)

     28,705       31,295  
  

 

 

   

 

 

 

Total investments in securities, at value (cost of $1,757,560 and $1,619,829, respectively)

     1,701,936       1,542,214  

Cash and cash equivalents

     59,461       91,309  

Restricted cash

     15,886       3,686  

Interest receivable

     14,408       12,262  

Other assets

     906       5,244  
  

 

 

   

 

 

 

Total assets

   $ 1,792,597     $ 1,654,715  
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued liabilities

   $ 25,115     $ 26,896  

SBA Debentures, net (principal of $190,200 and $190,200, respectively)(1)

     188,457       188,141  

2022 Notes, net (principal of $150,000 and $150,000, respectively)(1)

     147,728       147,572  

2024 Notes, net (principal of $83,510 and $183,510, respectively)(1)

     81,694       179,001  

2025 Notes, net (principal of $75,000 and $0, respectively)(1)

     72,616       —    

2021 Asset-Backed Notes, net (principal of $31,088 and $49,153, respectively)(1)

     30,698       48,650  

2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively)(1)

     224,269       223,488  

Credit Facilities

     58,323       —    
  

 

 

   

 

 

 

Total liabilities

   $ 828,900     $ 813,748  

Net assets consist of:

    

Common stock, par value

     94       85  

Capital in excess of par value

     1,026,313       908,501  

Unrealized appreciation (depreciation) on investments(2)

     (56,760     (79,760

Accumulated undistributed realized gains (losses) on investments

     (34,205     (20,374

Undistributed net investment income

     28,255       32,515  
  

 

 

   

 

 

 

Total net assets

   $ 963,697     $ 840,967  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,792,597     $ 1,654,715  
  

 

 

   

 

 

 

Shares of common stock outstanding ($0.001 par value, 200,000,000 authorized)

     94,260       84,424  

Net asset value per share

   $ 10.22     $ 9.96  

 

(1)

The Company’s SBA Debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2021 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”.

(2)

Amounts include $1.1 million and $2.1 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, and estimated taxes payable as of June 30, 2018 and December 31, 2017, respectively.

 

See notes to consolidated financial statements.

 

S-67


Table of Contents
Index to Financial Statements

The following table presents the assets and liabilities of our consolidated securitization trust for the 2021 Asset-Backed Notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, 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)

   June 30, 2018      December 31, 2017  

Assets

     

Restricted Cash

   $ 15,886      $ 3,686  

Total investments in securities, at value (cost of $98,105 and $146,208, respectively)

     97,924        144,513  
  

 

 

    

 

 

 

Total assets

   $ 113,810      $ 148,199  
  

 

 

    

 

 

 

Liabilities

     

2021 Asset-Backed Notes, net (principal of $31,088 and $49,153, respectively)(1)

   $ 30,698      $ 48,650  
  

 

 

    

 

 

 

Total liabilities

   $ 30,698      $ 48,650  
  

 

 

    

 

 

 

 

(1)

The Company’s 2021 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4—Borrowings”.

 

 

See notes to consolidated financial statements.

 

S-68


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2018             2017             2018             2017      

Investment income:

        

Interest income

        

Non-control/Non-affiliate investments

   $ 44,535     $ 39,979     $ 86,369     $ 82,324  

Control investments

     841       527       1,427       1,041  

Affiliate investments

     500       —         1,061       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     45,876       40,506       88,857       83,367  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee income

        

Commitment, facility and loan fee income:

        

Non-control/Non-affiliate investments

     1,930       2,440       4,370       5,374  

Control investments

     —         5       —         10  

Affiliate investments

     84       —         192       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commitment, facility and loan fee income

     2,014       2,445       4,562       5,384  
  

 

 

   

 

 

   

 

 

   

 

 

 

One-time fee income:

        

Non-control/Non-affiliate investments

     1,672       5,501       4,843       6,066  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total one-time fee income

     1,672       5,501       4,843       6,066  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     3,686       7,946       9,405       11,450  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     49,562       48,452       98,262       94,817  

Operating expenses:

        

Interest

     9,878       9,254       19,264       18,861  

Loan fees

     3,362       1,348       4,537       4,186  

General and administrative

        

Legal Expenses

     637       2,141       1,212       2,867  

Other Expenses

     3,037       2,609       6,471       5,947  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

     3,674       4,750       7,683       8,814  
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee compensation:

        

Compensation and benefits

     7,017       5,916       12,775       11,262  

Stock-based compensation

     2,857       1,909       5,166       3,742  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     9,874       7,825       17,941       15,004  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     26,788       23,177       49,425       46,865  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     22,774       25,275       48,837       47,952  

Net realized gain (loss) on investments

        

Non-control/Non-affiliate investments

     (3,953     (5,319     (7,465     (2,030

Control investments

     (2,900     (394     (4,308     (445

Affiliate investments

     (2,058     —         (2,058     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss) on investments

     (8,911     (5,713     (13,831     (2,475
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

        

Non-control/Non-affiliate investments

     32,700       66,255       18,360       34,100  

Control investments

     3,957       (53,349     3,337       (53,135

Affiliate investments

     1,540       681       1,303       1,119  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     38,197       13,587       23,000       (17,916
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     29,286       7,874       9,169       (20,391
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 52,060     $ 33,149     $ 58,006     $ 27,561  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before investment gains and losses per common share:

        

Basic

   $ 0.26     $ 0.31     $ 0.57     $ 0.58  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets resulting from operations per common share:

        

Basic

   $ 0.59     $ 0.40     $ 0.67     $ 0.33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.59     $ 0.40     $ 0.67     $ 0.33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     87,125       82,292       85,868       81,858  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     87,199       82,395       85,939       81,953  
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

        

Basic

   $ 0.31     $ 0.31     $ 0.62     $ 0.62  

See notes to consolidated financial statements.

 

S-69


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

   

 

Common Stock

    Capital in
excess

of par value
    Unrealized
Appreciation
(Depreciation)

on Investments
    Accumulated
Undistributed
Realized
Gains (Losses)

on Investments
    Undistributed
Net Investment

Income
    Net
Assets
 
    Shares     Par Value  

Balance at December 31, 2016

    79,555     $ 80     $ 839,657     $ (89,025   $ 14,314     $ 22,918     $ 787,944  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

    —         —         —         (17,916     (2,475     47,952       27,561  

Public offering, net of offering expenses

    3,309       3       46,908       —         —         —         46,911  

Issuance of common stock due to stock option exercises

    27       —         211       —         —         —         211  

Retired shares from net issuance

    (18     —         (170     —         —         —         (170

Issuance of common stock under restricted stock plan

    10       —         —         —         —         —         —    

Retired shares for restricted stock vesting

    (145     —         (1,988     —         —         —         (1,988

Distributions reinvested in common stock

    81       —         1,122       —         —         —         1,122  

Issuance of Convertible Notes

    —         —         3,413       —         —         —         3,413  

Distributions

    —         —         —         —         —         (51,330     (51,330

Stock-based compensation(1)

    —         —         3,777       —         —         —         3,777  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

    82,819     $ 83     $ 892,930     $ (106,941   $ 11,839     $ 19,540     $ 817,451  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    84,424     $ 85     $ 908,501     $ (79,760   $ (20,374   $ 32,515     $ 840,967  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

    —         —         —         23,000       (13,831     48,837       58,006  

Public offering, net of offering expenses

    9,486       9       112,617       —         —         —         112,626  

Issuance of common stock due to stock option exercises

    38       —         433       —         —         —         433  

Retired shares from net issuance

    (36     —         (447     —         —         —         (447

Issuance of common stock under restricted stock plan

    336       —         —         —         —         —         —    

Retired shares for restricted stock vesting

    (57     —         (688     —         —         —         (688

Distributions reinvested in common stock

    69       —         854       —         —         —         854  

Distributions

    —         —         —         —         —         (53,097     (53,097

Stock-based compensation(1)

    —         —         5,043       —         —         —         5,043  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

    94,260     $ 94     $ 1,026,313     $ (56,760   $ (34,205   $ 28,255     $ 963,697  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Stock-based compensation includes $20 and $35 of restricted stock and option expense related to director compensation for the six months ended June 30, 2018 and 2017, respectively.

See notes to consolidated financial statements.

 

S-70


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     For the Six Months
Ended June 30,
 
     2018     2017  

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 58,006     $ 27,561  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchase of investments

     (563,744     (340,632

Principal and fee payments received on investments

     414,347       349,519  

Proceeds from the sale of investments

     9,768       18,450  

Net unrealized depreciation (appreciation) on investments

     (23,000     17,916  

Net realized loss (gain) on investments

     13,831       2,475  

Accretion of paid-in-kind principal

     (4,696     (4,656

Accretion of loan discounts

     (1,562     (3,776

Accretion of loan discount on Convertible Notes

     336       280  

Accretion of loan exit fees

     (8,923     (10,653

Change in deferred loan origination revenue

     3,415       19  

Unearned fees related to unfunded commitments

     1,616       769  

Amortization of debt fees and issuance costs

     3,999       3,557  

Depreciation

     94       105  

Stock-based compensation and amortization of restricted stock grants(1)

     5,043       3,777  

Change in operating assets and liabilities:

    

Interest and fees receivable

     (2,146     1,410  

Prepaid expenses and other assets

     518       589  

Accounts payable

     244       —    

Accrued liabilities

     (1,016     898  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (93,870     67,608  

Cash flows from investing activities:

    

Purchases of capital equipment

     (116     (89
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (116     (89

Cash flows from financing activities:

    

Issuance of common stock, net

     112,626       46,911  

Retirement of employee shares

     (701     (1,947

Distributions paid

     (52,243     (50,208

Issuance of 2022 Convertible Notes

     —         230,000  

Issuance of 2024 Notes

     —         5,637  

Issuance of 2025 Notes

     75,000       —    

Repayments of 2019 Notes

     —         (110,364

Repayments of 2024 Notes

     (100,000     —    

Repayments of 2021 Asset-Backed Notes

     (18,065     (21,527

Borrowings of credit facilities

     150,700       8,497  

Repayments of credit facilities

     (92,377     (13,513

Cash paid for debt issuance costs

     (519     (4,480

Fees paid for credit facilities and debentures

     (83     (253
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     74,338       88,753  

Net increase (decrease) in cash, cash equivalents and restricted cash

     (19,648     156,272  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

     94,995       21,366  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 75,347     $ 177,638  
  

 

 

   

 

 

 

Supplemental non-cash investing and financing activities:

    

Distributions reinvested

     854       1,122  

 

(1)

Stock-based compensation includes $20 and $35 of restricted stock and option expense related to director compensation for the six months ended June 30, 2018 and 2017, respectively.

See notes to consolidated financial statements.

 

S-71


Table of Contents
Index to Financial Statements

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:

 

     For the Six Months
Ended June 30,
 

(Dollars in thousands)

   2018      2017  

Cash and cash equivalents

   $ 59,461      $ 160,412  

Restricted cash

     15,886        17,226  
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash presented in the Consolidated Statements of Cash Flows

   $ 75,347      $ 177,638  
  

 

 

    

 

 

 

See “Note 2—Summary of Significant Accounting Policies” and “Note 11- Recent Accounting Pronouncements” for a description of restricted cash and cash equivalents.

 

 

See notes to consolidated financial statements.

 

S-72


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

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     $ 5,152     $ 5,172  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,152       5,172  
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.54%)*

 

    5,152       5,172  
           

 

 

   

 

 

 

Consumer & Business Products

             

Under 1 Year Maturity

             

Gadget Guard (p.k.a Antenna79)(15)

  Consumer & Business Products   Senior Secured   December 2018  

Interest rate PRIME + 1.5%

or Floor rate of 11.00%

  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
           

 

 

   

 

 

 

1-5 Years Maturity

 

   

Gadget Guard (p.k.a Antenna79)(15)

  Consumer & Business Products   Senior Secured   December 2019  

Interest rate PRIME + 2.95%

or Floor rate of 12.45%, 2.95% Exit Fee

  $ 16,814       17,072       17,064  

WHOOP, INC.

  Consumer & Business Products   Senior Secured   July 2021  

Interest rate PRIME + 3.75%

or Floor rate of 8.50%, 6.95% Exit Fee

  $ 6,000       5,915       5,916  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    22,987       22,980  
           

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.49%)*

 

    23,987       23,980  
           

 

 

   

 

 

 

Diversified Financial Services

 

   

1-5 Years Maturity

 

   

Gibraltar Business Capital, LLC.(7)

  Diversified Financial Services   Unsecured   March 2023   Interest rate FIXED 14.50%   $ 10,000       9,809       9,809  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,809       9,809  
           

 

 

   

 

 

 

Subtotal: Diversified Financial Services (1.02%)*

 

    9,809       9,809  
           

 

 

   

 

 

 

Drug Delivery

             

Under 1 Year Maturity

             

Agile Therapeutics, Inc.(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 7,625       8,160       8,160  

ZP Opco, Inc. (p.k.a. Zosano Pharma)(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 2.70%

or Floor rate of 7.95%, 2.87% Exit Fee

  $ 3,233       3,570       3,570  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    11,730       11,730  
           

 

 

   

 

 

 

1-5 Years Maturity

             

AcelRx Pharmaceuticals, Inc.(11)(15)

  Drug Delivery   Senior Secured   March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 14,891       15,567       15,486  

Antares Pharma Inc.(10)(15)

  Drug Delivery   Senior Secured   July 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.25%, 4.25% Exit Fee

  $ 25,000       25,155       25,124  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    40,722       40,610  
           

 

 

   

 

 

 

Subtotal: Drug Delivery (5.43%)*

 

    52,452       52,340  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-73


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Drug Discovery & Development

 

 

Under 1 Year Maturity

 

 

Auris Medical Holding, AG(5)(10)

  Drug Discovery & Development   Senior Secured   February 2019  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 3,067       $3,695       $3,695  

CytRx Corporation(11)(15)

  Drug Discovery & Development   Senior Secured   August 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, 7.09% Exit Fee

  $ 7,884       9,576       9,576  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development   Senior Secured   December 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 2,277       2,561       33  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    15,832       13,304  
           

 

 

   

 

 

 

1-5 Years Maturity

 

 

Acacia Pharma Inc.

  Drug Discovery & Development   Senior Secured   January 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.25%, 3.95% Exit Fee

  $ 10,000       9,759       9,759  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       9,993       9,861  
  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       10,066       10,011  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       20,059       19,872  

Axovant Sciences
Ltd.(5)(10)(13)(16)

  Drug Discovery & Development   Senior Secured   March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       53,942       53,958  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development   Senior Secured   September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 7.49% Exit Fee

  $ 5,581       5,960       5,967  

BridgeBio Pharma LLC

  Drug Discovery & Development   Senior Secured   January 2022  

Interest rate PRIME + 4.35%

or Floor rate of 9.35%, 6.35% Exit Fee

  $ 35,000       34,651       34,651  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development   Senior Secured   December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 15,000       14,892       14,833  

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development   Senior Secured   May 2021  

Interest rate PRIME + 2.75%

or Floor rate of 7.75%, 10.12% Exit Fee

  $ 14,000       14,591       14,568  

Mesoblast(5)(10)

  Drug Discovery & Development   Senior Secured   March 2022  

Interest rate PRIME + 4.95%

or Floor rate of 9.45%, 6.95% Exit Fee

  $ 35,000       34,894       34,894  

Metuchen Pharmaceuticals LLC(12)(14)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 20,731       21,252       21,184  

Motif BioSciences Inc.(5)(10)(15)

  Drug Discovery & Development   Senior Secured   September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,774       14,665  

Myovant Sciences, Ltd.(5)(10)(13)

  Drug Discovery & Development   Senior Secured   May 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 40,000       39,772       39,408  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(10)(15)(16)

  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,558       40,128  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,151       10,033  

 

See notes to consolidated financial statements.

 

S-74


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000     $ 10,029     $ 9,935  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,738       60,096  

Stealth Bio Therapeutics
Corp.(5)(10)(12)

  Drug Discovery & Development   Senior Secured   January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 5.00% Exit Fee

  $ 20,000       20,069       19,878  

Tricida, Inc.(15)(17)

  Drug Discovery & Development   Senior Secured   March 2022  

Interest rate PRIME + 3.35%

or Floor rate of 8.35%, 11.14% Exit Fee

  $ 25,000       24,864       24,864  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development   Senior Secured   May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000       20,761       20,711  

Verastem, Inc.(12)

  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,005       4,982  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,037       5,014  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,003       4,979  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 10,000       9,904       9,781  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 25,000       24,949       24,756  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    415,927       414,064  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (44.35%)*

 

    431,759       427,368  
           

 

 

   

 

 

 

Electronics & Computer Hardware

           

1-5 Years Maturity

           

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Senior Secured   September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,016       9,963  

Glo AB(5)(10)(13)(14)

  Electronics & Computer Hardware   Senior Secured   February 2021  

Interest rate PRIME + 6.20%

or Floor rate of 10.45%,

PIK Interest 1.75%, 2.95% Exit Fee

  $ 12,084       12,042       12,042  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    22,058       22,005  
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (2.28%)*

 

    22,058       22,005  
           

 

 

   

 

 

 

Healthcare Services, Other

           

1-5 Years Maturity

           

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 17,764       17,635       17,691  
  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,053       5,019       5,034  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,817       22,654       22,725  

Oak Street Health(12)

  Healthcare Services, Other   Senior Secured   September 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.75%, 5.95% Exit Fee

  $ 30,000       30,100       29,823  

PH Group Holdings(13)

  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,913       19,785  

 

See notes to consolidated financial statements.

 

S-75


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 10,000     $ 9,944     $ 9,843  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,857       29,628  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    82,611       82,176  
           

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.53%)*

 

    82,611       82,176  
           

 

 

   

 

 

 

Information Services

           

1-5 Years Maturity

           

MDX Medical, Inc.(14)(15)(19)

  Information Services   Senior Secured   December 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%,

PIK Interest 1.70%

  $ 15,157       14,807       14,608  

Netbase Solutions, Inc.(13)(14)

  Information Services   Senior Secured   August 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 9,142       8,985       8,965  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    23,792       23,573  
           

 

 

   

 

 

 

Subtotal: Information Services (2.45%)*

 

    23,792       23,573  
           

 

 

   

 

 

 

Internet Consumer & Business Services

           

Under 1 Year Maturity

           

Intent Media, Inc.(14)(15)

  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%, 2.00% Exit Fee

  $ 5,076       5,096       5,096  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.35%, 2.00% Exit Fee

  $ 2,044       2,042       2,042  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.50%, 2.00% Exit Fee

  $ 2,047       2,045       2,045  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,167       9,183       9,183  

The Faction Group LLC

  Internet Consumer & Business Services   Senior Secured   January 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,000       2,000       2,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    11,183       11,183  
           

 

 

   

 

 

 

1-5 Years Maturity

 

   

AppDirect, Inc.(13)(19)

  Internet Consumer & Business Services   Senior Secured   January 2022  

Interest rate PRIME + 5.70%

or Floor rate of 9.95%, 3.45% Exit Fee

  $ 20,000       19,859       19,738  

Art.com, Inc.(14)(15)

  Internet Consumer & Business Services   Senior Secured   April 2021  

Interest rate PRIME + 5.40%

or Floor rate of 10.15%,

PIK Interest 1.70%, 1.50% Exit Fee

  $ 10,030       9,873       9,873  

Cloudpay, Inc.(5)(10)

  Internet Consumer & Business Services   Senior Secured   April 2022  

Interest rate PRIME + 4.05%

or Floor rate of 8.55%, 6.95% Exit Fee

  $ 11,000       10,884       10,884  

EverFi, Inc.(14)(16)

  Internet Consumer & Business Services   Senior Secured   May 2022  

Interest rate PRIME + 3.90%

or Floor rate of 8.65%,

PIK Interest 2.30%

  $ 50,115       50,067       50,067  

First Insight, Inc.(15)(17)

  Internet Consumer & Business Services   Senior Secured   November 2021  

Interest rate PRIME + 6.25%

or Floor rate of 11.25%

  $ 6,000       5,876       5,876  

 

See notes to consolidated financial statements.

 

S-76


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Greenphire, Inc.(17)

  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate 3-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 3,433     $ 3,432     $ 3,437  
  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate PRIME + 3.75%

or Floor rate of 7.00%

  $ 1,500       1,500       1,488  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 4,933       4,932       4,925  

Interactions Corporation(19)

  Internet Consumer & Business Services     Senior Secured     March 2021  

Interest rate 3-month LIBOR + 8.60%

or Floor rate of 9.85%, 1.75% Exit Fee

  $ 25,000       25,052       25,128  

LogicSource(15)

  Internet Consumer & Business Services     Senior Secured     October 2019  

Interest rate PRIME + 6.25%

or Floor rate of 9.75%, 5.00% Exit Fee

  $ 4,820       5,145       5,144  

RumbleON, Inc.

  Internet Consumer & Business Services     Senior Secured     May 2021  

Interest rate PRIME + 5.75%

or Floor rate of 10.25%, 4.55% Exit Fee

  $ 5,000       4,945       4,945  

Snagajob.com, Inc.(13)(14)

  Internet Consumer & Business Services     Senior Secured     July 2020  

Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%, 2.55% Exit Fee

  $ 41,429       41,398       41,552  

Tectura Corporation(7)(8)(9)(14)

  Internet Consumer & Business Services     Senior Secured     June 2021  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 20,608       20,608       19,127  
  Internet Consumer & Business Services     Senior Secured     June 2021   PIK Interest 8.00%   $ 10,680       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,288       20,848       19,127  

The Faction Group LLC.

  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate 3-month LIBOR + 9.25%

or Floor rate of 10.25%

  $ 8,000       8,000       8,008  

Wheels Up Partners LLC

  Internet Consumer & Business Services     Senior Secured     July 2022  

Interest rate 3-month LIBOR + 8.55%

or Floor rate of 9.55%

  $ 21,701       21,503       21,503  

Xometry, Inc.(17)(19)

  Internet Consumer & Business Services     Senior Secured     May 2021  

Interest rate PRIME + 3.95%

or Floor rate of 8.45%, 7.45% Exit Fee

  $ 7,000       6,942       6,942  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    235,324       233,712  
           

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (25.41%)*

 

    246,507       244,895  
           

 

 

   

 

 

 

Media/Content/Info

           

1-5 Years Maturity

           

Bustle(14)(15)

  Media/Content/Info     Senior Secured     June 2021  

Interest rate PRIME + 4.10%

or Floor rate of 8.35%,

PIK Interest 1.95%, 1.95% Exit Fee

  $ 15,164       15,133       15,156  

FanDuel, Inc.(9)(10)(12)(14)

  Media/Content/Info     Senior Secured     November 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%, 10.41% Exit Fee

  $ 19,354       20,380       20,380  
  Media/Content/Info    
Convertible
Debt
 
 
  September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,723  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       21,380       22,103  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    36,513       37,259  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (3.87%)*

 

    36,513       37,259  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-77


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Medical Devices & Equipment

           

Under 1 Year Maturity

           

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment     Senior Secured     October 2018  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 6.85% Exit Fee

  $ 1,793     $ 2,208     $ 829  

Quanterix Corporation(11)

  Medical Devices & Equipment     Senior Secured     March 2019  

Interest rate PRIME + 2.75%

or Floor rate of 8.00%

  $ 7,688       7,673       7,673  
         

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    9,881       8,502  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Intuity Medical, Inc.(15)

  Medical Devices & Equipment     Senior Secured     June 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 4.95% Exit Fee

  $ 17,500       17,251       17,278  

Micell Technologies, Inc.(12)

  Medical Devices & Equipment     Senior Secured     August 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.50%, 5.00% Exit Fee

  $ 3,942       4,291       4,251  

Quanta Fluid Solutions(5)(10)(11)

  Medical Devices & Equipment     Senior Secured     April 2020  

Interest rate PRIME + 8.05%

or Floor rate of 11.55%, 5.00% Exit Fee

  $ 7,864       8,290       8,250  

Rapid Micro Biosystems, Inc.(13)(15)

  Medical Devices & Equipment     Senior Secured     April 2022  

Interest rate PRIME + 5.15%

or Floor rate of 9.65%, 7.25% Exit Fee

  $ 18,000       17,929       17,929  

Sebacia, Inc.(15)

  Medical Devices & Equipment     Senior Secured     July 2020  

Interest rate PRIME + 4.35%

or Floor rate of 8.85%, 6.05% Exit Fee

  $ 8,000       8,054       8,066  

Transenterix, Inc.(10)

  Medical Devices & Equipment     Senior Secured     June 2022  

Interest rate PRIME + 4.55%

or Floor rate of 9.55%, 6.95% Exit Fee

  $ 20,000       19,827       19,827  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    75,642       75,601  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (8.73%)*

 

    85,523       84,103  
         

 

 

   

 

 

 

Software

           

Under 1 Year Maturity

           

Pollen, Inc.(15)

  Software     Senior Secured     April 2019  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, 4.00% Exit Fee

  $ 7,000       7,084       7,084  
         

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    7,084       7,084  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Banker’s Toolbox, Inc(13)(18)

  Software     Senior Secured     March 2023   Interest rate 3-month LIBOR + 7.88% or Floor rate of 8.88%   $ 39,900       39,085       39,085  

Businessolver.com, Inc.(16)(17)

  Software     Senior Secured     May 2023   Interest rate 3-month LIBOR + 7.50%   $ 51,000       50,000       50,000  

Clarabridge, Inc.(12)(14)

  Software     Senior Secured     April 2021  

Interest rate PRIME + 4.80%

or Floor rate of 8.55%,

PIK Interest 3.25%

  $ 41,570       41,549       41,724  

Dashlane, Inc.(14)(19)

  Software     Senior Secured     April 2022  

Interest rate PRIME + 4.05%

or Floor rate of 8.55%,

PIK Interest 1.10%, 9.25% Exit Fee

  $ 10,011       9,932       9,932  

Emma, Inc.(17)(18)

  Software     Senior Secured     September 2022   Interest rate 3-month LIBOR + 9.39%   $ 37,037       35,728       35,962  

Evernote Corporation(14)(15)(17)(19)

  Software     Senior Secured     October 2020  

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,980       6,072  

 

See notes to consolidated financial statements.

 

S-78


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Software   Senior Secured   July 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 1.25%

  $ 4,048     $ 4,028     $ 4,022  
  Software   Senior Secured   July 2022  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 1.25%

  $ 2,500       2,483       2,483  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 12,548       12,491       12,577  

Fuze, Inc.(13)(14)(15)(16)(19)

  Software   Senior Secured   July 2021  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.55%, 3.55% Exit Fee

  $ 50,728       51,097       51,014  

Impact Radius Holdings, Inc.(12)(14)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%, 1.75% Exit Fee

  $ 10,111       10,151       10,055  
  Software   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%

  $ 2,000       2,000       1,977  
         

 

 

   

 

 

   

 

 

 

Total Impact Radius Holdings, Inc.

  $ 12,111       12,151       12,032  

Insurance Technologies Corporation(17)

  Software   Senior Secured   March 2023   Interest rate 3-month LIBOR + 7.75% or Floor rate of 8.75%   $ 12,500       12,261       12,261  

Lightbend, Inc.(14)(15)

  Software   Senior Secured   August 2021  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%,

PIK Interest 2.00%

  $ 11,066       10,884       10,884  

Lithium Technologies, Inc.(17)

  Software   Senior Secured   October 2022   Interest rate 3-month LIBOR + 8.00% or Floor rate of 9.00%   $ 12,000       11,762       11,762  

Microsystems Holding Company, LLC(13)(19)

  Software   Senior Secured   July 2022   Interest rate 3-month LIBOR + 8.25% or Floor rate of 9.25%   $ 12,000       11,837       11,873  

OneLogin, Inc.(14)(15)

  Software   Senior Secured   July 2021  

Interest rate PRIME + 5.95%

or Floor rate of 10.70%,

PIK Interest 2.00%

  $ 21,153       20,953       20,935  

Quid, Inc.(14)(15)

  Software   Senior Secured   October 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%, 3.00% Exit Fee

  $ 8,398       8,533       8,554  

RapidMiner, Inc.(12)(14)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 5.50%

or Floor rate of 9.75%,

PIK Interest 1.65%

  $ 7,060       7,037       6,963  

Regent Education(14)

  Software   Senior Secured   January 2021  

Interest rate FIXED 10.00%,

PIK Interest 2.00%, 6.35% Exit Fee

  $ 3,275       3,299       2,144  

Salsa Labs, Inc.(17)

  Software   Senior Secured   April 2023   Interest rate 3-month LIBOR + 8.15% or Floor rate of 9.15%   $ 6,000       5,884       5,884  

Signpost, Inc.(14)

  Software   Senior Secured   February 2020  

Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%, 3.75% Exit Fee

  $ 15,647       15,932       15,840  

Vela Trading Technologies(18)

  Software   Senior Secured   July 2022   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%   $ 20,000       19,543       19,434  

Wrike, Inc.(13)(14)(19)

  Software   Senior Secured   February 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 10,268       10,056       10,180  

 

See notes to consolidated financial statements.

 

S-79


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

ZocDoc (19)

  Software   Senior Secured   April 2021   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 20,000     $ 20,043     $ 20,165  
  Software   Senior Secured   November 2021   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 10,000       10,020       10,082  
         

 

 

   

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,063       30,247  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    420,077       419,287  
         

 

 

   

 

 

 

Subtotal: Software (44.24%)*

 

    427,161       426,371  
         

 

 

   

 

 

 

Surgical Devices

           

Under 1 Year Maturity

           

Gynesonics, Inc.(9)(14)(15)

  Surgical Devices   Unsecured
Convertible
Debt
  May 2019   PIK Interest 8.00%   $ 105       105       132  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    105       132  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (0.01%)*

 

    105       132  
           

 

 

   

 

 

 

Sustainable and Renewable Technology

           

1-5 Years Maturity

           

ChargePoint Inc.(19)

  Sustainable and Renewable Technology   Senior Secured   August 2020   Interest rate 3-month LIBOR + 8.75% or Floor rate of 9.75%, 2.00% Exit Fee   $ 15,758       15,840       15,840  

FuelCell Energy, Inc.(12)

  Sustainable and Renewable Technology   Senior Secured   April 2020  

Interest rate PRIME + 5.40%

or Floor rate of 9.90%, 6.68% Exit Fee

  $ 13,091       12,997       13,024  
  Sustainable and Renewable Technology   Senior Secured   April 2020  

Interest rate PRIME + 5.40%

or Floor rate of 9.90%, 8.50% Exit Fee

  $ 11,909       13,531       13,542  
         

 

 

   

 

 

   

 

 

 

Total FuelCell Energy, Inc.

  $ 25,000       26,528       26,566  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Senior Secured   August 2019  

Interest rate PRIME + 8.70%

or Floor rate of 12.95%, 4.50% Exit Fee

  $ 10,500       10,468       10,382  

Impossible Foods, Inc.(17)

  Sustainable and Renewable Technology   Senior Secured   July 2021  

Interest rate PRIME + 3.95%

or Floor rate of 8.95%, 10.00% Exit Fee

  $ 15,000       14,768       14,768  

Metalysis Limited(5)(10)

  Sustainable and Renewable Technology   Senior Secured   March 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 6.95% Exit Fee

  $ 7,500       7,494       7,494  

Proterra, Inc.(11)(14)(17)

  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 5.95% Exit Fee

  $ 25,259       26,388       26,479  
  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 7.00% Exit Fee

  $ 5,052       5,276       5,285  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,311       31,664       31,764  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    106,762       106,814  
           

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (11.08%)*

 

    106,762       106,814  
           

 

 

   

 

 

 

Total: Debt Investments (160.43%)*

 

    1,554,191       1,545,997  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-80


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(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)

  Biotechnology Tools   Equity   Common Stock     55,780     $ 500     $ —    
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
         

 

 

   

 

 

 

Communications & Networking

           

GlowPoint, Inc.(4)

  Communications & Networking   Equity   Common Stock     114,192       102       23  

Peerless Network Holdings, Inc.

  Communications & Networking   Equity   Preferred Series A     1,135,000       1,229       6,204  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.65%)*

 

    1,331       6,227  
         

 

 

   

 

 

 

Diagnostic

           

Singulex, Inc.

  Diagnostic   Equity   Common Stock     937,998       750       407  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.04%)*

 

    750       407  
         

 

 

   

 

 

 

Diversified Financial Services

           

Gibraltar Business Capital, LLC(7)

  Diversified Financial Services   Equity   Common Stock     830,000       1,884       1,884  
  Diversified Financial Services   Equity   Preferred Series A     10,602,752       25,896       25,896  
       

 

 

   

 

 

   

 

 

 

Total Gibraltar Business Capital, LLC.

    11,432,752       27,780       27,780  
         

 

 

   

 

 

 

Subtotal: Diversified Financial Services (2.88%)*

 

    27,780       27,780  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)

  Drug Delivery   Equity   Common Stock     54,240       108       183  

BioQ Pharma Incorporated(15)

  Drug Delivery   Equity   Preferred Series D     165,000       500       705  

Edge Therapeutics, Inc.(4)

  Drug Delivery   Equity   Common Stock     49,965       309       51  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Equity   Common Stock     125,000       1,500       781  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.18%)*

 

    2,417       1,720  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(4)(10)(15)

  Drug Discovery & Development   Equity   Common Stock     1,901,791       1,715       4,481  

Axovant Sciences Ltd.(4)(5)(10)(16)

  Drug Discovery & Development   Equity   Common Stock     129,827       1,269       293  

Cerecor, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     119,087       1,000       517  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Equity   Common Stock     13,550       1,000       16  

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Equity   Common Stock     142,858       1,000       1,749  

Dynavax Technologies(4)(10)

  Drug Discovery & Development   Equity   Common Stock     20,000       550       305  

Eidos Therapeutics, Inc.(4)(10)

  Drug Discovery & Development   Equity   Common Stock     15,000       255       305  

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     223,463       2,000       191  

Insmed, Incorporated(4)

  Drug Discovery & Development   Equity   Common Stock     70,771       1,000       1,724  

Melinta Therapeutics(4)

  Drug Discovery & Development   Equity   Common Stock     51,821       2,000       330  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(10)(16)

  Drug Discovery & Development   Equity   Common Stock     76,362       2,744       779  

 

See notes to consolidated financial statements.

 

S-81


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Rocket Pharmaceuticals, Ltd (p.k.a. Inotek Pharmaceuticals Corporation)(4)

  Drug Discovery & Development   Equity   Common Stock     944     $ 1,500     $ 19  

Tricida, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     105,260       2,000       3,147  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.44%)*

 

    18,033       13,856  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Identiv, Inc.(4)

  Electronics & Computer Hardware   Equity   Common Stock     6,700       34       25  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       25  
         

 

 

   

 

 

 

Information Services

           

DocuSign, Inc.(4)

  Information Services   Equity   Common Stock     385,000       6,081       20,386  
         

 

 

   

 

 

 

Subtotal: Information Services (2.12%)*

 

    6,081       20,386  
         

 

 

   

 

 

 

Internet Consumer & Business Services

           

Blurb, Inc.(15)

  Internet Consumer & Business Services   Equity   Preferred Series B     220,653       175       90  

Brigade Group, Inc. (p.k.a. Philotic, Inc.)

  Internet Consumer & Business Services   Equity   Common Stock     9,023       93       —    

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Equity   Preferred Series C     230,030       250       283  
  Internet Consumer & Business Services   Equity   Preferred Series D     198,677       250       255  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

    428,707       500       538  

OfferUp, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series A     286,080       1,663       1,920  
  Internet Consumer & Business Services   Equity   Preferred Series A-1     108,710       632       729  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

    394,790       2,295       2,649  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Equity   Preferred Series G     218,351       250       337  
  Internet Consumer & Business Services   Equity   Preferred Series H     87,802       250       247  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

    306,153       500       584  

RazorGator Interactive Group, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series AA     34,783       15       —    

Tectura Corporation(7)

  Internet Consumer & Business Services   Equity   Common Stock     414,994,863       900       —    
  Internet Consumer & Business Services   Equity   Preferred Series BB     1,000,000       —         —    
       

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

    415,994,863       900       —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.40%)*

 

    4,478       3,861  
         

 

 

   

 

 

 

Media/Content/Info

 

   

Pinterest, Inc.

  Media/Content/Info   Equity   Preferred Series Seed     620,000       4,085       4,681  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.49%)*

 

    4,085       4,681  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

AtriCure, Inc.(4)(15)

  Medical Devices & Equipment   Equity   Common Stock     7,536       266       204  

 

See notes to consolidated financial statements.

 

S-82


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Equity   Preferred Series AA     221,893     $ 1,500     $ —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Equity   Common Stock     198,202       —         657  
  Medical Devices & Equipment   Equity   Preferred Series A-1     191,210       425       729  
  Medical Devices & Equipment   Equity   Preferred Series A-2     191,626       500       680  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

    581,038       925       2,066  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Equity   Preferred Series E     136,798       250       93  
  Medical Devices & Equipment   Equity   Preferred Series F     73,971       155       86  
  Medical Devices & Equipment   Equity   Preferred Series G     163,934       500       252  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

    374,703       905       431  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Equity   Preferred Series B     6,185,567       3,000       411  
  Medical Devices & Equipment   Equity   Preferred Series C     1,927,309       655       119  
  Medical Devices & Equipment   Equity   Preferred Series D     55,103,923       5,257       3,721  
  Medical Devices & Equipment   Equity   Preferred Series E     31,199,131       2,609       2,843  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    94,415,930       11,521       7,094  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Equity   Preferred Series B     232,061       527       723  

Quanterix Corporation(4)

  Medical Devices & Equipment   Equity   Common Stock     84,778       1,000       1,217  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.22%)*

 

    16,644       11,735  
         

 

 

   

 

 

 

Software

           

Braxton Technologies, LLC

  Software   Equity   Class A Units     62,735       188       267  

CapLinked, Inc.

  Software   Equity   Preferred Series A-3     53,614       51       90  

Druva, Inc.

  Software   Equity   Preferred Series 2     458,841       1,000       1,455  
  Software   Equity   Preferred Series 3     93,620       300       358  
       

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,813  

HighRoads, Inc.

  Software   Equity   Common Stock     190       307       —    

NewVoiceMedia Limited(5)(10)

  Software   Equity   Preferred Series E     669,173       963       1,570  

Palantir Technologies

  Software   Equity   Preferred Series E     727,696       5,431       4,797  
  Software   Equity   Preferred Series G     326,797       2,211       2,155  
       

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       6,952  

Sprinklr, Inc.

  Software   Equity   Common Stock     700,000       3,749       4,069  

WildTangent, Inc.(15)

  Software   Equity   Preferred Series 3     100,000       402       183  
         

 

 

   

 

 

 

Subtotal: Software (1.55%)*

 

    14,602       14,944  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       61  
  Surgical Devices   Equity   Preferred Series C     656,538       282       85  
  Surgical Devices   Equity   Preferred Series D     1,991,157       712       906  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       610  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,673       1,662  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       447  
  Surgical Devices   Equity   Preferred Series C     119,999       300       418  

 

See notes to consolidated financial statements.

 

S-83


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  
  Surgical Devices   Equity   Preferred Series D     260,000     $ 650     $ 1,160  
  Surgical Devices   Equity   Preferred Series F     100,200       500       591  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,616  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.44%)*

 

    4,223       4,278  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

 

   

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Equity   Common Stock     192       761       —    

Modumetal, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series C     3,107,520       500       91  

Proterra, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series 5     99,280       500       522  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Equity   Common Stock     288       61,502       10,996  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.20%)*

 

    63,263       11,609  
         

 

 

   

 

 

 

Total: Equity Investments (12.61%)*

 

    164,221       121,509  
         

 

 

   

 

 

 

Warrant Investments

           

Biotechnology Tools

           

Labcyte, Inc.(15)

  Biotechnology Tools   Warrant   Preferred Series C     1,127,624       323       514  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.05%)*

 

    323       514  
         

 

 

   

 

 

 

Communications & Networking

           

Peerless Network Holdings, Inc.

  Communications & Networking   Warrant   Common Stock     3,328       —         14  

Spring Mobile Solutions, Inc.

  Communications & Networking   Warrant   Common Stock     2,834,375       418       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    418       14  
         

 

 

   

 

 

 

Consumer & Business Products

           

Gadget Guard (p.k.a Antenna79)(15)

  Consumer & Business Products   Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

  Consumer & Business Products   Warrant   Preferred Series B     190,234       230       188  

The Neat Company(15)

  Consumer & Business Products   Warrant   Preferred Series C-1     540,540       365       —    

WHOOP, INC.

  Consumer & Business Products   Warrant   Preferred Series C     68,627       18       18  
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.02%)*

 

    841       206  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     176,730       786       174  

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     180,274       730       3  

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       658  

Celsion Corporation(4)

  Drug Delivery   Warrant   Common Stock     13,927       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     78,595       390       20  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       1,222  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       25  

Pulmatrix Inc.(4)

  Drug Delivery   Warrant   Common Stock     25,150       116       —    

ZP Opco, Inc. (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant   Common Stock     3,618       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.22%)*

 

    3,670       2,102  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-84


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Drug Discovery & Development

           

Acacia Pharma Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     201,330     $ 304     $ 304  

ADMA Biologics, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     89,750       295       30  

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     15,672       249       —    

Brickell Biotech, Inc.

  Drug Discovery & Development   Warrant   Preferred Series C     26,086       119       60  

Cerecor, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     22,328       70       25  

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series D     325,261       490       —    

Cleveland BioLabs, Inc.(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     7,813       105       1  

Concert Pharmaceuticals, Inc.(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     132,069       545       584  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     29,239       165       —    

CytRx Corporation(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     105,694       160       24  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     17,190       369       —    

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     200       28       —    

Evofem Biosciences, Inc. (p.k.a Neothetics, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     7,806       266       7  

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     73,009       142       11  

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     403,136       431       160  

Immune Pharmaceuticals(4)

  Drug Discovery & Development   Warrant   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

  Drug Discovery & Development   Warrant   Common Stock     40,545       626       —    

Motif BioSciences Inc.(4)(5)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     73,452       282       198  

Myovant Sciences, Ltd.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     73,710       460       892  

Neuralstem, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

  Drug Discovery & Development   Warrant   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(10)(15)(16)

  Drug Discovery & Development   Warrant   Common Stock     75,214       178       33  

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     32,467       203       130  

Sorrento Therapeutics, Inc.(4)(10)

  Drug Discovery & Development   Warrant   Common Stock     306,748       889       1,075  

Stealth Bio Therapeutics Corp.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series A     650,000       158       188  

Tricida, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     53,458       222       918  

uniQure B.V.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     37,174       218       701  

 

See notes to consolidated financial statements.

 

S-85


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

XOMA Corporation(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     9,063     $ 279     $ 9  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.56%)*

 

    8,332       5,350  
         

 

 

   

 

 

 

Electronics & Computer Hardware

         

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Warrant   Preferred Series D     79,856       100       68  

Clustrix, Inc.

  Electronics & Computer Hardware   Warrant   Common Stock     50,000       12       —    
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       68  
         

 

 

   

 

 

 

Healthcare Services, Other

           

Chromadex Corporation(4)(15)

  Healthcare Services, Other   Warrant   Common Stock     139,673       157       126  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.01%)*

 

    157       126  
         

 

 

   

 

 

 

Information Services

           

INMOBI Inc.(5)(10)

  Information Services   Warrant   Common Stock     65,587       82       —    

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C-1     898,134       49       74  

MDX Medical, Inc.(15)

  Information Services   Warrant   Common Stock     2,812,500       283       296  

Netbase Solutions, Inc.

  Information Services   Warrant   Preferred Series 1     60,000       356       367  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.08%)*

 

    868       737  
         

 

 

   

 

 

 

Internet Consumer & Business Services

           

Aria Systems, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series G     231,535       73       —    

Art.com, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series B     311,005       66       106  

Blurb, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     234,280       636       42  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer & Business Services   Warrant   Preferred Series E     968,992       19       177  

Cloudpay, Inc.(5)(10)

  Internet Consumer & Business Services   Warrant   Preferred Series B     4,960       45       62  

The Faction Group LLC

  Internet Consumer & Business Services   Warrant   Preferred Series A     8,703       234       525  

First Insight, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series B     45,551       56       57  

Intent Media, Inc.(15)

  Internet Consumer & Business Services   Warrant   Common Stock     140,077       168       230  

Interactions Corporation

  Internet Consumer & Business Services   Warrant   Preferred Series G-3     68,187       204       422  

Just Fabulous, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B     206,184       1,102       3,003  

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Warrant   Preferred Series C     245,610       20       133  

LogicSource(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     79,625       30       26  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Warrant   Preferred Series G     174,562       78       85  

RumbleON, Inc.(4)

  Internet Consumer & Business Services   Warrant   Common Stock     81,818       72       105  

ShareThis, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     493,502       547       —    

Snagajob.com, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A     1,800,000       782       332  

 

See notes to consolidated financial statements.

 

S-86


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Tapjoy, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series D     748,670     $ 316     $ 42  

Thumbtack, Inc.

  Internet Consumer & Business Services   Warrant   Class A Units     102,821       124       101  

TraceLink, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A-2     283,353       1,832       2,705  

Xometry, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B     87,784       47       47  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.85%)*

 

    6,451       8,200  
         

 

 

   

 

 

 

Media/Content/Info

           

FanDuel, Inc.(10)

  Media/Content/Info   Warrant   Common Stock     15,570       —         —    
  Media/Content/Info   Warrant   Preferred Series A     4,648       730       1,875  
       

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       3,972  

Napster (p.k.a. Rhapsody International, Inc.)(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       122  

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant   Common Stock     255,818       4       39  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       30  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.63%)*

 

    3,425       6,038  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

Amedica Corporation(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     8,603       459       —    

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B-1     112,858       455       —    

Avedro, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series AA     300,000       401       382  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Warrant   Preferred Series AA     155,325       362       —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     74,784       78       144  

InspireMD, Inc.(4)(5)(10)

  Medical Devices & Equipment   Warrant   Common Stock     1,124       242       —    

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series 4     1,819,078       294       458  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Warrant   Preferred Series E     455,539       370       106  

Micell Technologies, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series D-2     84,955       262       164  

NetBio, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series A     7,841       408       —    

NinePoint Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     587,840       170       126  

Optiscan Biomedical, Corp.(6)

  Medical Devices & Equipment   Warrant   Preferred Series E     7,442,491       572       233  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Warrant   Preferred Series A     500,000       402       630  

Quanterix Corporation(4)

  Medical Devices & Equipment   Warrant   Common Stock     66,039       204       199  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series D     778,301       133       173  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices & Equipment   Warrant   Preferred Series A     6,464       188       —    

Tela Bio, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B     387,930       62       195  

 

See notes to consolidated financial statements.

 

S-87


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

ViewRay, Inc.(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     128,231     $ 333     $ 239  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.32%)*

 

    5,395       3,049  
         

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       159       475  
  Semiconductors   Warrant   Preferred Series D-2     750,000       99       718  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       258       1,193  

Aquantia Corp.(4)

  Semiconductors   Warrant   Common Stock     19,683       4       10  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       47       248  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.15%)*

 

    309       1,451  
         

 

 

   

 

 

 

Software

           

Actifio, Inc.

  Software   Warrant   Common Stock     73,584       249       82  
  Software   Warrant   Preferred Series F     31,673       343       76  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       158  

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433       258       39  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       66  
  Software   Warrant   Preferred Series C     592,019       730       53  
  Software   Warrant   Preferred Series C-A     2,218,214       230       427  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       546  

DNAnexus, Inc.

  Software   Warrant   Preferred Series C     909,091       97       84  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       248  

Fuze, Inc.(15)(16)

  Software   Warrant   Preferred Series F     256,158       89       —    

Lightbend, Inc.(15)

  Software   Warrant   Preferred Series C-1     391,778       79       78  

Mattersight Corporation(4)

  Software   Warrant   Common Stock     357,143       538       144  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718       334       451  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       —    

NewVoiceMedia Limited(5)(10)

  Software   Warrant   Preferred Series E     225,586       33       206  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     305,296       224       284  

Poplicus, Inc.

  Software   Warrant   Common Stock     132,168       —         —    

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       15  

RapidMiner, Inc.

  Software   Warrant   Preferred Series C-1     4,982       24       26  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series C-Prime     640,603       66       36  

Signpost, Inc.

  Software   Warrant   Preferred Series C     324,005       314       180  

Wrike, Inc.

  Software   Warrant   Common Stock     698,760       462       1,676  
         

 

 

   

 

 

 

Subtotal: Software (0.43%)*

 

    4,529       4,171  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

           

Alimera Sciences, Inc.(4)

  Specialty Pharmaceuticals   Warrant   Common Stock     1,717,709       861       203  
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.02%)*

 

    861       203  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       20  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       360  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       380  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series D     175,000       100       568  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       101  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    225,544       138       669  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.11%)*

 

    533       1,049  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-88


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Sustainable and Renewable Technology

         

Agrivida, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D     471,327     $ 120     $ —    

American Superconductor Corporation(4)

  Sustainable and Renewable Technology   Warrant   Common Stock     58,823       39       66  

Calera, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     44,529       513       —    

Fluidic, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series D     61,804       102       —    

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Warrant   Common Stock     5,310       181       —    
  Sustainable and Renewable Technology   Warrant   Preferred Series 2-A     63       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    5,373       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series C-1     280,897       274       472  

GreatPoint Energy, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series A     325,000       155       104  
  Sustainable and Renewable Technology   Warrant   Preferred Series B     131,883       63       32  
       

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       136  

Polyera Corporation(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     311,609       338       —    

Proterra, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series 4     477,517       41       470  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series E     234,477       12       8  

TAS Energy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and Renewable Technology   Warrant   Preferred Series 3-A     1,019,793       189       —    
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.12%)*

 

    2,924       1,152  
       

 

 

   

 

 

 

Total: Warrant Investments (3.57%)*

 

    39,148       34,430  
   

 

 

   

 

 

 

Total Investments in Securities (176.60%)*

 

  $ 1,757,560     $ 1,701,936  
   

 

 

   

 

 

 

 

*

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 5.00% at June 30, 2018. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 1.93%, 2.09%, 2.34% and 2.76%, respectively, at June 30, 2018.

(3)

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $38.1 million, $102.0 million and $64.0 million respectively. The tax cost of investments is $1.7 billion.

(4)

Except for warrants in 41 publicly traded companies and common stock in 21 publicly traded companies, all investments are restricted at June 30, 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.

(5)

Non-U.S. company or the company’s principal place of business is outside the United States.

 

See notes to consolidated financial statements.

 

S-89


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2018

(unaudited)

(dollars in thousands)

 

(6)

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.

(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 June 30, 2018, and is therefore considered non-income producing. Note that at June 30, 2018, only the $10.7 million PIK, or payment-in-kind, 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 Hercules Technology II, L.P., or HT II, or Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business investment companies, or 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 June 30, 2018.

(17)

Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at June 30, 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.

 

S-90


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

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     $ 5,115     $ 5,146  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,115       5,146  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.61%)*

 

    5,115       5,146  
         

 

 

   

 

 

 

Communications & Networking

           

Under 1 Year Maturity

             

OpenPeak, Inc.(8)

  Communications & Networking   Senior Secured   April 2018  

Interest rate PRIME + 8.75%

or Floor rate of 12.00%

  $ 11,464       8,228       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    8,228       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    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%

  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer & Business Products   Senior Secured   December 2019  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%, 2.95% Exit Fee

  $ 18,440       18,580       18,571  

Second Time Around (Simplify Holdings, LLC)(7)(8)(15)

  Consumer & Business Products   Senior Secured   February 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%, 4.75% Exit Fee

  $ 1,746       1,781       —    
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    20,361       18,571  
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.33%)*

 

    21,361       19,571  
         

 

 

   

 

 

 

Drug Delivery

           

Under 1 Year Maturity

           

Agile Therapeutics, Inc.(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 10,888       11,292       11,292  

Pulmatrix Inc.(9)(11)

  Drug Delivery   Senior Secured   July 2018  

Interest rate PRIME + 6.25%

or Floor rate of 9.50%, 3.50% Exit Fee

  $ 3,259       3,455       3,455  

ZP Opco, Inc. (p.k.a. Zosano Pharma)(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 2.70%

or Floor rate of 7.95%, 2.87% Exit Fee

  $ 6,316       6,609       6,609  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    21,356       21,356  
         

 

 

   

 

 

 

1-5 Years Maturity

           

AcelRx Pharmaceuticals, Inc.(10)(11)(15)

  Drug Delivery   Senior Secured   March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 18,653       18,925       18,875  

Antares Pharma Inc.(10)(15)

  Drug Delivery   Senior Secured   July 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.00%, 4.25% Exit Fee

  $ 25,000       25,006       24,958  

 

See notes to consolidated financial statements.

 

S-91


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Edge Therapeutics, Inc.(12)

  Drug Delivery   Senior Secured   February 2020  

Interest rate PRIME + 4.65%

or Floor rate of 9.15%, 4.95% Exit Fee

  $ 20,000     $ 20,377     $ 20,331  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    64,308       64,164  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (10.17%)*

 

    85,664       85,520  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Under 1 Year Maturity

             

CytRx Corporation(11)(15)

  Drug Discovery & Development   Senior Secured   August 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, 7.09% Exit Fee

  $ 9,986       11,172       11,172  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development   Senior Secured   April 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 3,027       3,310       340  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    14,482       11,512  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Auris Medical Holding, AG(5)(10)

  Drug Discovery & Development   Senior Secured   January 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 10,341       10,610       10,563  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       10,345       10,344  
  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       9,918       9,915  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       20,263       20,259  

Axovant Sciences Ltd.(5)(10)

  Drug Discovery & Development   Senior Secured   March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       53,631       53,448  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development   Senior Secured   September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 6.75% Exit Fee

  $ 6,090       6,380       6,361  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development   Senior Secured   December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 5,000       4,947       4,947  

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development   Senior Secured   January 2019  

Interest rate PRIME + 2.25%

or Floor rate of 7.25%, 4.95% Exit Fee

  $ 13,851       14,482       14,385  

Insmed, Incorporated(11)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 4.75%

or Floor rate of 9.25%, 4.86% Exit Fee

  $ 55,000       55,425       54,963  

Metuchen Pharmaceuticals LLC(12)(14)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 25,561       25,721       25,643  

Motif BioSciences Inc.(15)

  Drug Discovery & Development   Senior Secured   September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,651       14,651  

Myovant Sciences, Ltd.(5)(10)(13)(17)

  Drug Discovery & Development   Senior Secured   May 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 25,000       24,704       24,704  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(15)

  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,144       39,829  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,040       9,958  

 

See notes to consolidated financial statements.

 

S-92


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000     $ 9,964     $ 9,895  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,148       59,682  

PhaseRx, Inc.(15)

  Drug Discovery & Development   Senior Secured   December 2019  

Interest rate PRIME + 5.75%

or Floor rate of 9.25%, 5.85% Exit Fee

  $ 4,694       4,842       1,917  

Stealth Bio Therapeutics Corp.(5)(10)(12)

  Drug Discovery & Development   Senior Secured   January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 5.00% Exit Fee

  $ 15,000       14,898       14,847  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development   Senior Secured   May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000       20,579       20,543  

Verastem, Inc.(12)(17)

  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,957       4,910  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,996       4,949  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,953       4,907  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 15,000       14,906       14,766  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    346,187       341,679  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (42.00%)*

 

    360,669       353,191  
         

 

 

   

 

 

 

Electronics & Computer Hardware

 

 

1-5 Years Maturity

 

 

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Senior Secured   September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,014       9,887  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    10,014       9,887  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (1.18%)*

 

    10,014       9,887  
         

 

 

   

 

 

 

Healthcare Services, Other

 

 

1-5 Years Maturity

 

 

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 17,607       17,437       17,437  
  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,009       4,963       4,963  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,616       22,400       22,400  

Oak Street Health(12)

  Healthcare Services, Other   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  

PH Group Holdings(13)

  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,878       19,803  
  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 10,000       9,922       9,840  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,800       29,643  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    72,165       72,008  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.56%)*

 

    72,165       72,008  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-93


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Information Services

 

 

1-5 Years Maturity

 

 

MDX Medical, Inc.(14)(15)(17)

  Information Services   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.25%,

PIK Interest 1.70%

  $ 7,568     $ 7,369     $ 7,327  

Netbase Solutions, Inc.(13)(14)

  Information Services   Senior Secured   August 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 9,051       8,730       8,730  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    16,099       16,057  
         

 

 

   

 

 

 

Subtotal: Information Services (1.91%)*

 

    16,099       16,057  
         

 

 

   

 

 

 

Internet Consumer & Business Services

           

1-5 Years Maturity

             

AppDirect, Inc.

  Internet Consumer & Business Services   Senior Secured   January 2022  

Interest rate PRIME + 5.70%

or Floor rate of 9.95%, 3.45% Exit Fee

  $ 10,000       9,885       9,885  

Aria Systems, Inc.(11)(14)

  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 3.20%

or Floor rate of 6.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 2,103       2,104       1,803  
  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 5.20%

or Floor rate of 8.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 18,832       18,839       16,144  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 20,935       20,943       17,947  

Greenphire Inc.

  Internet Consumer & Business Services   Senior Secured   January 2021   Interest rate 3-month LIBOR + 8.00% or Floor rate of 9.00%   $ 3,883       3,883       3,883  
  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate PRIME + 3.75%

or Floor rate of 7.00%

  $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 4,883       4,883       4,883  

Intent Media, Inc.(14)(15)

  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%, 2.00% Exit Fee

  $ 5,050       5,011       5,027  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.35%, 2.00% Exit Fee

  $ 2,020       1,987       1,991  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.50%, 2.00% Exit Fee

  $ 2,022       1,988       1,992  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,092       8,986       9,010  

Interactions Corporation

  Internet Consumer & Business Services   Senior Secured   March 2021   Interest rate 3-month LIBOR + 8.60% or Floor rate of 9.85%, 1.75% Exit Fee   $ 25,000       25,013       25,013  

LogicSource(15)

  Internet Consumer & Business Services   Senior Secured   October 2019  

Interest rate PRIME + 6.25%

or Floor rate of 9.75%, 5.00% Exit Fee

  $ 6,452       6,701       6,726  

Snagajob.com, Inc.(13)(14)

  Internet Consumer & Business Services   Senior Secured   July 2020  

Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%, 2.55% Exit Fee

  $ 41,023       40,633       41,036  

 

See notes to consolidated financial statements.

 

S-94


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Tectura Corporation(7)(8)(9)(14)

  Internet Consumer & Business Services   Senior Secured   June 2021  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 20,298     $ 20,298     $ 19,219  
  Internet Consumer & Business Services   Senior Secured   June 2021   PIK Interest 8.00%   $ 11,015       240       —    
       

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,313       20,538       19,219  

The Faction Group

  Internet Consumer & Business Services   Senior Secured   January 2021   Interest rate 3-month LIBOR + 9.25% or Floor rate of 10.25%   $ 8,000       8,000       8,000  
  Internet Consumer & Business Services   Senior Secured   January 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,000       2,000       2,000  
         

 

 

   

 

 

   

 

 

 

Total The Faction Group

  $ 10,000       10,000       10,000  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    147,582       143,719  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (17.09%)*

 

    147,582       143,719  
     

 

 

   

 

 

 

Media/Content/Info

 

 

Under 1 Year Maturity

 

 

Machine Zone, Inc.(14)(16)

  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  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    106,641       106,641  
         

 

 

   

 

 

 

1-5 Years Maturity

 

 

Bustle(14)(15)

  Media/Content/Info   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

  $ 19,354       19,762       19,695  
  Media/Content/Info   Convertible Debt   September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       20,762       20,695  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,697       35,630  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (16.92%)*

 

    142,338       142,271  
         

 

 

   

 

 

 

Medical Devices & Equipment

 

 

Under 1 Year Maturity

 

 

Amedica Corporation(9)(15)

  Medical Devices & Equipment   Senior Secured   January 2018  

Interest rate PRIME + 7.70%

or Floor rate of 10.95%, 8.25% Exit Fee

  $ 605       2,255       2,255  

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Senior Secured   October 2018  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 5.42% Exit Fee

  $ 2,527       2,848       2,848  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    5,103       5,103  
         

 

 

   

 

 

 

1-5 Years Maturity

 

 

IntegenX, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 12,500       13,042       12,991  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 2,500       2,599       2,598  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 9.75% Exit Fee

  $ 2,500       2,618       2,601  
         

 

 

   

 

 

   

 

 

 

Total IntegenX, Inc.

  $ 17,500       18,259       18,190  

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 4.95% Exit Fee

  $ 17,500       17,013       17,013  

 

See notes to consolidated financial statements.

 

S-95


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Micell Technologies, Inc.(12)

  Medical Devices & Equipment   Senior Secured   August 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.50%, 5.00% Exit Fee

  $ 5,469     $ 5,744     $ 5,708  

Quanta Fluid Solutions(5)(10)(11)

  Medical Devices & Equipment   Senior Secured   April 2020  

Interest rate PRIME + 8.05%

or Floor rate of 11.55%, 5.00% Exit Fee

  $ 10,117       10,432       10,386  

Quanterix Corporation(11)

  Medical Devices & Equipment   Senior Secured   March 2019  

Interest rate PRIME + 2.75%

or Floor rate of 8.00%, 4.00% Exit Fee

  $ 9,043       9,477       9,477  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Senior Secured   July 2020  

Interest rate PRIME + 4.35%

or Floor rate of 8.85%, 6.05% Exit Fee

  $ 8,000       7,927       7,919  

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

  $ 5,000       4,991       4,973  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    73,843       73,666  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (9.37%)*

 

    78,946       78,769  
         

 

 

   

 

 

 

Semiconductors

 

   

1-5 Years Maturity

 

   

Achronix Semiconductor Corporation(15)(17)

  Semiconductors   Senior Secured   August 2020  

Interest rate PRIME + 7.00%

or Floor rate of 11.00%, 12.50% Exit Fee

  $ 5,000       5,084       5,100  
  Semiconductors   Senior Secured   February 2019  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%

  $ 4,274       4,274       4,273  
         

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

  $ 9,274       9,358       9,373  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,358       9,373  
         

 

 

   

 

 

 

Subtotal: Semiconductors (1.11%)*

 

    9,358       9,373  
         

 

 

   

 

 

 

Software

             

Under 1 Year Maturity

             

Clickfox, Inc.(13)

  Software   Senior Secured   May 2018  

Interest rate PRIME + 8.00%

or Floor rate of 11.50%, 12.01% Exit Fee

  $ 6,378       7,671       7,671  

Digital Train Limited (p.k.a. Jumpstart Games, Inc.)(15)

  Software   Senior Secured   July 2018   Interest rate 12-month LIBOR + 2.50%   $ 5,671       5,671       4,073  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    13,342       11,744  
         

 

 

   

 

 

 

1-5 Years Maturity

 

   

Clarabridge, Inc.(12)(14)

  Software   Senior Secured   April 2021  

Interest rate PRIME + 4.80%

or Floor rate of 8.55%,

PIK Interest 3.25%

  $ 40,893       40,870       41,063  

Emma, Inc.

  Software   Senior Secured   September 2022  

Interest rate daily LIBOR + 7.75%

or Floor rate of 8.75%

  $ 50,000       48,565       48,565  

Evernote Corporation(14)(15)(17)

  Software   Senior Secured   October 2020  

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,974       6,100  
  Software   Senior Secured   July 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 1.25%

  $ 4,023       3,999       3,992  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 10,023       9,973       10,092  

Fuze, Inc.(13)(14)(15)

  Software   Senior Secured   July 2021  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.55%, 3.55% Exit Fee

  $ 50,332       50,464       50,420  

 

See notes to consolidated financial statements.

 

S-96


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Impact Radius Holdings, Inc.(14)(17)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%, 1.75% Exit Fee

  $ 7,544     $ 7,552     $ 7,498  

Lithium Technologies, Inc.(17)

  Software   Senior Secured   October 2022   Interest rate 1-month LIBOR + 8.00% or Floor rate of 9.00%   $ 12,000       11,740       11,740  

Microsystems Holding Company, LLC

  Software   Senior Secured   July 2022   Interest rate 3-month LIBOR + 8.25% or Floor rate of 9.25%   $ 12,000       11,821       11,821  

OneLogin, Inc.(14)(15)

  Software   Senior Secured   August 2019  

Interest rate PRIME + 6.45%

or Floor rate of 9.95%,

PIK Interest 3.25%

  $ 15,883       15,811       16,071  

PerfectServe, Inc.

  Software   Senior Secured   April 2021   Interest rate 3-month LIBOR + 9.00% or Floor rate of 10.00%, 2.50% Exit Fee   $ 16,000       16,023       16,023  
  Software   Senior Secured   April 2021   Interest rate 3-month LIBOR + 9.00% or Floor rate of 10.00%, 2.50% Exit Fee   $ 4,000       4,005       4,005  
         

 

 

   

 

 

   

 

 

 

Total PerfectServe, Inc.

  $ 20,000       20,028       20,028  

Pollen, Inc.(15)

  Software   Senior Secured   April 2019  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, 4.00% Exit Fee

  $ 7,000       6,964       6,964  

Poplicus, Inc.(8)(14)

  Software   Senior Secured   May 2022  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 1,250       1,250       —    

Quid, Inc.(14)(15)

  Software   Senior Secured   October 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%, 3.00% Exit Fee

  $ 8,303       8,397       8,430  

RapidMiner, Inc.(14)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 5.50%

or Floor rate of 9.75%,

PIK Interest 1.65%

  $ 7,001       6,971       6,971  

Regent Education(14)

  Software   Senior Secured   January 2021  

Interest rate FIXED 10.00%,

PIK Interest 2.00%, 6.35% Exit Fee

  $ 3,285       3,291       3,291  

Signpost, Inc.(14)

  Software   Senior Secured   February 2020  

Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%, 3.75% Exit Fee

  $ 15,510       15,603       15,685  

Vela Trading Technologies

  Software   Senior Secured   July 2022  

Interest rate daily LIBOR + 9.50%

or Floor rate of 10.50%

  $ 20,000       19,495       19,557  

Wrike, Inc.(14)(17)

  Software   Senior Secured   February 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 10,165       9,971       10,007  

ZocDoc

  Software   Senior Secured   April 2021   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 20,000       20,011       20,011  
  Software   Senior Secured   November 2021   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 10,000       10,005       10,005  
         

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,016       30,016  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    318,782       318,219  
         

 

 

   

 

 

 

Subtotal: Software (39.24%)*

 

    332,124       329,963  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-97


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Specialty Pharmaceuticals

           

Under 1 Year Maturity

           

Jaguar Animal Health, Inc.(11)

  Specialty Pharmaceuticals   Senior Secured   August 2018  

Interest rate PRIME + 5.65%

or Floor rate of 9.90%, 7.00% Exit Fee

  $ 1,089     $ 1,496     $ 1,496  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,496       1,496  
           

 

 

   

 

 

 

1-5 Years Maturity

           

Alimera Sciences, Inc.(11)(14)

  Specialty Pharmaceuticals   Senior Secured   November 2020  

Interest rate PRIME + 7.50%

or Floor rate of 11.00%,

PIK Interest 1.00%, 4.00% Exit Fee

  $ 35,398       35,517       35,517  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,517       35,517  
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (4.40%)*

 

    37,013       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       8,756       8,757  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    8,756       8,757  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (1.04%)*

 

    8,756       8,757  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Under 1 Year Maturity

           

FuelCell Energy, Inc.(12)

  Sustainable and Renewable Technology   Senior Secured   October 2018  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 8.50% Exit Fee

  $ 16,806       18,190       18,190  

Kinestral Technologies Inc.

  Sustainable and Renewable Technology   Senior Secured   October 2018   Interest rate 3-month LIBOR + 7.75% or Floor rate of 8.75%, 3.23% Exit Fee   $ 3,867       3,882       3,882  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    22,072       22,072  
           

 

 

   

 

 

 

1-5 Years Maturity

           

ChargePoint Inc.

  Sustainable and Renewable Technology   Senior Secured   August 2020   Interest rate 3-month LIBOR + 8.75% or Floor rate of 9.75%, 2.00% Exit Fee   $ 19,394       19,416       19,416  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Senior Secured   August 2019  

Interest rate PRIME + 8.70%

or Floor rate of 12.95%, 4.50% Exit Fee

  $ 14,000       13,604       13,604  

Proterra, Inc.(11)(14)(17)

  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 5.95% Exit Fee

  $ 25,036       25,997       26,097  
  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 7.00% Exit Fee

  $ 5,007       5,173       5,190  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,043       31,170       31,287  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Senior Secured   January 2019  

Interest rate PRIME + 6.20%

or Floor rate of 9.45%, 4.00% Exit Fee

  $ 4,258       4,498       4,515  

Tendril Networks(12)

  Sustainable and Renewable Technology   Senior Secured   June 2019   Interest rate FIXED 9.25%, 8.50% Exit Fee   $ 13,156       13,863       13,845  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    82,551       82,667  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (12.45%)*

 

    104,623       104,739  
         

 

 

   

 

 

 

Total: Debt Investments (168.38%)*

 

    1,440,055       1,415,984  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-98


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(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)

   
Biotechnology
Tools
 
 
    Equity       Common Stock       55,780     $ 500     $ —    
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
         

 

 

   

 

 

 

Communications & Networking

 

   

Achilles Technology Management Co II, Inc.(7)(15)

   
Communications &
Networking
 
 
    Equity       Common Stock       100       3,100       242  

GlowPoint, Inc.(4)

   
Communications &
Networking
 
 
    Equity       Common Stock       114,192       102       41  

Peerless Network Holdings, Inc.

   
Communications &
Networking
 
 
    Equity       Preferred Series A       1,000,000       1,000       5,865  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.73%)*

 

    4,202       6,148  
         

 

 

   

 

 

 

Diagnostic

 

   

Singulex, Inc.

    Diagnostic       Equity       Common Stock       937,998       750       720  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.09%)*

 

    750       720  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)

    Drug Delivery       Equity       Common Stock       54,240       108       109  

BioQ Pharma Incorporated(15)

    Drug Delivery       Equity       Preferred Series D       165,000       500       826  

Edge Therapeutics, Inc.(4)

    Drug Delivery       Equity       Common Stock       49,965       309       468  

Neos Therapeutics, Inc.(4)(15)

    Drug Delivery       Equity       Common Stock       125,000       1,500       1,275  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.32%)*

 

    2,417       2,678  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(4)(10)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       1,901,791       1,715       5,315  

Axovant Sciences Ltd.(4)(5)(10)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       129,827       1,270       707  

Cerecor, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       119,087       1,000       381  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       13,550       1,000       29  

Dicerna Pharmaceuticals, Inc.(4)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       142,858       1,000       1,290  

Dynavax Technologies(4)(10)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       20,000       550       374  

Epirus Biopharmaceuticals, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       200,000       1,000       —    

Genocea Biosciences, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       223,463       2,000       259  

Inotek Pharmaceuticals Corporation(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       3,778       1,500       10  

Insmed, Incorporated(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       70,771       1,000       2,154  

Melinta Therapeutics(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       43,840       2,000       693  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       76,362       2,743       1,367  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.50%)*

 

    16,778       12,579  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Identiv, Inc.(4)

   
Electronics &
Computer Hardware
 
 
    Equity       Common Stock       6,700       34       22  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       22  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-99


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry     Type of
Investment(1)
    Series     Shares     Cost(3)     Value(4)  

Information Services

           

DocuSign, Inc.

    Information Services       Equity       Common Stock       385,000     $ 6,081     $ 8,011  
         

 

 

   

 

 

 

Subtotal: Information Services (0.95%)*

 

    6,081       8,011  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

       
Blurb, Inc.(15)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series B       220,653       175       46  
Brigade Group, Inc. (p.k.a. Philotic, Inc.)    
Internet Consumer &
Business Services
 
 
    Equity       Common Stock       9,023       93       —    
Lightspeed POS, Inc.(5)(10)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series C       230,030       250       233  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series D       198,677       250       213  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

 

    428,707       500       446  
OfferUp, Inc.    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A       286,080       1,663       2,236  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A-1       108,710       632       850  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

 

    394,790       2,295       3,086  
Oportun (p.k.a. Progress Financial)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series G       218,351       250       451  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series H       87,802       250       255  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

 

    306,153       500       706  
RazorGator Interactive Group, Inc.    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series AA       34,783       15       49  
Tectura Corporation(7)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series BB       1,000,000       —         —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.52%)*

 

    3,578       4,333  
       

 

 

   

 

 

 

Media/Content/Info

 

       
Pinterest, Inc.     Media/Content/Info       Equity       Preferred Series Seed       620,000       4,085       5,055  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.60%)*

 

    4,085       5,055  
       

 

 

   

 

 

 

Medical Devices & Equipment

 

       
AtriCure, Inc.(4)(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       7,536       266       138  
Flowonix Medical Incorporated    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series AA       221,893       1,500       —    
Gelesis, Inc.(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       198,202       —         879  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-1       191,210       425       939  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-2       191,626       500       894  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

 

    581,038       925       2,712  
Medrobotics Corporation(15)    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series E       136,798       250       302  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series F       73,971       155       225  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series G       163,934       500       532  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

 

    374,703       905       1,059  
Optiscan Biomedical, Corp.(6)(15)    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series B       6,185,567       3,000       402  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series C       1,927,309       655       114  

 

See notes to consolidated financial statements.

 

S-100


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  
  Medical Devices &
Equipment
  Equity   Preferred Series D     55,103,923     $ 5,257     $ 4,232  
  Medical Devices &
Equipment
  Equity   Preferred Series E     15,638,888       1,307       1,457  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    78,855,687       10,219       6,205  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices &
Equipment
  Equity   Preferred Series B     232,061       527       596  
Quanterix Corporation(4)   Medical Devices &
Equipment
  Equity   Common Stock     84,778       1,000       1,820  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.49%)*

 

    15,342       12,530  
       

 

 

   

 

 

 

Software

       
CapLinked, Inc.   Software   Equity   Preferred Series
A-3
    53,614       51       90  
Druva, Inc.   Software   Equity   Preferred Series 2     458,841       1,000       1,044  
  Software   Equity   Preferred Series 3     93,620       300       312  
       

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,356  
ForeScout Technologies, Inc.(4)   Software   Equity   Common Stock     199,844       529       6,373  
HighRoads, Inc.   Software   Equity   Common Stock     190       307       —    
NewVoiceMedia Limited(5)(10)   Software   Equity   Preferred Series E     669,173       963       1,544  
Palantir Technologies   Software   Equity   Preferred Series E     727,696       5,431       4,923  
  Software   Equity   Preferred Series G     326,797       2,211       2,211  
       

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       7,134  
Sprinklr, Inc.   Software   Equity   Common Stock     700,000       3,749       4,600  
WildTangent, Inc.(15)   Software   Equity   Preferred Series 3     100,000       402       179  
       

 

 

   

 

 

 

Subtotal: Software (2.53%)*

 

    14,943       21,276  
       

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       44  
  Surgical Devices   Equity   Preferred Series C     656,538       282       60  
  Surgical Devices   Equity   Preferred Series D     1,991,157       712       795  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       521  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,673       1,420  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       376  
  Surgical Devices   Equity   Preferred Series C     119,999       300       309  
  Surgical Devices   Equity   Preferred Series D     260,000       650       957  
  Surgical Devices   Equity   Preferred Series F     100,200       500       531  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,173  
       

 

 

   

 

 

 

Subtotal: Surgical Devices (0.43%)*

 

    4,223       3,593  
       

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Equity   Common Stock     19,250       761       —    

Modumetal, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series C     3,107,520       500       477  

Proterra, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series 5     99,280       500       539  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and
Renewable Technology
  Equity   Common Stock     288       61,502       11,400  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.48%)*

 

    63,263       12,416  
       

 

 

   

 

 

 

Total: Equity Investments (10.63%)*

 

    136,196       89,361  
         

 

 

   

 

 

 

Warrant Investments

           

Biotechnology Tools

           

Labcyte, Inc.(15)

  Biotechnology Tools   Warrant   Preferred Series C     1,127,624       323       458  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.05%)*

 

    323       458  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

S-101


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Communications & Networking

           

PeerApp, Inc.

  Communications &
Networking
  Warrant   Preferred Series B     298,779     $ 61     $ —    

Peerless Network Holdings, Inc.

  Communications &
Networking
  Warrant   Preferred Series A     135,000       95       501  

Spring Mobile Solutions, Inc.

  Communications &
Networking
  Warrant   Common Stock     2,834,375       418       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.06%)*

 

    574       501  
         

 

 

   

 

 

 

Consumer & Business Products

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer & Business
Products
  Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

  Consumer & Business
Products
  Warrant   Preferred Series B     190,234       230       221  

The Neat Company(15)

  Consumer & Business
Products
  Warrant   Preferred Series C-1     540,540       365       —    
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.03%)*

 

    823       221  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)(15)

  Drug Delivery   Warrant   Common Stock     176,730       786       61  

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     180,274       730       65  

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       968  

Celsion Corporation(4)

  Drug Delivery   Warrant   Common Stock     13,927       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     78,595       390       230  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       1,540  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       148  

Pulmatrix Inc.(4)

  Drug Delivery   Warrant   Common Stock     25,150       116       4  

ZP Opco, Inc. (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant   Common Stock     72,379       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.36%)*

 

    3,670       3,016  
         

 

 

   

 

 

 

Drug Discovery & Development

       

ADMA Biologics, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     89,750       295       12  

Anthera Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     5,022       984       —    

Audentes Therapeutics, Inc.(4)(10)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     9,914       62       147  

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     156,726       249       19  

Brickell Biotech, Inc.

  Drug Discovery &
Development
  Warrant   Preferred Series C     26,086       119       93  

Cerecor, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     22,328       70       15  

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery &
Development
  Warrant   Preferred Series D     325,261       490       —    

Cleveland BioLabs, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     7,813       105       3  

Concert Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     132,069       545       1,344  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     29,239       165       2  

CytRx Corporation(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     105,694       160       58  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     17,190       369       —    

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     200       28       —    

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     64,194       276       —    

 

See notes to consolidated financial statements.

 

S-102


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     73,009     $ 142     $ 29  

Genocea Biosciences, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     73,725       266       4  

Immune Pharmaceuticals(4)

  Drug Discovery &
Development
  Warrant   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

  Drug Discovery &
Development
  Warrant   Common Stock     31,655       626       12  

Motif BioSciences Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     73,452       282       414  

Myovant Sciences, Ltd.(4)(5)(10)

  Drug Discovery &      
Development
  Warrant   Common Stock     49,800       283       128  

Neothetics, Inc. (p.k.a. Lithera, Inc.)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     46,838       266       53  

Neuralstem, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     75,214       178       212  

PhaseRx, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     63,000       125       —    

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     32,467       203       8  

Sorrento Therapeutics, Inc.(4)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     306,748       889       453  

Stealth Bio Therapeutics Corp.(5)(10)

  Drug Discovery &
Development
  Warrant   Preferred Series A     487,500       116       107  

uniQure B.V.(4)(5)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     37,174       218       240  

XOMA Corporation(4)(10)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     9,063       279       50  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.40%)*

 

    8,869       3,403  
         

 

 

   

 

 

 

Electronics & Computer Hardware

       
908 DEVICES INC.(15)   Electronics &
Computer Hardware
  Warrant   Preferred Series D     79,856       100       73  
Clustrix, Inc.   Electronics &
Computer Hardware
  Warrant   Common Stock     50,000       12       —    
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       73  
         

 

 

   

 

 

 

Healthcare Services, Other

       
Chromadex Corporation(4)(15)   Healthcare Services,
Other
  Warrant   Common Stock     139,673       157       329  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.04%)*

 

    157       329  
         

 

 

   

 

 

 

Information Services

       

INMOBI Inc.(5)(10)

  Information Services   Warrant   Common Stock     65,587       82       —    

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C     648,400       98       21  
  Information Services   Warrant   Preferred Series C-1     1,165,183       74       37  
       

 

 

   

 

 

   

 

 

 

Total InXpo, Inc.

    1,813,583       172       58  

MDX Medical, Inc.(15)

  Information Services   Warrant   Common Stock     2,250,000       246       129  

Netbase Solutions, Inc.

  Information Services   Warrant   Preferred Series 1     60,000       356       363  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.07%)*

 

    954       550  
         

 

 

   

 

 

 

Internet Consumer & Business Services

       

Aria Systems, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series G     231,535       73       —    

 

See notes to consolidated financial statements.

 

S-103


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Blurb, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     234,280     $ 636     $ 9  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer &
Business Services
  Warrant   Preferred Series E     968,992       18       154  

The Faction Group

  Internet Consumer &
Business Services
  Warrant   Preferred Series A     8,703       234       234  

Intent Media, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Common Stock     140,077       168       207  

Interactions Corporation

  Internet Consumer &
Business Services
  Warrant   Preferred Series G-3     68,187       204       204  

Just Fabulous, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series B     206,184       1,102       2,627  

Lightspeed POS, Inc.(5)(10)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     245,610       20       93  

LogicSource(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     79,625       30       36  

Oportun (p.k.a. Progress Financial)

  Internet Consumer &
Business Services
  Warrant   Preferred Series G     174,562       78       196  

ShareThis, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     493,502       547       —    

Snagajob.com, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series A     1,800,000       782       1,257  

Tapjoy, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series D     748,670       316       7  

TraceLink, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series A-2     283,353       1,833       1,833  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.82%)*

 

    6,041       6,857  
         

 

 

   

 

 

 

Media/Content/Info

       

FanDuel, Inc.

  Media/Content/Info   Warrant   Common Stock     15,570       —         —    
  Media/Content/Info   Warrant   Preferred Series A     4,648       730       1,875  
       

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.(16)

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       3,743  

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       4  

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant   Common Stock     255,818       4       17  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       33  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.67%)*

 

    3,425       5,672  
         

 

 

   

 

 

 

Medical Devices & Equipment

       

Amedica Corporation(4)(15)

  Medical Devices &
Equipment
  Warrant   Common Stock     8,603       459       1  

Aspire Bariatrics, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series B-1     112,858       455       65  

Avedro, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     300,000       401       275  

Flowonix Medical Incorporated

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     155,325       362       —    

Gelesis, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series A-1     74,784       78       216  

InspireMD, Inc.(4)(5)(10)

  Medical Devices &
Equipment
  Warrant   Common Stock     39,364       242       —    

IntegenX, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series C     547,752       15       —    

Intuity Medical, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series 4     1,819,078       294       294  

Medrobotics Corporation(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series E     455,539       370       411  

Micell Technologies, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series D-2     84,955       262       150  

 

See notes to consolidated financial statements.

 

S-104


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

NetBio, Inc.

  Medical
Devices &
Equipment
  Warrant   Preferred Series A     7,841     $ 408     $ 56  

NinePoint Medical, Inc.(15)

  Medical
Devices &
Equipment
  Warrant   Preferred Series A-1     587,840       170       82  

Optiscan Biomedical, Corp.(6)(15)

  Medical
Devices &
Equipment
  Warrant   Preferred Series D     10,535,275       1,252       86  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical
Devices &
Equipment
  Warrant   Preferred Series A     500,000       402       430  

Quanterix Corporation(4)

  Medical
Devices &
Equipment
  Warrant   Common Stock     66,039       205       536  

Sebacia, Inc.(15)

  Medical
Devices &
Equipment
  Warrant   Preferred Series D     778,301       133       127  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical
Devices &
Equipment
  Warrant   Preferred Series A     6,464       188       —    

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(4)

  Medical
Devices &
Equipment
  Warrant   Common Stock     13,864       401       —    

Tela Bio, Inc.(15)

  Medical
Devices &
Equipment
  Warrant   Preferred Series B     387,930       62       153  

ViewRay, Inc.(4)(15)

  Medical
Devices &
Equipment
  Warrant   Common Stock     128,231       333       414  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.39%)*

 

    6,492       3,296  
         

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       160       308  
  Semiconductors   Warrant   Preferred Series D-2     750,000       99       519  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       259       827  

Aquantia Corp.(4)

  Semiconductors   Warrant   Common Stock     19,683       4       11  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       46       195  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.12%)*

 

    309       1,033  
         

 

 

   

 

 

 

Software

       

Actifio, Inc.

  Software   Warrant   Common Stock     73,584       249       84  
  Software   Warrant   Preferred Series F     31,673       343       79  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       163  

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A     168,750       188       —    

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433       258       113  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       129  
  Software   Warrant   Preferred Series C     592,019       730       179  
  Software   Warrant   Preferred
Series C-A
    2,218,214       230       4,458  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       4,766  

DNAnexus, Inc.

  Software   Warrant   Preferred Series C     909,091       97       97  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       175  

Fuze, Inc.(15)

  Software   Warrant   Preferred Series F     256,158       89       53  

Mattersight Corporation(4)

  Software   Warrant   Common Stock     357,143       538       168  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718       334       639  

Mobile Posse, Inc.(15)

  Software   Warrant   Preferred Series C     396,430       130       353  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       —    

 

See notes to consolidated financial statements.

 

S-105


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

NewVoiceMedia Limited(5)(10)

  Software   Warrant   Preferred Series E     225,586     $ 33     $ 190  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     228,972       150       227  

PerfectServe, Inc.

  Software   Warrant   Preferred Series C     129,073       720       720  

Poplicus, Inc.

  Software   Warrant   Common Stock     132,168       —         —    

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       7  

RapidMiner, Inc.

  Software   Warrant   Preferred Series C-1     4,982       23       23  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series C-Prime     640,603       66       44  

Signpost, Inc.

  Software   Warrant   Preferred Series C     324,005       314       106  

Wrike, Inc.

  Software   Warrant   Common Stock     698,760       462       1,040  
         

 

 

   

 

 

 

Subtotal: Software (1.06%)*

 

    5,413       8,884  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

       

Alimera Sciences, Inc.(4)

  Specialty Pharmaceuticals   Warrant   Common Stock     1,717,709       861       488  
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.06%)*

 

    861       488  
         

 

 

   

 

 

 

Surgical Devices

       

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       15  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       291  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       306  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436       225       16  
  Surgical Devices   Warrant   Preferred Series D     175,000       100       429  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       60  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       505  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.10%)*

 

    758       811  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

       

Agrivida, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     471,327       120       88  

Alphabet Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 1B     13,667       82       —    

American Superconductor Corporation(4)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     58,823       39       7  

Brightsource Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 1     116,666       104       —    

Calera, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     44,529       513       —    

EcoMotors, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series B     437,500       308       —    

Fluidic, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     61,804       102       —    

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     530,811       181       —    
  Sustainable and
Renewable Technology
  Warrant   Preferred Series 2-A     6,229       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    537,040       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C-1     280,897       275       357  

GreatPoint Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series A     325,000       155       155  
  Sustainable and
Renewable Technology
  Warrant   Preferred Series B     131,883       63       63  
       

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       218  

Polyera Corporation(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     311,609       338       —    

Proterra, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 4     477,517       41       599  

 

See notes to consolidated financial statements.

 

S-106


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Rive Technology, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series E     234,477     $ 12     $ 8  

Stion Corporation(6)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series Seed     2,154       1,378       —    

TAS Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 3-A     1,019,793       189       —    
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.15%)*

 

    4,797       1,277  
         

 

 

   

 

 

 

Total: Warrant Investments (4.38%)*

 

    43,578       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 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.

(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 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.

(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, or payment-in-kind, 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 Hercules Technology II, L.P., or HT II, or Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business investment companies, or 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.

 

S-107


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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, Reston, VA, 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 Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was subject to tax as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a regulated investment company, or 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 Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”).

Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“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. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they 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, or (“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 II and HT III hold approximately $115.4 million and $294.8 million in assets, respectively, and they accounted for approximately 5.2% and 13.4% of the Company’s total assets, respectively, prior to consolidation at June 30, 2018. The Company completed repayment of the remaining outstanding HT II debentures on July 13, 2018. See “Note 12—Subsequent Events.”

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. generally accepted accounting principles (“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.

The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIE. All significant inter-company accounts and transactions have been eliminated in consolidation. As provided under Regulation S-X and ASC 946, the Company will not consolidate its investment

 

S-108


Table of Contents
Index to Financial Statements

in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Rather, an investment company’s interest in portfolio companies that are not investment companies should be measured at fair value in accordance with ASC Topic 946.

The accompanying consolidated interim financial statements have been prepared in conformity with U.S. GAAP for interim financial information, and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the full fiscal year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2017. The year-end Consolidated Statement of Assets and Liabilities data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

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.

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.

 

S-109


Table of Contents
Index to Financial Statements

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 2021 Asset-Backed Notes (as defined herein). See “Note 4—Borrowings”.

Reclassification

Certain balances from prior years have been reclassified in order to conform to the current year presentation.

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 June 30, 2018, approximately 94.9% 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 Company’s 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, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.

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 Company’s Board of Directors is 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 Company’s Board of Directors has 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;

 

S-110


Table of Contents
Index to Financial Statements

(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.

 

S-111


Table of Contents
Index to Financial Statements

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 June 30, 2018 and as of December 31, 2017. 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 six months ended June 30, 2018, there were no transfers between Levels 1 or 2.

 

(in thousands)

Description

   Balance
June 30,
2018
     Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior Secured Debt

   $ 1,536,056      $ —        $ —        $ 1,536,056  

Unsecured Debt

     9,941        —          —          9,941  

Preferred Stock

     66,768        —          —          66,768  

Common Stock

     54,741        36,728        —          18,013  

Warrants

     34,430        —          6,418        28,012  

Escrow Receivable

     1,115        —          —          1,115  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,703,051      $ 36,728      $ 6,418      $ 1,659,905  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(in thousands)

Description

   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)
 

Senior Secured Debt

   $ 1,415,984      $ —        $ —        $ 1,415,984  

Preferred Stock

     40,683        —          —          40,683  

Common Stock

     48,678        22,825        —          25,853  

Warrants

     36,869        —          5,664        31,205  

Escrow Receivable

     752        —          —          752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,542,966      $ 22,825      $ 5,664      $ 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 six months ended June 30, 2018 and the year ended December 31, 2017.

 

(in thousands)

  Balance
January 1,
2018
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(3)
    Gross
Transfers
out of
Level 3(3)
    Balance
June 30,
2018
 

Senior Debt

  $ 1,415,984     $ (13,295   $ 15,850     $ 524,301     $ —       $ (406,784   $ —       $ —       $ 1,536,056  

Unsecured Debt

    —         —         27       15,585       —         (5,671     —         —         9,941  

Preferred Stock

    40,683       —         (1,172     27,257       —         —         —         —         66,768  

Common Stock

    25,853       (2,900     878       2,761       (200     —         —         (8,379     18,013  

Warrants

    31,205       (2,418     324       809       (1,692     —         —         (216     28,012  

Escrow Receivable

    752       78       (143     875       (447     —         —         —         1,115  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,514,477     $ (18,535   $ 15,764     $ 571,588     $ (2,339   $ (412,455   $ —       $ (8,595   $ 1,659,905  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands)

  Balance
January 1,
2017
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(4)
    Gross
Transfers
out of
Level 3(4)
    Balance
December 31,
2017
 

Senior Debt

  $ 1,323,978     $ (24,684   $ 29,610     $ 776,648     $ —       $ (626,897   $ —       $ (62,671   $ 1,415,984  

Preferred Stock

    39,418       (7,531     11,955       2,683       (468     —         —         (5,374     40,683  

Common Stock

    10,965       (487     (49,462     3,748       (1,582     —         62,671       —         25,853  

Warrants

    24,246       727       8,450       5,449       (7,303     —         —         (364     31,205  

Escrow Receivable

    1,382       261       —         3,127       (4,018     —         —         —         752  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,399,989     $ (31,714   $ 553     $ 791,655     $ (13,371   $ (626,897   $ 62,671     $ (68,409   $ 1,514,477  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in net realized gains or losses in the accompanying Consolidated Statement of Operations.

 

S-112


Table of Contents
Index to Financial Statements
(2)

Included in net change in unrealized appreciation (depreciation) in the accompanying Consolidated Statement of Operations.

(3)

Transfers out of Level 3 during the six months ended June 30, 2018 relate to the initial public offerings of DocuSign, Inc., and Tricida, Inc.

(4)

Transfers out of Level 3 during the year ended December 31, 2017 relate to the conversion of the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s debt investment in Gamma Medica, Inc. to common stock through bankruptcy transactions. Initial public offerings 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 the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s debt investment in Gamma Medica, Inc. to common stock through bankruptcy transactions.

(5)

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.

(6)

Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures.

For the six months ended June 30, 2018, approximately $1.2 million in net unrealized depreciation and $2.0 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 $3.5 million in net unrealized depreciation and $2.1 million 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 June 30, 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.

 

S-113


Table of Contents
Index to Financial Statements

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

   Fair Value at
June 30, 2018
(in thousands)
     Valuation Techniques/
Methodologies
  Unobservable Input(1)   Range    Weighted
Average(2)
 
Pharmaceuticals    $ 59,758      Originated Within 4-6 Months   Origination Yield   12.53% - 13.01%      12.73%  
     360,183      Market Comparable Companies   Hypothetical Market Yield   10.46% - 16.04%      13.50%  
        Premium/(Discount)   (0.50%) - 0.50%   
     33      Liquidation(3)   Probability weighting of
alternative outcomes
  50.00%   
Technology      60,760      Originated Within 4-6 Months   Origination Yield   11.17% - 12.52%      11.53%  
     421,695      Market Comparable Companies   Hypothetical Market Yield   10.05% - 18.48%      13.43%  
        Premium/(Discount)   (0.25%) - 0.50%   
     2,144      Liquidation(3)   Probability weighting of
alternative outcomes
  50.00%   
Sustainable and Renewable      19,535      Originated Within 4-6 Months   Origination Yield   14.27% - 15.19%      14.84%  
Technology      68,713      Market Comparable Companies   Hypothetical Market Yield   11.25% - 21.16%      13.98%  
        Premium/(Discount)   0.00% - 0.50%   

Medical Devices

     62,968      Market Comparable Companies   Hypothetical Market Yield   11.18% - 16.05%      13.21%  
        Premium/(Discount)   0.00% - 1.00%   
     829      Liquidation(3)   Probability weighting of
alternative outcomes
  5.00% - 75.00%   
Lower Middle Market      19,682      Originated Within 4-6 Months   Origination Yield   14.16% - 16.39%      15.27%  
     87,722      Market Comparable Companies   Hypothetical Market Yield   9.48% - 13.89%      12.96%  
        Premium/(Discount)   0.00% - 0.25%   
     19,127      Liquidation(3)   Probability weighting of
alternative outcomes
  10.00% - 55.00%   
      Debt Investments Where Fair Value Approximates Cost     
     272,833      Debt Investments originated within 3 months     
     37,943      Imminent Payoffs(4)     
     52,072      Debt Investments Maturing in Less than One Year     
  

 

 

           
   $ 1,545,997      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 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, Surgical Devices 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)

The weighted averages are calculated based on the fair market value of each investment.

 

S-114


Table of Contents
Index to Financial Statements
(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

(4)

Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

 

Investment Type - Level

Three Debt Investments

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/
Methodologies

 

Unobservable Input(1)

  Range   Weighted
Average(2)
 

Pharmaceuticals

  $ 44,301    

Originated Within 6 Months

 

Origination Yield

  10.71% - 12.61%     11.89%  
    379,841     Market Comparable Companies   Hypothetical Market Yield   10.14% - 16.14%     12.94%  
     

Premium/(Discount)

  (0.25%) - 0.75%  
    2,257     Liquidation(3)   Probability weighting of alternative outcomes   100.00%  

Technology

    158,916    

Originated Within 6 Months

 

Origination Yield

  9.4% - 25.11%     11.68%  
    290,561     Market Comparable Companies   Hypothetical Market Yield   9.47% - 19.21%     13.55%  
      Premium/(Discount)   (0.25%) - 1.00%  
    22,020     Liquidation(3)   Probability weighting of alternative outcomes   5.00% - 100.00%  

Sustainable and Renewable

    33,020     Originated Within 6 Months   Origination Yield   11.97% - 20.06%     15.31%  

Technology

    49,647    

Market Comparable Companies

  Hypothetical Market Yield   11.15% - 14.16%     12.13%  
      Premium/(Discount)   0.00% - 0.25%  

Medical Devices

    17,013     Originated Within 6 Months   Origination Yield   13.49%     13.49%  
    89,869     Market Comparable Companies  

Hypothetical Market Yield

  9.66% - 17.57%     12.28%  
      Premium/(Discount)   0.00% - 0.50%  

Lower Middle Market

    97,291    

Originated Within 6 Months

  Origination Yield   8.29% - 12.68%     12.01%  
    19,219    

Liquidation(3)

  Probability weighting of alternative outcomes   10.00% - 100.00%  
    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)

The weighted averages are calculated based on the fair market value of each investment.

 

(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

(4)

Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

 

S-115


Table of Contents
Index to Financial Statements

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
June 30, 2018
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input(1)

  Range     Weighted
Average(6)

Equity Investments

  $ 11,411    

Market Comparable Companies

 

EBITDA Multiple(2)

    8.3x - 24.9x     2.7x
     

Revenue Multiple(2)

    0.7x - 12.4x     2.6x
     

Discount for Lack of Marketability(3)

    10.49% - 23.88%     20.57%
     

Average Industry Volatility(4)

    34.06% - 106.41%     65.88%
     

Risk-Free Interest Rate

    2.02% - 2.45%     2.37%
     

Estimated Time to Exit (in months)

    5 - 20     16
    15,975     Market Adjusted OPM Backsolve   Market Equity Adjustment(5)     (87.43%) - 49.59%     16.59%
     

Average Industry Volatility(4)

    34.79% - 81.59%     74.30%
     

Risk-Free Interest Rate

    0.92% - 2.18%     2.08%
     

Estimated Time to Exit (in months)

    11 - 23     17
    10,996    

Liquidation

 

Probability weighting of alternative outcomes

    75%    
    46,399    

Other(7)

     
Warrant Investments     17,143     Market Comparable Companies  

EBITDA Multiple(2)

    8.3x - 18.4x     0.9x
     

Revenue Multiple(2)

    0.4x - 7.9x     1.7x
     

Discount for Lack of Marketability(3)

    10.49% - 30.06%     19.97%
     

Average Industry Volatility(4)

    34.06% - 102.64%     67.77%
     

Risk-Free Interest Rate

    2.28% - 2.68%     2.36%
     

Estimated Time to Exit (in months)

    11 - 48     16
    8,994     Market Adjusted OPM Backsolve  

Market Equity Adjustment(5)

    (23.4%) - 200.72%     14.52%
     

Average Industry Volatility(4)

    34.79% - 103.09%     49.66%
     

Risk-Free Interest Rate

    1.08% - 2.50%     1.41%
      Estimated Time to Exit (in months)     8 - 44     13
    1,875     Other(7)      
 

 

 

         
Total Level Three Warrant and Equity Investments   $ 112,793          
 

 

 

         

 

(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 Black Scholes option pricing model (“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. The significant unobservable input used in the fair value measurement of impaired equity securities is the probability weighting of alternative outcomes.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Represents the range of changes in industry valuations since the portfolio company’s last external valuation event.

(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.

 

S-116


Table of Contents
Index to Financial Statements

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input(1)

  Range     Weighted
Average(6)

Equity Investments

  $ 7,684    

Market Comparable Companies

 

EBITDA Multiple(2)

    5.1x - 40.2x     13.2x
     

Revenue Multiple(2)

    0.5x - 6.2x     2.9x
     

Discount for Lack of  Marketability(3)

    7.49% - 12.97%     8.77%
     

Average Industry Volatility(4)

    27.8% - 77.3%     53.35%
     

Risk-Free Interest Rate

    1.40% - 1.90%     1.47%
     

Estimated Time to Exit (in months)

    3 - 10     5
    19,323     Market Adjusted OPM Backsolve   Market Equity Adjustment(5)     (16.43%) - 29.4%     11.79%
     

Average Industry Volatility(4)

    33.17% - 78.77%     68.99%
     

Risk-Free Interest Rate

    0.84% - 1.51%     1.42%
     

Estimated Time to Exit (in months)

    5 - 26     13
    39,529     Other(7)      

Warrant Investments

    19,310    

Market Comparable Companies

 

EBITDA Multiple(2)

    5x - 40.2x     14.6x
     

Revenue Multiple(2)

    0.5x - 6.4x     2.6x
     

Discount for Lack of  Marketability(3)

    5.16% - 27.41%     13.57%
     

Average Industry Volatility(4)

    27.8% - 102.77%     55.15%
     

Risk-Free Interest Rate

    1.31% - 2.09%     1.66%
     

Estimated Time to Exit (in months)

    2 - 48     13
    6,713     Market Adjusted OPM Backsolve  

Market Equity Adjustment(5)

    (68.52%) - 154.5%     11.76%
     

Average Industry Volatility(4)

    33.17% - 110.32%     66.97%
     

Risk-Free Interest Rate

    0.96% - 2.09%     1.59%
     

Estimated Time to Exit (in months)

    5 - 48     20
    5,182     Other(7)      
 

 

 

         

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 Black Scholes 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.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Represents the range of changes in industry valuations since the portfolio company’s last external valuation event.

(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.

 

S-117


Table of Contents
Index to Financial Statements

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/assess market based movements.

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

 

S-118


Table of Contents
Index to Financial Statements

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 June 30, 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.

 

S-119


Table of Contents
Index to Financial Statements

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 three and six months ended June 30, 2018 and 2017.

 

(in thousands)               For the Three Months Ended June 30, 2018     For the Six Months Ended June 30, 2018  

Portfolio Company

  Type     Fair Value at
June 30,
2018
    Interest
Income
    Fee
Income
    Net Change in
Unrealized
(Depreciation)/
Appreciation
    Realized
Gain/
(Loss)
    Interest
Income
    Fee
Income
    Net Change in
Unrealized
(Depreciation)/
Appreciation
    Realized
Gain/
(Loss)
 

Control Investments

                   

Achilles Technology Management Co II, Inc.

    Control     $ —       $ —       $ —       $ 2,983     $ (2,900   $ —       $ —       $ 2,858     $ (2,900

Gibraltar Business Capital, LLC

    Control       37,589       373       —         —         —         501       —         —         —    

Second Time Around (Simplify Holdings, LLC)

    Control       —         —         —         —         —         —         —         1,781       (1,743

Tectura Corporation

    Control       19,127       468       —         974       —         926       —         (1,302     335  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 56,716     $ 841     $ —       $ 3,957     $ (2,900   $ 1,427     $ —       $ 3,337     $ (4,308
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

                   

Optiscan BioMedical, Corp.

    Affiliate     $ 7,327     $ —       $ —       $ 1,480       (680   $ —       $ —       $ 415     $ (680

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

    Affiliate       21,378       500       84       (1,318     —         1,061       192       (490     —    

Stion Corporation

    Affiliate       —         —         —         1,378       (1,378     —         —         1,378       (1,378
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 28,705     $ 500     $ 84     $ 1,540     $ (2,058   $ 1,061     $ 192     $ 1,303     $ (2,058
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

    $ 85,421     $ 1,341     $ 84     $ 5,497     $ (4,958   $ 2,488     $ 192     $ 4,640     $ (6,366
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)               For the Three Months Ended June 30, 2017     For the Six Months Ended June 30, 2017  

Portfolio Company

  Type     Fair Value at
June 30,
2017
    Interest
Income
    Fee
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Realized
Gain/
(Loss)
    Interest
Income
    Fee
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Realized
Gain/
(Loss)
 

Control Investments

                   

Achilles Technology Management Co II, Inc.

    Control     $ 2,116     $ 73     $ 5     $ (267   $ —       $ 142     $ 10     $ (2,208   $ —    

HercGamma, Inc.

    Control       1,169       —         —         —         —         —         —         —         —    

SkyCross, Inc.

    Control       —         —         —         133       (394     —         —         2,236       (394

Tectura Corporation

    Control       19,991       454       —         —         —         899       —         51       (51

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

    Control       8,288       —         —         (53,215     —         —         —         (53,214     —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 31,564     $ 527     $ 5     $ (53,349   $ (394   $ 1,041     $ 10     $ (53,135   $ (445
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

                   

Optiscan BioMedical, Corp.

    Affiliate     $ 5,991     $ —       $ —       $ 681     $ —       $ —       $ —       $ 1,119     $ —    

Stion Corporation

    Affiliate       —         —         —         —         —         2       —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 5,991     $ —       $ —       $ 681     $ —       $ 2     $ —       $ 1,119     $ —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

    $ 37,555     $ 527     $ 5     $ (52,668   $ (394   $ 1,043     $ 10     $ (52,016   $ (445
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

S-120


Table of Contents
Index to Financial Statements

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 this investment is classified as a control investment as of September 30, 2017. As of 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, 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 as of June 30, 2018.

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 as of June 30, 2018.

The following table shows the fair value of the Company’s portfolio of investments by asset class as of June 30, 2018 and December 31, 2017:

 

     June 30, 2018     December 31, 2017  

(in thousands)

   Investments at
Fair Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior Secured Debt with Warrants

   $ 700,793        41.2   $ 880,115        57.1

Senior Secured Debt

     869,693        51.1     572,738        37.1

Unsecured Debt

     9,941        0.6     —          —    

Preferred Stock

     66,768        3.9     40,683        2.6

Common Stock

     54,741        3.2     48,678        3.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,701,936        100.0   $ 1,542,214        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

S-121


Table of Contents
Index to Financial Statements

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.

A summary of the Company’s investment portfolio, at value, by geographic location as of June 30, 2018 and December 31, 2017 is shown as follows:

 

     June 30, 2018     December 31, 2017  

(in thousands)

   Investments at
Fair Value
     Percentage of
Total Portfolio
    Investments at
Fair Value
     Percentage of
Total Portfolio
 

United States

   $ 1,471,237        86.4   $ 1,404,235        91.1

United Kingdom

     137,881        8.1     91,105        5.9

Australia

     34,894        2.1     —          0.0

Netherlands

     21,412        1.3     20,783        1.3

Cayman Islands

     20,066        1.2     14,954        1.0

Sweden

     12,042        0.7     —          0.0

Switzerland

     3,695        0.2     10,581        0.7

Canada

     709        0.0     556        0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,701,936        100.0   $ 1,542,214        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the fair value of the Company’s portfolio by industry sector at June 30, 2018 and December 31, 2017:

 

     June 30, 2018     December 31, 2017  

(in thousands)

   Investments at
Fair Value
     Percentage of
Total Portfolio
    Investments at
Fair Value
     Percentage of
Total Portfolio
 

Drug Discovery & Development

   $ 446,575        26.3   $ 369,173        23.9

Software

     445,486        26.2     360,123        23.4

Internet Consumer & Business Services

     256,956        15.1     154,909        10.0

Sustainable and Renewable Technology

     119,575        7.1     118,432        7.7

Medical Devices & Equipment

     98,887        5.8     94,595        6.1

Healthcare Services, Other

     82,302        4.8     72,337        4.7

Drug Delivery

     56,161        3.3     91,214        5.9

Media/Content/Info

     47,977        2.8     152,998        9.9

Information Services

     44,696        2.6     24,618        1.6

Diversified Financial Services

     37,589        2.2     —          —    

Consumer & Business Products

     24,186        1.4     19,792        1.3

Electronics & Computer Hardware

     22,099        1.3     9,982        0.6

Communications & Networking

     6,241        0.4     6,649        0.4

Biotechnology Tools

     5,686        0.3     5,604        0.4

Surgical Devices

     5,459        0.3     13,161        0.9

Semiconductors

     1,451        0.1     10,406        0.7

Diagnostic

     407        0.0     720        0.1

Specialty Pharmaceuticals

     203        0.0     37,501        2.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,701,936        100.0   $ 1,542,214        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

No single portfolio investment represents more than 10% of the fair value of the investments as of June 30, 2018 and December 31, 2017.

 

S-122


Table of Contents
Index to Financial Statements

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 June 30, 2018, approximately 85.9% of the Company’s debt investments were in a senior secured first lien position, with 49.2% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 29.3% 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, 1.4% of the Company’s debt investments were senior secured by the equipment of the portfolio company and 6.1% 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 13.5% of the Company’s debt investments were secured by a second priority security interest in the portfolio company’s assets, and 0.6% were unsecured.

Cash, Restricted Cash, and Cash Equivalents

Cash and cash equivalents consists 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.

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 June 30, 2018, the Company had two debt investments on non-accrual with a cumulative investment cost and approximate fair value of $2.8 million and $33,000, respectively. At December 31, 2017, the Company had five debt investments on non-accrual with cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cost of debt investments on non-accrual between December 31, 2017 and June 30, 2018 is the result of the write-off of two debt investments that were on non-accrual at December 31, 2017 which resulted in a realized loss of approximately $10.3 million, and a 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 us 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 $33.7 million of unamortized fees at June 30, 2018, of which

 

S-123


Table of Contents
Index to Financial Statements

approximately $27.9 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $5.8 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 as 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 $1.7 million and $5.5 million in one-time fee income during the three months ended June 30, 2018 and 2017, respectively. The Company recorded approximately $4.8 million and $6.1 million in one-time fee income during the six months ended June 30, 2018 and 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 June 30, 2018, the Company had approximately $23.8 million in exit fees receivable, of which approximately $21.6 million was included as a component of the cost basis of the Company’s current debt investments and approximately $2.2 million was a deferred receivable 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.

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 the 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 $2.3 million and $2.5 million in PIK income during the three months ended June 30, 2018 and 2017, respectively. The Company recorded approximately $4.6 million and $4.7 million in PIK income during the six months ended June 30, 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 three and six months ended June 30, 2018 and 2017.

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.

 

S-124


Table of Contents
Index to Financial Statements

Based on market quotations on or around June 30, 2018, the 2022 Notes, 2021 Asset-Backed Notes and 2022 Convertible Notes were quoted for 0.999, 1.000 and 1.012 per dollar at par value, respectively. At June 30, 2018, the 2024 Notes and 2025 Notes were trading on the NYSE for $25.27 and $24.83, respectively, per unit at par value. The par value at underwriting for the 2024 Notes and 2025 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 $193.8 million, compared to the carrying amount of $190.2 million as of June 30, 2018. The fair value of the outstanding borrowings under the Union Bank Facility is equal to its principal outstanding balance as of June 30, 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.

The following tables provide additional information about the fair value and level in the fair value hierarchy of the Company’s outstanding borrowings at June 30, 2018 and December 31, 2017:

 

(in thousands)

Description(1)

   June 30, 2018      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

SBA Debentures

   $ 193,778      $ —        $ —        $ 193,778  

2022 Notes

     149,781        —          149,781        —    

2024 Notes

     84,412        —          84,412        —    

2025 Notes

     74,490        —          74,490        —    

2021 Asset-Backed Notes

     31,098        —          31,098        —    

2022 Convertible Notes

     232,696        —          232,696        —    

Union Bank Facility

     58,323        —          —          58,323  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 824,578      $ —        $ 572,477      $ 252,101  
  

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

Description(1)

   December 31, 2017      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

SBA Debentures

   $ 198,038      $ —        $ —        $ 198,038  

2022 Notes

     152,091        —          152,091        —    

2024 Notes

     188,061        —          188,061        —    

2021 Asset-Backed Notes

     49,199        —          49,199        —    

2022 Convertible Notes

     236,470        —          236,470        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 823,859      $ —        $ 625,821      $ 198,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

As of June 30, 2018, there were no borrowings outstanding on the Wells Facility and no borrowings outstanding on both the Wells Facility and Union Bank Facility as of December 31, 2017.

4. Borrowings

Outstanding Borrowings

At June 30, 2018 and December 31, 2017, the Company had the following available and outstanding borrowings:

 

     June 30, 2018      December 31, 2017  

(in thousands)

   Total Available      Principal      Carrying Value (1)      Total Available      Principal      Carrying Value (1)  

SBA Debentures(2)

   $ 190,200      $ 190,200      $ 188,457      $ 190,200      $ 190,200      $ 188,141  

2022 Notes

     150,000        150,000        147,728        150,000        150,000        147,572  

2024 Notes

     83,510        83,510        81,694        183,510        183,510        179,001  

2025 Notes

     75,000        75,000        72,616        —          —          —    

2021 Asset-Backed Notes

     31,088        31,088        30,698        49,153        49,153        48,650  

2022 Convertible Notes

     230,000        230,000        224,269        230,000        230,000        223,488  

Wells Facility(3)

     120,000        —          —          120,000        —          —    

Union Bank Facility(3)

     100,000        58,323        58,323        75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 979,798      $ 818,121      $ 803,785      $ 997,863      $ 802,863      $ 786,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

S-125


Table of Contents
Index to Financial Statements

 

(1)

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.

(2)

At both June 30, 2018 and 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.

(3)

Availability subject to the Company meeting the borrowing base requirements.

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, were as follows as of June 30, 2018 and December 31, 2017:

 

(in thousands)

   June 30, 2018      December 31, 2017  

SBA Debentures

   $ 1,743      $ 2,059  

2022 Notes

     1,559        1,633  

2024 Notes

     1,871        4,591  

2025 Notes

     416        —    

2021 Asset-Backed Notes

     390        503  

2022 Convertible Notes

     3,269        3,715  

Wells Facility(1)

     188        227  

Union Bank Facility(1)

     273        379  
  

 

 

    

 

 

 

Total

   $ 9,709      $ 13,107  
  

 

 

    

 

 

 

 

(1)

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 is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With the Company’s net investment of $44.0 million in HT II as of June 30, 2018, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of June 30, 2018. As of June 30, 2018, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of June 30, 2018 the Company held investments in HT II in 33 companies with a fair value of approximately $78.5 million, accounting for approximately 4.6% of the Company’s total investment portfolio at June 30, 2018. HT II held approximately $115.4 million in assets and accounted for approximately 5.2% of the Company’s total assets prior to consolidation at June 30, 2018. The Company completed repayment of the remaining outstanding HT II debentures on July 13, 2018. See “Note 12—Subsequent Events.”

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to 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 June 30, 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 June 30, 2018. As of June 30, 2018, HT III has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of June 30, 2018, the Company held investments in HT III in 45 companies with a fair value of approximately $255.2 million, accounting for approximately 15.0% of the Company’s total investment portfolio at June 30, 2018. HT III held approximately $294.8 million in assets and accounted for approximately 13.4% of the Company’s total assets prior to consolidation at June 30, 2018.

 

S-126


Table of Contents
Index to Financial Statements

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 subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their 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 II and HT III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of June 30, 2018 as a result of having sufficient capital as defined under the SBA regulations.

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 March 2009, the initial maturity of SBA debentures will occur in March 2019. 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 II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. 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 SBA debentures range from 3.05% to 5.53% when including these annual fees.

The average amount of debentures outstanding for the three and six months ended June 30, 2018 for HT II was approximately $41.2 million with an average interest rate of approximately 4.51% and 4.48%, respectively. The average amount of debentures outstanding for the three and six months ended June 30, 2018 for HT III was approximately $149.0 million with an average interest rate of approximately 3.42% and 3.40%, respectively.

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the SBA debentures are as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(in thousands)

       2018              2017              2018              2017      

Interest expense

   $ 1,737      $ 1,737      $ 3,456      $ 3,456  

Amortization of debt issuance cost (loan fees)

     158        156        317        324  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 1,895      $ 1,893      $ 3,773      $ 3,780  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —        $ 3,442      $ 3,442  

In aggregate, at June 30, 2018, with the Company’s net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At

 

S-127


Table of Contents
Index to Financial Statements

June 30, 2018, the Company has issued $190.2 million in SBA-guaranteed debentures in the Company’s SBIC subsidiaries.

The Company reported the following SBA debentures outstanding principal balances as of June 30, 2018 and December 31, 2017:

 

(in thousands)

Issuance/Pooling Date

   Maturity Date      Interest
Rate(1)
    June 30,
2018
     December 31,
2017
 

March 25, 2009

     March 1, 2019        5.53   $ 18,400      $ 18,400  

September 23, 2009

     September 1, 2019        4.64     3,400        3,400  

September 22, 2010

     September 1, 2020        3.62     6,500        6,500  

September 22, 2010

     September 1, 2020        3.50     22,900        22,900  

March 29, 2011

     March 1, 2021        4.37     28,750        28,750  

September 21, 2011

     September 1, 2021        3.16     25,000        25,000  

March 21, 2012

     March 1, 2022        3.28     25,000        25,000  

March 21, 2012

     March 1, 2022        3.05     11,250        11,250  

September 19, 2012

     September 1, 2022        3.05     24,250        24,250  

March 27, 2013

     March 1, 2023        3.16     24,750        24,750  
       

 

 

    

 

 

 

Total SBA Debentures

        $ 190,200      $ 190,200  
       

 

 

    

 

 

 

 

(1)

Interest rate includes annual charge

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 three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2019 Notes are as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  

(in thousands)

       2018              2017              2018              2017      

Interest expense

   $ —        $ —        $ —        $ 1,159  

Amortization of debt issuance cost (loan fees)

     —          —          —          1,546  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ —        $ —        $ —        $ 2,705  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —        $ —        $ 1,911  

2022 Notes

On October 23, 2017, the Company issued $150.0 million in aggregate principal amount of 4.625% Notes due 2022 (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.

 

S-128


Table of Contents
Index to Financial Statements

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 June 30, 2018, the Company was in compliance with the terms of the 2022 Notes Indenture.

As of June 30, 2018 and December 31, 2017, the components of the carrying value of the 2022 Notes were as follows:

 

(in thousands)

   June 30, 2018      December 31, 2017  

Principal amount of debt

   $ 150,000      $ 150,000  

Unamortized debt issuance cost

     (1,559      (1,633

Original issue discount, net of accretion

     (713      (795
  

 

 

    

 

 

 

Carrying value of 2022 Notes

   $ 147,728      $ 147,572  
  

 

 

    

 

 

 

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2022 Notes are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

       2018              2017              2018              2017      

Interest expense

   $ 1,734      $ —        $ 3,469      $ —    

Amortization of debt issuance cost (loan fees)

     86        —          171        —    

Accretion of original issue discount

     41        —          82        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 1,861      $ —        $ 3,722      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 3,469      $ —        $ 3,469      $ —    

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 of 6.25% unsecured notes due 2024 (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.

 

S-129


Table of Contents
Index to Financial Statements

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 of 1933, as amended (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.

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 Company’s 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.

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 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 six months ended June 30, 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 June 30, 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.”

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

 

S-130


Table of Contents
Index to Financial Statements

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 June 30, 2018, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture.

As of June 30, 2018 and December 31, 2017, the components of the carrying value of the 2024 Notes were as follows:

 

(in thousands)

   June 30,
2018
    December 31,
2017
 

Principal amount of debt

   $ 83,510     $ 183,510  

Unamortized debt issuance cost

     (1,871     (4,591

Original issue premium, net of amortization

     55       82  
  

 

 

   

 

 

 

Carrying value of 2024 Notes

   $ 81,694     $ 179,001  
  

 

 

   

 

 

 

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands)

       2018             2017             2018             2017      

Interest expense

   $ 1,340     $ 4,039     $ 4,220     $ 8,026  

Amortization of debt issuance cost (loan fees)

     2,546       252       2,720       501  

Amortization of original issue premium

     (14     (13     (27     (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense and fees

   $ 3,872     $ 4,278     $ 6,913     $ 8,498  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash paid for interest expense

   $ 2,381     $ 4,039     $ 5,249     $ 8,016  

2025 Notes

On April 26, 2018, the Company issued $75.0 million in aggregate principal amount of 5.25% notes due 2025 (the “2025 Notes”). The 2025 Notes were issued pursuant to the Fifth Supplemental Indenture to the Base Indenture, dated April 26, 2018 (the “2025 Notes Indenture”), between the Company and U.S. Bank, National Association, as trustee. The sale of the 2025 Notes generated net proceeds of approximately $72.6 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $2.4 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.”

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 Hercules Capital, Inc.

 

S-131


Table of Contents
Index to Financial Statements

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 June 30, 2018, the Company was in compliance with the terms of the 2025 Notes Indenture.

As of June 30, 2018, and December 31, 2017, the components of the carrying value of the 2025 Notes were as follows:

 

(in thousands)

   June 30,
2018
    December 31,
2017
 

Principal amount of debt

   $ 75,000     $ —    

Unamortized debt issuance cost

     (2,384     —    
  

 

 

   

 

 

 

Carrying value of 2025 Notes

   $ 72,616     $ —    
  

 

 

   

 

 

 

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2025 Notes are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

       2018              2017              2018              2017      

Interest expense

   $ 711      $ —        $ 711      $ —    

Amortization of debt issuance cost (loan fees)

     57        —          57        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 768      $ —        $ 768      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —        $ —        $ —    

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 fixed rate asset-backed notes (the “2021 Asset-Backed Notes”), which were rated A(sf) by Kroll Bond Rating Agency, Inc. 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.

As part of this transaction, the Company entered into a sale and contribution agreement with the 2014 Trust Depositor under which the Company has agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2014 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor.

In connection with the issuance and sale of the 2021 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to the Company. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rules 501(a)(1), (2), (3)

 

S-132


Table of Contents
Index to Financial Statements

or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Section 2(a)(51)(A) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S under the Securities Act. The 2014 Securitization Issuer is not registered under the 1940 Act in reliance on an exemption provided by Section 3(c)(7) thereof and Rule 3a-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants.

The 2014 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2014 Loans. The Company is entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014).The Company also serves as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At June 30, 2018 and December 31, 2017, the 2021 Asset-Backed Notes had an outstanding principal balance of $31.1 million and $49.2 million, respectively.

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2021 Asset-Backed Notes are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

       2018              2017              2018              2017      

Interest expense

   $ 282      $ 807      $ 623      $ 1,695  

Amortization of debt issuance cost (loan fees)

     30        211        113        421  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 312      $ 1,018      $ 736      $ 2,116  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 289      $ 848      $ 676      $ 1,788  

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. There was approximately $15.9 million and $3.7 million of restricted cash as of June 30, 2018 and December 31, 2017, respectively, funded through interest collections.

Convertible Notes

2022 Convertible Notes

On January 25, 2017, the Company issued $230.0 million in aggregate principal amount of 4.375% Convertible Notes due 2022 (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.

 

S-133


Table of Contents
Index to Financial Statements

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 June 30, 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%.

 

S-134


Table of Contents
Index to Financial Statements

As of June 30, 2018 and December 31, 2017, the components of the carrying value of the 2022 Convertible Notes were as follows:

 

(in thousands)    June 30, 2018      December 31, 2017  

Principal amount of debt

   $ 230,000      $ 230,000  

Unamortized debt issuance cost

     (3,269      (3,715

Original issue discount, net of accretion

     (2,462      (2,797
  

 

 

    

 

 

 

Carrying value of 2022 Convertible Notes

   $ 224,269      $ 223,488  
  

 

 

    

 

 

 

For the three and six months ended June 30, 2018 and 2017, the components of interest expense, fees and cash paid for interest expense for the 2022 Convertible notes were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

   2018      2017      2018      2017  

Interest expense

   $ 2,516      $ 2,516      $ 5,031      $ 4,274  

Amortization of debt issuance cost (loan fees)

     223        212        446        345  

Accretion of original issue discount

     168        168        336        280  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 2,907      $ 2,896      $ 5,813      $ 4,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 5,031      $ —        $ 5,031      $ —    

As of June 30, 2018, the Company is in compliance with the terms of the indentures governing the 2022 Convertible Notes.

Credit Facilities

As of June 30, 2018 and December 31, 2017, the Company has two available credit facilities, the Wells Facility and the Union Bank Facility (together, the “Credit Facilities”).

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 (the “Wells Facility”) 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.

The Wells Facility matures on August 2, 2019, unless terminated sooner in accordance with its terms.

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. 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 three and six months ended June 30, 2018, this non-use fee was $78,000 and $228,000, respectively. For the three and six months ended June 30, 2017, this non-use fee was $152,000 and $297,000, respectively.

 

S-135


Table of Contents
Index to Financial Statements

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.

As of June 30, 2018, the minimum tangible net worth covenant increased to $841.5 million as a result of the public offering of 18.2 million shares of common stock issued for a total gross proceeds of approximately $242.8 million under an At-The-Market (“ATM”) equity distribution agreement (the “Prior Equity Distribution Agreement”) with JMP Securities (“JMP”) through February 2017, and a new ATM equity distribution agreement in September 2017 (the “Equity Distribution Agreement”) with JMP for the issuance of 1.6 million shares for gross proceeds of $20.5 million during 2017, and the issuance of 9.5 million shares for gross proceeds of $116.1 million during the six months ended June 30, 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, the Company paid an additional $750,000 in structuring fees and in connection with the amendment in December 2015, the Company paid an additional $188,000 in structuring fees. These fees are being amortized through the end of the term of the Wells Facility.

The Company had aggregate draws of $75.7 million on the available facility during the six months ended June 30, 2018, offset by repayments of $75.7 million. The Company had aggregate draws of $8.5 million on the available facility during the six months ended June 30, 2017, offset by repayments of $13.5 million. There were no borrowings outstanding on the facility as of June 30, 2018 and December 31, 2017.

For the three and six months ended June 30, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the Wells Facility are as follows:

 

         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
(in thousands)    2018      2017      2018      2017  

Interest expense

   $ 746      $ —        $ 746      $ 2  

Amortization of debt issuance cost (loan fees)

     44        106        89        213  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 790      $ 106      $ 835      $ 215  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 478      $ 214      $ 478      $ 470  

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 credit facility (the “Union Bank Facility”) with MUFG 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 company’s credit facility (the “Prior Union Bank Facility”) entered into on August 14, 2014 (as amended and restated from time to time) with MUFG Union Bank, as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility 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.

 

S-136


Table of Contents
Index to Financial Statements

On July 18, 2016, the Company entered into the First Amendment to the Loan and Security Agreement, dated as of May 5, 2016 with MUFG Union Bank, N.A. 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 MUFG 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 MUFG 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 three and six months ended June 30, 2018, the company incurred non-use fees of $50,000 and $143,000, respectively. For the three and six months ended June 30, 2017, the company incurred non-use fees under the Prior Union Bank Facility of $95,000 and $189,000, respectively.

The Union Bank Facility also includes various financial and other covenants applicable to the Company and its 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 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 (the “Amendment”) to the Union Bank Facility with MUFG Union Bank, N.A., 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 MUFG Union Bank’s commitments thereunder from $75.0 million to $100.0 million.

As of June 30, 2018, the minimum tangible net worth covenant increased to $885.2 million as a result the public offering of 18.2 million shares of common stock issued for a total net proceeds of approximately $239.8 million under the Prior Equity Distribution Agreement through February 2017, and the issuance of 1.6 million shares for net proceeds of $20.0 million during 2017, and the issuance of 9.5 million shares for net proceeds of $112.6 million during the six months ended June 30, 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 MUFG Union Bank, as agent. Under the Sale Agreement, the Company agrees to (i) sell or transfer certain loans to Hercules Funding III under the MUFG Union Bank Facility and (ii) act as servicer for the loans sold or transferred.

 

S-137


Table of Contents
Index to Financial Statements

The Company had aggregate draws of $75.0 million on the available facility during the six months ended June 30, 2018, offset by repayments of $16.7 million. The Company did not make any draws or repayments on the available facility during the six months ended June 30, 2017. At December 31, 2017, there were no borrowings outstanding on the Union Bank Facility.

For the three and six months ended June 30, 2018 and 2017, 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:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(in thousands)        2018              2017              2018              2017      

Interest expense

   $ 565      $ —        $ 565      $ —    

Amortization of debt issuance cost (loan fees)

     78        112        152        224  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 643      $ 112      $ 717      $ 224  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 281      $ 96      $ 281      $ 238  

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.

During the three months ended June 30, 2018, the Company declared a distribution of $0.31 per share. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s taxable year generally based upon its taxable income for the full taxable year and distributions paid for the full taxable year. As a result, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. If the Company had determined the tax attributes of our distributions taxable year-to-date as of June 30, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the actual tax attributes of the Company’s 2018 distributions to stockholders will be.

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 sum of (1) 98% of the Company’s ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of the Company’s 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

 

S-138


Table of Contents
Index to Financial Statements

income realized, but not distributed, in preceding calendar years (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 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 at normal corporate tax rates based on its taxable income.

Taxable income for the six months ended June 30, 2018 was approximately $51.0 million or $0.59 per share. Taxable net realized gains for the same period were $4.2 million or approximately $0.05 per share. Taxable income for the six months ended June 30, 2017 was approximately $42.3 million or $0.52 per share. Taxable net realized losses for the same period were $1.2 million or approximately $0.01 per share.

For the six months ended June 30, 2018, the Company paid approximately $671,000 of tax expense and had no accrued but unpaid tax expense as of the balance sheet date. For the six months ended June 30, 2017, the Company paid approximately $1.0 million of tax expense and had no accrued but unpaid tax expense as of the balance sheet date.

The Company intends to distribute 100% of spillover earnings from ordinary income from the Company’s taxable year ended December 31, 2017 to the Company’s stockholders during 2018.

6. Stockholder’s 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, we 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.

 

S-139


Table of Contents
Index to Financial Statements

During the three and six months ended June 30, 2018, the Company sold 2.1 million and 2.6 million shares of common stock for total accumulated net proceeds of approximately $25.4 million and $31.4 million, respectively, including $566,000 and $877,000 of offering expenses, respectively, under the Equity Distribution Agreement.

During the six months ended June 30, 2017, the Company sold 3.3 million shares of common stock under the Prior Equity Distribution Agreement for total accumulated net proceeds of approximately $46.9 million, including $532,000 of offering expenses. The Company did not sell any shares under the program during the three months ended June 30, 2017.

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 June 30, 2018, approximately 7.8 million shares remain available for issuance and sale under the Equity Distribution Agreement. See “Note 12—Subsequent Events.”

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 (“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.

The Company has issued stock options for common stock subject to future issuance, of which 573,038 and 590,525 were outstanding at June 30, 2018 and December 31, 2017, respectively.

7. Equity Incentive Plans

The Company and its stockholders authorized and adopted the 2004 Equity Incentive Plan (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 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) 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

 

S-140


Table of Contents
Index to Financial Statements

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 Company’s 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 dividend 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”). The target number of Retention PSUs granted to senior personnel is 1,299,757 in the aggregate. The target amount of the Cash Awards granted to senior personnel is $4,000,000 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 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 June 30, 2018, all of Retention PSUs and Cash Awards were unvested. During the three and six months ended June 30, 2018, the Company had approximately $751,000 of compensation expense related to the

 

S-141


Table of Contents
Index to Financial Statements

Retention PSUs and $143,000 of compensation expense related to the Cash Awards. The expense related to the Cash Awards is included within the Consolidated Statement of Assets and Liabilities.

On May 13, 2018, the Company’s Board of Directors further amended and restated the 2004 Plan and renamed it the Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan (the “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, increases the number of shares available for issuance to eligible participants by an additional 6,700,000 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 Company’s Board of Directors adopted the Hercules Capital, Inc. 2018 Non-employee Director Plan (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 with respect to the 2018 Equity Incentive Plan and the Director Plan for an exemptive order from certain provisions of the 1940 Act. If granted by the SEC, the exemptive order would allow the Company 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. Similar to an exemptive order previously received by the Company with respect to Plans, the exemptive order would also (i) allow participants in the Director Plan and the 2018 Equity Incentive Plan to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”) and (ii) permit the holders of restricted stock to elect to have the Company withhold shares of the Company’s 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. The Company may not make awards under the Director Plan or the 2018 Equity Incentive Plan unless and until the Company receives the exemptive order from the SEC.

The following table summarizes the common stock option activities for the six months ended June 30, 2018 and 2017:

 

     Six Months Ended June 30,  
     2018      2017  
     Common Stock
Options
    Weighted
Average
Exercise
Price
     Common
Stock
Options
    Weighted
Average
Exercise
Price
 

Outstanding at December 31,

     590,525     $ 13.60        668,171     $ 13.73  

Granted

     78,000     $ 12.48        76,000     $ 14.69  

Exercised

     (38,319   $ 11.31        (26,657   $ 11.24  

Forfeited

     (26,073   $ 13.00        (33,058   $ 14.03  

Expired

     (31,095   $ 14.43        (42,445   $ 15.43  
  

 

 

      

 

 

   

Outstanding at June 30,

     573,038     $ 13.58        642,011     $ 13.82  
  

 

 

      

 

 

   

Shares Expected to Vest at June 30,

     198,300     $ 13.58        259,343     $ 13.82  

 

S-142


Table of Contents
Index to Financial Statements

The following table summarizes common stock options outstanding and exercisable at June 30, 2018:

 

(Dollars in thousands,

except exercise price)

   Options Outstanding      Options Exercisable  

Range of exercise prices

   Number
of

shares
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
     Weighted
Average
Exercise
Price
     Number
of shares
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
     Weighted
Average
Exercise
Price
 

$9.25 - $14.56  

     360,038        5.45      $ 194,830      $ 12.44        173,962        4.49      $ 150,951      $ 12.09  

$14.86 - $16.34  

     213,000        3.52        —        $ 15.51        200,776        3.38        —        $ 15.54  
  

 

 

       

 

 

       

 

 

       

 

 

    

$9.25 - $16.34  

     573,038        4.73      $ 194,830      $ 13.58        374,738        3.89      $ 150,951      $ 13.94  
  

 

 

       

 

 

       

 

 

       

 

 

    

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 June 30, 2018 options for 374,738 shares were exercisable at a weighted average exercise price of approximately $13.94 per share with a weighted average remaining contractual term of 3.89 years.

The Company determined that the fair value of options granted under the Plans during the six months ended June 30, 2018 and 2017 was approximately $44,000 and $54,000, respectively. During the six months ended June 30, 2018 and 2017, approximately $28,000 and $39,000 of share-based cost due to stock option grants was expensed, respectively. As of June 30, 2018, there was approximately $102,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average remaining vesting period of 2.13 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 the six months ended June 30, 2018 and 2017:

 

     Six Months Ended June 30,  
     2018     2017  

Expected Volatility

     21.19     23.07

Expected Dividends

     10     10

Expected term (in years)

     4.5       4.5  

Risk-free rate

     2.19% - 2.90%       1.62% - 2.02%  

During the six months ended June 30, 2018 and 2017, the Company granted 334,995 shares and 10,111 shares, respectively, of restricted stock awards pursuant to the Plans. The Company determined that the fair value, based on grant date close price, of restricted stock awards granted under the Plans during the six months ended June 30, 2018 and 2017 was approximately $4.4 million and $150,000, respectively. As of June 30, 2018, there was approximately $4.8 million of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average remaining vesting period of 2.09 years.

 

S-143


Table of Contents
Index to Financial Statements

The following table summarizes the activities for the Company’s unvested restricted stock awards for the six months ended June 30, 2018 and 2017:

 

     Six Months Ended June 30,  
     2018      2017  
     Restricted Stock
Awards
    Weighted
Average

Grant
Date

Fair
Value
     Restricted Stock
Awards
    Weighted
Average

Grant Date
Fair Value
 

Unvested at December 31,

     261,245     $ 12.43        799,558     $ 12.54  

Granted

     334,995     $ 13.04        10,111     $ 14.83  

Vested

     (125,735   $ 12.73        (330,689   $ 12.56  

Forfeited

     (3,085   $ 11.70        (5,576   $ 13.27  
  

 

 

      

 

 

   

Unvested at June 30,

     467,420     $ 12.79        473,404     $ 12.57  
  

 

 

      

 

 

   

During the six months ended June 30, 2018, and 2017, the Company granted 411,689 shares and 600,461 shares of restricted stock units pursuant to the Plans based on the December 2016 amended terms. The Company determined that the fair value, based on grant date close price, of restricted stock units granted under the Plans during the six months ended June 30, 2018 and 2017, was approximately $5.4 million and $8.5 million respectively. As of June 30, 2018, there was approximately $8.5 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average remaining vesting period of 2.08 years.

The following table summarizes the activities for the Company’s unvested restricted stock units for the six months ended June 30, 2018:

 

     Six Months Ended June 30,      Six Months Ended June 30,  
     2018      2017  
     Restricted Stock
Units
    Weighted
Average

Grant Date
Fair Value
     Restricted
Stock Units
    Weighted
Average

Grant Date
Fair Value
 

Unvested at December 31,

     594,322     $ 12.99        —       $ —    

Granted

     411,689     $ 13.04        600,461     $ 13.94  

Distribution Equivalent Unit Granted

     39,617     $ 11.90        26,717     $ 13.60  

Vested(1)

     (251,194   $ 12.70        —       $ —    

Forfeited

     (5,841   $ 12.63        (2,874   $ 13.92  
  

 

 

      

 

 

   

Unvested at June 30,

     788,593     $ 12.43        624,304     $ 13.60  
  

 

 

      

 

 

   

 

(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 six months ended June 30, 2018, the Company expensed approximately $4.3 million of compensation expense related to restricted stock awards and restricted stock units. The Company had approximately $3.7 million in compensation expense related to restricted stock awards during the six months ended June 30, 2017.

 

S-144


Table of Contents
Index to Financial Statements

8. Earnings Per Share

Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands, except per share data)

   2018     2017     2018     2017  

Numerator

        

Net increase in net assets resulting from operations

   $ 52,060     $ 33,149     $ 58,006     $ 27,561  

Less: Distributions declared-common and restricted shares

     (26,678     (25,663     (53,097     (51,330
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

     25,382       7,486       4,909       (23,769
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings-common shares

     25,246       7,439       4,879       (23,769

Add: Distributions declared-common shares

     26,532       25,503       52,779       50,982  
  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic and diluted change in net assets per common share

   $ 51,778     $ 32,942     $ 57,658     $ 27,213  
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Basic weighted average common shares outstanding

     87,125       82,292       85,868       81,858  

Common shares issuable

     74       103       71       95  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding assuming dilution

     87,199       82,395       85,939       81,953  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share

        

Basic

   $ 0.59     $ 0.40     $ 0.67     $ 0.33  

Diluted

   $ 0.59     $ 0.40     $ 0.67     $ 0.33  

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 three and six months ended June 30, 2018 and 2017, the effect of the 2022 Convertible Notes under the treasury stock method is anti-dilutive and, accordingly, is excluded from the calculation of diluted earnings per share.

The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti-dilutive shares. For the three months ended June 30, 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 4.6 million shares related to 2022 Convertible Notes, 74,845 shares of unvested common stock options, 803 shares of unvested restricted stock units, and 97,777 shares of unvested Retention PSUs. For the six months ended June 30, 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 4.5 million shares related to 2022 Convertible Notes, 74,006 shares of unvested common stock options, no shares of unvested restricted stock units, and 45,958 shares of unvested Retention PSUs. For the three and six months ended June 30, 2017, 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 2.7 million and 1.9 million shares related to 2022 Convertible Notes, 43,723 shares and 31,039 shares of unvested common stock options, and no shares of unvested restricted stock units, respectively.

At June 30, 2018 and December 31, 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.

 

S-145


Table of Contents
Index to Financial Statements

9. Financial Highlights

Following is a schedule of financial highlights for the six months ended June 30, 2018 and 2017:

 

     Six Months Ended June 30,  
             2018                     2017          

Per share data(1):

    

Net asset value at beginning of period

   $ 9.96     $ 9.90  

Net investment income

     0.57       0.59  

Net realized gain (loss) on investments

     (0.16     (0.03

Net unrealized appreciation (depreciation) on investments

     0.26       (0.22
  

 

 

   

 

 

 

Total from investment operations

     0.67       0.34  

Net increase (decrease) in net assets from capital share transactions(1)

     0.15       0.21  

Distributions of net investment income(6)

     (0.62     (0.63

Distributions of capital gains(6)

     —         —    

Stock-based compensation expense included in investment income(2)

     0.06       0.05  
  

 

 

   

 

 

 

Net asset value at end of period

   $ 10.22     $ 9.87  
  

 

 

   

 

 

 

Ratios and supplemental data:

    

Per share market value at end of period

   $ 12.65     $ 13.24  

Total return(3)

     1.24     (2.04 %) 

Shares outstanding at end of period

     94,260       82,819  

Weighted average number of common shares outstanding

     85,868       81,858  

Net assets at end of period

   $ 963,697     $ 817,451  

Ratio of total expense to average net assets(4)

     11.59     11.24

Ratio of net investment income before investment gains and losses to average net assets(4)

     11.45     11.50

Portfolio turnover rate(5)

     28.31     24.18

Weighted average debt outstanding

   $ 813,889     $ 707,323  

Weighted average debt per common share

   $ 9.48     $ 8.64  

 

(1)

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.

(2)

Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC Topic 718 (“Compensation—Stock Compensation”), net investment income includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.

(3)

The total return for the six months ended June 30, 2018 and 2017 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.

(4)

These ratios are calculated based on weighted average net assets for the relevant period and are annualized. The ratio of total expense to average net assets for the period ended June 30, 2017 was incorrectly computed. The ratio was revised from 7.63% as previously disclosed to 11.24% as adjusted.

(5)

The portfolio turnover rate for the six months ended June 30, 2018 and 2017 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.

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 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

 

S-146


Table of Contents
Index to Financial Statements

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 June 30, 2018, the Company had approximately $129.7 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 $80.0 million of non-binding term sheets outstanding at June 30, 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 June 30, 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

   Unfunded
Commitments(1)
 

ThumbTack, Inc.

   $ 25,000  

Tricida, Inc.

     25,000  

Contentful, Inc.

     15,000  

Impossible Foods, Inc.

     15,000  

Chemocentryx, Inc.

     10,000  

Proterra, Inc.

     10,000  

Evernote Corporation

     7,500  

Businessolver.com, Inc.

     6,375  

Achronix Semiconductor Corporation

     5,000  

Xometry, Inc.

     4,000  

Emma, Inc.

     2,963  

First Insight, Inc.

     1,500  

Lithium Technologies, Inc.

     878  

Greenphire, Inc.

     500  

Insurance Technologies Corporation

     500  

Salsa Labs, Inc.

     500  
  

 

 

 

Total

   $ 129,716  
  

 

 

 

 

(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.

Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense amounted to approximately $510,000 and $961,000 during the three and six months ended June 30, 2018. Total rent expense amounted to approximately $449,000 and $893,000 during the three and six months ended June 30, 2017.

 

S-147


Table of Contents
Index to Financial Statements

The Company’s contractual obligations as of June 30, 2018 include:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less
than 1
year
     1-3 years      3-5 years      After 5
years
 

Borrowings(2)(3)(5)

   $ 818,121      $ 72,288      $ 97,073      $ 490,250      $ 158,510  

Operating Lease Obligations(4)

     16,655        2,352        5,614        5,868        2,821  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 834,776      $ 74,640      $ 102,687      $ 496,118      $ 161,331  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to the Company’s portfolio companies.

(2)

Includes $190.2 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, $31.1 million of the 2021 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes and $58.3 million under the Union Credit Facility as of June 30, 2018.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to the Company’s consolidated financial statements.

(4)

Facility leases and licenses.

(5)

Reflects the Company’s intention to repay the remaining outstanding debentures in HT II in Q3 2018. See “Note 12—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. 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.

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

 

S-148


Table of Contents
Index to Financial Statements

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.

12. Subsequent Events

Distribution Declaration

On July 25, 2018 the Board of Directors declared a cash distribution of $0.31 per share to be paid on August 20, 2018 to stockholders of record as of August 13, 2018. This distribution represents the Company’s fifty-second consecutive distribution since the Company’s IPO, bringing the total cumulative distribution to date to $14.64 per share.

ATM Equity Program Issuances

Subsequent to June 30, 2018 and as of July 30, 2018, the Company sold 1.6 million shares of common stock for total accumulated net proceeds of approximately $19.8 million, including $150,000 of offering expenses, under the Equity Distribution Agreement with JMP. As of July 30, 2018, approximately 6.2 million shares remain available for issuance and sale under the Equity Distribution Agreement.

Hercules Technology II Debentures Full Redemption

On July 13, 2018, the Company completed repayment of the $41.2 million of outstanding HT II debentures.

Wells Facility

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.

 

S-149


Table of Contents
Index to Financial Statements

Portfolio Company Developments

As of July 30, 2018, the Company held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both 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 initial public offerings will do so in a timely manner or at all. Subsequent to June 30, 2018 and as of July 30, 2018, there were no announced or completed liquidity events.

 

S-150


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

For the Six Months Ended June 30, 2018

(in thousands)

 

Portfolio Company

 

Investment(1)

  Amount of
Interest
Credited to
Income(2)
    Realized
Gain (Loss)
    As of
December 31,
2017
Fair Value
    Gross
Additions(3)
    Gross
Reductions(4)
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    As of
June 30,
2018
Fair Value
 

Control Investments

               

Majority Owned Control Investments

               

Achilles Technology Management Co II, Inc.

  Common Stock   $ —       $ (2,900   $ 242     $ —       $ (3,100   $ 2,858     $ —    

Gibraltar Business Capital, LLC(8)

  Senior Debt     501       —         —         9,809       —         —         9,809  
  Preferred Stock     —         —         —         25,896       —         —         25,896  
  Common Stock     —         —         —         1,884       —         —         1,884  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Majority Owned Control Investments

    $ 501     $ (2,900   $ 242     $ 37,589     $ (3,100   $ 2,858     $ 37,589  

Other Control Investments

               

Second Time Around (Simplify Holdings, LLC)(7)

  Senior Debt   $ —       $ (1,743   $ —       $ —       $ (1,781   $ 1,781     $ —    

Tectura Corporation(5)

  Senior Debt     926       335       19,219       645       (335     (402     19,127  
  Preferred Stock     —         —         —         —         —         —         —    
  Common Stock     —         —         —         900       —         (900     —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Control Investments

    $ 926     $ (1,408   $ 19,219     $ 1,545     $ (2,116   $ 479     $ 19,127  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 1,427     $ (4,308   $ 19,461     $ 39,134     $ (5,216   $ 3,337     $ 56,716  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

               

Optiscan BioMedical, Corp.

  Preferred Warrants   $ —       $ (680   $ 86     $ —       $ (680   $ 827     $ 233  
  Preferred Stock     —         —         6,205       1,301       —         (412     7,094  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Senior Debt     1,061       —         13,604       364       (3,500     (86     10,382  
  Common Stock     —         —         11,400       —         —         (404     10,996  

Stion Corporation

  Preferred Warrants     —         (1,378     —         —         (1,378     1,378       —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 1,061     $ (2,058   $ 31,295     $ 1,665     $ (5,558   $ 1,303     $ 28,705  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control and Affiliate Investments

    $ 2,488     $ (6,366   $ 50,756     $ 40,799     $ (10,774   $ 4,640     $ 85,421  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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

 

S-151


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of June 30, 2018

(in thousands)

 

Portfolio Company

 

Industry

  Type of
Investment(1)
  Maturity
Date
    Interest Rate
and Floor
  Principal
or Shares
    Cost     Value(2)  

Control Investments

 

Majority Owned Control Investments

 

Gibraltar Business Capital, LLC

  Diversified Financial Services   Unsecured Debt     March 2023     Interest rate FIXED
14.50%
  $ 10,000     $ 9,809     $ 9,809  
  Diversified Financial Services   Preferred Stock         10,602,752       25,896       25,896  
  Diversified Financial Services   Common Stock         830,000       1,884       1,884  
           

 

 

   

 

 

 

Total Gibraltar Business Capital, LLC

 

  $ 37,589     $ 37,589  
 

 

 

   

 

 

 

Total Majority Owned Control Investments (3.90%)*

 

  $ 37,589     $ 37,589  

Other Control Investments

 

Tectura Corporation

  Internet Consumer & Business Services   Senior Secured Debt     June 2021     Interest rate FIXED
6.00%,

PIK Interest 3.00%

  $ 20,608       20,608       19,127  
  Internet Consumer & Business Services   Senior Secured Debt     June 2021     PIK Interest 8.00%   $ 10,680       240       —    
  Internet Consumer & Business Services   Preferred Series BB
Equity
        1,000,000       —         —    
  Internet Consumer & Business Services   Common Stock         414,994,863       900       —    
           

 

 

   

 

 

 

Total Tectura Corporation

 

    21,748       19,127  
 

 

 

   

 

 

 

Total Other Control Investments (1.98%)*

 

  $ 21,748     $ 19,127  
 

 

 

   

 

 

 

Total Control Investments (5.89%)*

 

  $ 59,337     $ 56,716  
 

 

 

   

 

 

 

Affiliate Investments

 

Optiscan BioMedical, Corp.

  Medical Devices & Equipment   Preferred Series B
Equity
        6,185,567     $ 3,000     $ 411  
  Medical Devices & Equipment   Preferred Series C
Equity
        1,927,309       655       119  
  Medical Devices & Equipment   Preferred Series D
Equity
        55,103,923       5,257       3,721  
  Medical Devices & Equipment   Preferred Series E
Equity
        31,199,131       2,609       2,843  
  Medical Devices & Equipment   Preferred Series E
Warrants
        7,442,491       572       233  
           

 

 

   

 

 

 

Total Optiscan BioMedical, Corp.

 

    12,093       7,327  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

 

Sustainable and Renewable Technology

 

Senior Secured Debt

 

 

August 2019

 

 

Interest rate PRIME +
8.70% or Floor rate
of 12.95%, 4.50%
Exit Fee

  $ 10,500       10,468       10,382  
  Sustainable and Renewable Technology   Common Stock         288       61,502       10,996  
           

 

 

   

 

 

 

Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

 

  $ 71,970     $ 21,378  
 

 

 

   

 

 

 

Total Affiliate Investments (2.98%)*

 

  $ 84,063     $ 28,705  
 

 

 

   

 

 

 

Total Control and Affiliate Investments (8.86%)*

 

  $ 143,400     $ 85,421  
 

 

 

   

 

 

 

 

*

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.

 

S-152


Table of Contents
Index to Financial Statements

$750,000,000

 

 

LOGO

Common Stock

Preferred Stock

Warrants

Subscription Rights

Debt Securities

This prospectus relates to the offer, from time to time, in one or more offerings or series, up to $750,000,000 of shares of our common stock, par value $0.001 per share, preferred stock, par value $0.001 per share, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities, which we refer to, collectively, as the “securities.” The preferred stock, debt securities, subscription rights and warrants offered hereby may be convertible or exchangeable into shares of our common stock. We may sell our securities through underwriters or dealers, “at-the-market” to or through a market maker into an existing trading market or otherwise directly to one or more purchasers, including existing stockholders in a rights offering, or through agents or through a combination of methods of sale, including auctions. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.

In the event we offer common stock, the offering price per share will not be less than the net asset value per share of our common stock at the time we make the offering except (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the holders of the majority of our voting securities and approval of our Board of Directors, or (3) under such circumstances as the Securities and Exchange Commission may permit. See “Risk Factors” for more information.

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 primarily finance privately-held companies backed by leading venture capital and private equity firms and publicly-traded companies that lack access to public capital or are sensitive to equity ownership dilution. We source our investments through our principal office located in Palo Alto, CA, as well as through additional offices in Boston, MA, New York, NY, Washington, DC, Hartford, CT 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. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. 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 invest primarily in private companies but also have investments in public companies.

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. We are an internally-managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended.

Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol “HTGC.” On May 29, 2018, the last reported sale price of a share of our common stock on the NYSE, was $12.40. The net asset value per share of our common stock at March 31, 2018 (the last date prior to the date of this prospectus on which we determined net asset value) was $9.72.

 

 

An investment in our securities may be speculative and involves risks including a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. See “Risk Factors” beginning on page 14 to read about risks that you should consider before investing in our securities, including the risk of leverage.

Please read this prospectus before investing and keep it for future reference. It contains important information about us that a prospective investor ought to know before investing in our securities. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. The information is available free of charge by contacting us at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301 or by telephone calling collect at (650) 289-3060 or on our website at www.htgc.com. The SEC also maintains a website at www.sec.gov that contains such information.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus may not be used to consummate sales of any securities unless accompanied by a prospectus supplement.

The date of this prospectus is June 5, 2018


Table of Contents
Index to Financial Statements

You should rely only on the information contained in this prospectus. We have not authorized any dealer, salesperson or other person to provide you with different information or to make representations as to matters not stated in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is not an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information in this prospectus is accurate only as of its date, and under no circumstances should the delivery of this prospectus or the sale of any securities imply that the information in this prospectus is accurate as of any later date or that the affairs of Hercules Capital, Inc. have not changed since the date hereof. This prospectus will be updated to reflect material changes.

 

 

TABLE OF CONTENTS

 

     Page  

Summary

     1  

Fees and Expenses

     10  

Selected Consolidated Financial Data

     12  

Risk Factors

     14  

Forward-Looking Statements

     63  

Use of Proceeds

     65  

Price Range of Common Stock and Distributions

     66  

Ratio of Earnings to Fixed Charges

     69  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Business

     113  

Portfolio Companies

     126  

Senior Securities

     149  

Management

     152  

Corporate Governance

     164  

Executive Compensation

     170  

Control Persons and Principal Stockholders

     192  

Certain Relationships and Related Transactions

     194  

Certain United States Federal Income Tax Considerations

     195  

Regulation

     205  

Determination of Net Asset Value

     211  

Sales of Common Stock Below Net Asset Value

     215  

Dividend Reinvestment Plan

     220  

Description of Capital Stock

     221  

Description of Our Preferred Stock

     228  

Description of Our Subscription Rights

     230  

Description of Warrants

     232  

Description of Our Debt Securities

     234  

Plan of Distribution

     247  

Brokerage Allocation and Other Practices

     249  

Custodian, Transfer and Dividend Paying Agent and Registrar

     249  

Legal Matters

     249  

Experts

     249  

Available Information

     250  

Index to Financial Statements

     F-1  

 

 

Hercules Capital, Inc., our logo and other trademarks of Hercules Capital, Inc. mentioned in this prospectus are the property of Hercules Capital, Inc. All other trademarks or trade names referred to in this prospectus are the property of their respective owners.


Table of Contents
Index to Financial Statements

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission using the “shelf” registration process. Under the shelf registration process, which constitutes a delayed offering in reliance on Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), we may offer, from time to time, up to $750,000,000 of our common stock, preferred stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities on the terms to be determined at the time of the offering. We may sell our securities through underwriters or dealers, “at-the-market” to or through a market maker, into an existing trading market or otherwise directly to one or more purchasers, including existing stockholders in a rights offering, or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. Please carefully read this prospectus and any such supplements together with the additional information described under “Available Information” in the “Summary” and “Risk Factors” sections before you make an investment decision.

A prospectus supplement may also add to, update or change information contained in this prospectus.


Table of Contents
Index to Financial Statements

SUMMARY

This summary highlights some of the information in this prospectus and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus and the documents that are referenced in this prospectus, together with any accompanying supplements. In this prospectus, unless the context otherwise requires, 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.

Our Company

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. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments. We are an internally-managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. 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.

As of March 31, 2018, our total assets were approximately $1.6 billion, of which our investments comprised $1.5 billion at fair value and $1.6 billion at cost. Since inception through March 31, 2018, we have made debt and equity commitments of more than $7.6 billion to our portfolio companies.

We also make investments in qualifying small businesses through our two wholly-owned small business investment companies, or SBICs. Our SBIC subsidiaries, Hercules Technology II, L.P., or HT II, and Hercules Technology III, L.P., or HT III, hold approximately $113.1 million and $285.8 million in assets, respectively, and accounted for approximately 5.7% and 14.4% of our total assets, respectively, prior to consolidation at March 31, 2018. At March 31, 2018, we have issued $190.2 million in Small Business Administration, or SBA, guaranteed debentures in our SBIC subsidiaries. See “Regulation—Small Business Administration Regulations” for additional information regarding our SBIC subsidiaries.

As of March 31, 2018, our investment professionals, including Manuel A. Henriquez, our co-founder, Chairman, President and Chief Executive Officer, are currently comprised of 33 professionals who have, on average, more than 15 years of experience in venture capital, structured finance, commercial lending or acquisition finance with the types of technology-related companies that we are targeting. We believe that we can leverage the experience and relationships of our management team to successfully identify attractive investment opportunities, underwrite prospective portfolio companies and structure customized financing solutions.



 

1


Table of Contents
Index to Financial Statements

The following chart shows the ownership structure and relationship of certain entities with us.

 

 

LOGO

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



 

2


Table of Contents
Index to Financial Statements

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.

Our Business Strategy

Our strategy to achieve our investment objective includes the following key elements:

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 15 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 420 technology-related companies, representing more than $7.6 billion in commitments from inception to March 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.



 

3


Table of Contents
Index to Financial Statements

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.

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



 

4


Table of Contents
Index to Financial Statements

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 (“SQL”) database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance. As of March 31, 2018, our proprietary SQL-based database system included approximately 48,810 technology-related companies and approximately 10,400 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.

Dividend Reinvestment Plan

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. See “Dividend Reinvestment Plan.” Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.

Taxation

Effective January 1, 2006, we elected to be treated for tax purposes as a RIC under the Code. As a RIC, we generally will not be subject to corporate-level federal income taxes on any ordinary income or capital gains that we distribute as dividends for U.S. federal income tax purposes to our stockholders, which allows us to reduce or eliminate our corporate level tax. See “Certain United States Federal Income Tax Considerations.” To maintain our ability to be subject to tax as a RIC, we must meet specified source-of-income and asset diversification requirements and distribute each taxable year dividends for U.S. federal income tax purposes of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of assets legally available for distribution. There is no assurance that we will meet these tests and be able to maintain our RIC status. If we do not qualify as a RIC, we would be subject to tax as a C corporation.

Assuming we continue to be treated as a RIC under the Code, distributions from our taxable earnings (including net realized securities gains) paid to our U.S. resident shareholders generally will be subject to U.S. federal income tax at rates applicable to ordinary income or capital gains, as appropriate, and all or a portion of such distributions paid to qualifying shareholders not resident in the U.S. (i.e., foreign shareholders) generally would not be subject U.S. nonresident withholding tax. See “Certain United States Federal Income Tax Considerations.”

Use of Proceeds

We intend to use the net proceeds from selling our securities to fund investments in debt and equity securities in accordance with our investment objectives, to make acquisitions, to retire certain debt obligations and for other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.



 

5


Table of Contents
Index to Financial Statements

Leverage

We borrow funds to make additional investments, and we have granted, and may in the future grant, a security interest in our assets to a lender in connection with any such borrowings, including any borrowings by any of our subsidiaries. We use this practice, which is known as “leverage,” to attempt to increase returns to our common stockholders. However, leverage involves significant risks. See “Risk Factors.” With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150%, subject to certain approval and disclosure requirements) after such borrowing. We received an exemptive order from the Securities and Exchange Commission, or SEC, that allows us to exclude all SBA leverage from our asset coverage ratio. The amount of leverage that we employ will depend on our assessment of market and other factors at the time of any proposed borrowing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity, and Capital Resources” for additional information related to our outstanding debt.

Distributions

As a RIC, we are required to distribute dividends for U.S. federal income tax purposes each taxable year to our stockholders of an amount at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We are not subject to corporate level income taxation on income we timely distribute as dividends for U.S. federal income tax purposes to our stockholders. See “Certain United States Federal Income Tax Considerations.” We pay regular quarterly distributions based upon an estimate of annual taxable income available for distribution to stockholders as well as the amount of any taxable income carried over from the prior taxable year for distribution in the current taxable year.

Principal Risk Factors

Investing in our common stock may be speculative and involves certain risks relating to our structure and our investment objective that you should consider before deciding whether to invest. In addition, we expect that our portfolio will continue to consist primarily of securities issued by privately-held technology-related companies, which generally require additional capital to become profitable. These investments may involve a high degree of business and financial risk, and they are generally illiquid. Our portfolio companies typically will require additional outside capital beyond our investment in order to succeed or to fully repay the amounts owed to us. A large number of entities compete for the same kind of investment opportunities as we seek.

We borrow funds to make our investments in portfolio companies. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings magnify the potential for gain and loss on amounts invested and, therefore increase the risks associated with investing in our common stock. Also, we are subject to certain risks associated with valuing our portfolio, changing interest rates, accessing additional capital, fluctuating quarterly results, and operating in a regulated environment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding whether to invest in our securities.

Certain Anti-Takeover Provisions

Our charter and bylaws, as well as certain statutes and regulations, contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for our company. This could delay or prevent a transaction that could give our stockholders the opportunity to realize a premium over the price for their securities.



 

6


Table of Contents
Index to Financial Statements

Recent Developments

Distribution Declaration

On April 25, 2018, our board of directors (the “Board of Directors”) declared a cash distribution of $0.31 per share to be paid on May 21, 2018 to stockholders of record as of May 14, 2018. This distribution represented our fifty-first consecutive distribution since our initial public offering, bringing the total cumulative distribution to date to $14.33 per share.

Closed and Pending Commitments

As of May 29, 2018, we have:

 

   

Closed debt and equity commitments of approximately $303.8 million to new and existing portfolio companies and funded approximately $219.2 million subsequent to March 31, 2018.

 

   

Pending commitments (signed non-binding term sheets) of approximately $155.0 million.

The table below summarizes our year-to-date closed and pending commitments as follows:

 

Closed Commitments and Pending Commitments (in millions)

  

January 1—March 31, 2018 Closed Commitments

   $ 266.0  

April 1—May 29, 2018 Closed Commitments(a)

   $ 303.8  

Pending Commitments (as of May 29, 2018)(b)

   $ 155.0  
  

 

 

 

Closed and Pending Commitments as of May 29, 2018

   $ 724.8  
  

 

 

 

 

a.

Closed Commitments may include renewals of existing credit facilities. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close.

b.

Not all pending commitments (signed non-binding term sheets) are expected to close and they do not necessarily represent any future cash requirements.

Redemption of 2024 Notes

On February 9, 2018, our Board of Directors approved a redemption of $100.0 million of our outstanding aggregate principal amount of 6.25% notes due 2024 (the “2024 Notes”), which were redeemed on April 2, 2018.

ATM Equity Program Issuances

Subsequent to March 31, 2018 and as of May 29, 2018, we sold 1,542,000 shares of common stock for total accumulated net proceeds of approximately $18.8 million, including $171,000 of offering expenses, under the at-the-market, or ATM, equity distribution agreement, dated September 8, 2017, or the Equity Distribution Agreement, with JMP Securities LLC, or JMP. As of May 29, 2018, approximately 8.4 million shares remain available for issuance and sale under the Equity Distribution Agreement.

2025 Notes

On April 26, 2018, we issued $75.0 million in aggregate principal amount of 5.25% notes due 2025 (the “2025 Notes”). The 2025 Notes were issued pursuant to the Fifth Supplemental Indenture, dated April 26, 2018 (the “2025 Notes Indenture”), between us and U.S. Bank, National Association, as trustee, to the indenture, dated April 17, 2012, between us and U.S. Bank, National Association, as trustee (the “Base Indenture”). The sale of the 2025 Notes generated net proceeds of approximately $73.0 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $2.0 million.



 

7


Table of Contents
Index to Financial Statements

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.

The 2025 Notes will be our direct unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by Hercules Capital, Inc.

We 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.

The 2025 Notes are listed on the NYSE, and trade on the NYSE under the symbol “HCXZ.”

Portfolio Company Developments

As of May 29, 2018, the Company held warrants or equity positions in three companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. All 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 initial public offerings will do so in a timely manner or at all. In addition, subsequent to March 31, 2018, the following companies announced or completed liquidity events:

 

  1.

In April 2018, our portfolio company, DocuSign, Inc. completed its initial public offering.

 

  2.

In May 2018, our portfolio company RazorGator Inc., an online ticket reselling platform for sports, theater and concert tickets, and vacation packages for sporting events, was acquired by TickPick, an online ticket marketplace to buy, bid on and sell tickets on sports, concerts and other live events. Terms of the transaction were not disclosed.

 

  3.

In May 2018, our portfolio company FanDuel, a leading U.S. daily fantasy sports operator, announced they had entered into a definitive agreement with Paddy Power Betfair plc, an international, multi-channel sports betting and gaming operator, to combine Paddy Power’s U.S. business (Betfair US) with FanDuel. Under the agreement, Paddy Power will contribute its existing U.S. assets along with $158.0 million of cash. The cash contribution will be used to pay down existing FanDuel debt and fund working capital of the combined business.

 

  4.

In May 2018, our portfolio company PerfectServe, Inc., healthcare’s most comprehensive and secure care team collaboration platform, was acquired by K1 Investment Management LLC, a private equity firm investing in high-growth private companies across North America. Terms of the acquisition were not disclosed.

General Information

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 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 SEC. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.



 

8


Table of Contents
Index to Financial Statements

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. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. 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.



 

9


Table of Contents
Index to Financial Statements

FEES AND EXPENSES

The following table is intended to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The footnotes to the fee table state which items are estimates. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Hercules Capital, Inc.

 

Stockholder Transaction Expenses (as a percentage of the public offering price):

  

Sales load (as a percentage of offering price)(1)

     —  

Offering expenses

     —   %(2) 

Dividend reinvestment plan fees

     —   %(3) 
  

 

 

 

Total stockholder transaction expenses (as a percentage of the public offering price)

     —   %(4) 
  

 

 

 

Annual Expenses (as a percentage of net assets attributable to common stock):(5)

  

Operating expenses

     5.68 %(6)(7) 

Interest and fees paid in connection with borrowed funds

     4.96 %(8) 
  

 

 

 

Total annual expenses

     10.64 %(9) 
  

 

 

 

 

(1)

In the event that our securities are sold to or through underwriters, a corresponding prospectus supplement to this prospectus will disclose the applicable sales load.

(2)

In the event that we conduct an offering of our securities, a corresponding prospectus supplement to this prospectus will disclose the estimated offering expenses.

(3)

The expenses associated with the administration of our dividend reinvestment plan are included in “Operating expenses.” We pay all brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see “Dividend Reinvestment Plan.”

(4)

Total stockholder transaction expenses may include sales load and will be disclosed in a future prospectus supplement, if any.

(5)

“Net assets attributable to common stock” equals the weighted average net assets for the three-months ended March 31, 2018, which is approximately $850.9 million.

(6)

“Operating expenses” represents our estimated operating expenses by annualizing or actual operating expenses incurred for the three-months ended March 31, 2018, including all fees and expenses of our consolidated subsidiaries and excluding interests and fees on indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Management.”

(7)

We do not have an investment adviser and are internally managed by our executive officers under the supervision of our Board of Directors. As a result, we do not pay investment advisory fees, but instead we pay the operating costs associated with employing investment management professionals.

(8)

“Interest and fees paid in connection with borrowed funds” represents our estimated interest, fees and credit facility expenses by annualizing our actual interest, fees and credit facility expenses incurred for the three-months ended March 31, 2018, including our Wells Facility, Union Bank Facility, the 2022 Notes, the 2024 Notes, the 2022 Convertible Notes, the 2021 Asset-Backed Notes and the SBA debentures, each of which is defined herein.

(9)

“Total annual expenses” is the sum of “operating expenses,” and “interest and fees paid in connection with borrowed funds.” “Total annual expenses” is presented as a percentage of weighted average net assets attributable to common stockholders because the holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) bear all of our fees and expenses, including the fees and expenses of our wholly-owned consolidated subsidiaries, all of which are included in this fee table presentation.

 

10


Table of Contents
Index to Financial Statements

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. These amounts are based upon our payment of annual operating expenses at the levels set forth in the table above and assume no additional leverage.

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 common stock investment, assuming a 5% annual return

   $ 103      $ 294      $ 464      $ 813  

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or lesser than those shown. Moreover, while the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or lesser than 5%. In addition, while the example assumes reinvestment of all distributions at net asset value (“NAV”), participants in our dividend reinvestment plan may receive shares valued at the market price in effect at that time. This price may be at, above or below NAV. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.

 

11


Table of Contents
Index to Financial Statements

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Senior Securities” and the consolidated financial statements and related notes included elsewhere herein. The selected balance sheet data as of the end of fiscal year 2017, 2016, 2015, 2014, and 2013 and the financial statement of operations data for fiscal years 2017, 2016, 2015, 2014, and 2013 has been derived from our audited financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, but not all of which are presented in this Form N-2.” The historical data are not necessarily indicative of results to be expected for any future period. The selected financial and other data for the three-months ended March 31, 2018 and other quarterly financial information is derived from our unaudited financial statements, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results as of and for the three-months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

    For the Three-
Months Ended
March 31,

(unaudited)
    For the Year Ended December 31,  

(in thousands, except per share amounts)

  2018     2017     2017     2016     2015     2014     2013  

Investment income:

             

Interest

  $ 42,981     $ 42,861     $ 172,196     $ 158,727     $ 140,266     $ 126,618     $ 123,671  

Fees

    5,719       3,504       18,684       16,324       16,866       17,047       16,042  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    48,700       46,365       190,880       175,051       157,132       143,665       139,713  

Operating expenses:

             

Interest

    9,386       9,607       37,857       32,016       30,834       28,041       30,334  

Loan fees

    1,175       2,838       8,728       5,042       6,055       5,919       4,807  

General and administrative:

             

Legal expenses

    576       726       4,572       4,823       3,079       1,366       1,440  

Other expenses

    3,433       3,338       11,533       11,283       13,579       8,843       7,914  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

    4,009       4,064       16,105       16,106       16,658       10,209       9,354  

Employee Compensation:

             

Compensation and benefits

    5,758       5,345       24,555       22,500       20,713       16,604       16,179  

Stock-based compensation

    2,309       1,833       7,191       7,043       9,370       9,561       5,974  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

    8,067       7,178       31,746       29,543       30,083       26,165       22,153  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,637       23,687       94,436       82,707       83,630       70,334       66,648  

Other income (loss)

    —       —         —       8,000       (1     (1,581     —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    26,063       22,678       96,444       100,344       73,501       71,750       73,065  

Net realized gain (loss) on investments

    (4,920     3,237       (26,711     4,576       5,147       20,112       14,836  

Net change in unrealized appreciation (depreciation) on investments

    (15,197     (31,503     9,265       (36,217     (35,732     (20,674     11,545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

    (20,117     (28,266     (17,446     (31,641     (30,585     (562     26,381  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 5,946     $ (5,588   $ 78,998     $ 68,703     $ 42,916     $ 71,188     $ 99,446  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share (basic)

  $ 0.07     $ (0.07   $ 0.95     $ 0.91     $ 0.60     $ 1.12     $ 1.67  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

  $ 0.31     $ 0.31     $ 1.24     $ 1.24     $ 1.24     $ 1.24     $ 1.11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents
Index to Financial Statements
    For the Three- Months
Ended March 31,
(unaudited)
    For the Year Ended December 31,  

(in thousands, except per share amounts)

  2018     2017     2017     2016     2015     2014     2013  

Balance sheet data:

             

Investments, at value

  $ 1,483,578     $ 1,406,267     $ 1,542,214     $ 1,423,942     $ 1,200,638     $ 1,020,737     $ 910,295  

Cash and cash equivalents

    118,228       148,140       91,309       13,044       95,196       227,116       268,368  

Total assets

    1,619,712       1,586,248       1,654,715       1,464,204       1,334,761       1,299,223       1,221,715  

Total liabilities

    790,981       778,352       813,748       676,260       617,627       640,359       571,708  

Total net assets

    828,731       807,896       840,967       787,944       717,134       658,864       650,007  

Other Data:

             

Total return(3)

    (5.44 %)      9.47     1.47     26.87     (9.70 %)      (1.75 %)      58.49

Total debt investments, at value

    1,336,326       1,311,925       1,415,984       1,328,803       1,110,209       923,906       821,988  

Total warrant investments, at value

    33,253       32,011       36,869       27,485       22,987       25,098       35,637  

Total equity investments, at value

    113,999       62,331       89,361       67,654       67,442       71,733       52,670  

Unfunded Commitments(2)

    51,878       75,865       73,604       59,683       75,402       147,689       69,091  

Net asset value per share(1)

  $ 9.72     $ 9.76     $ 9.96     $ 9.90     $ 9.94     $ 10.18     $ 10.51  

 

(1)

Based on common shares outstanding at period end.

(2)

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.

(3)

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.

The following tables set forth certain quarterly financial information for each of the eight quarters up to and ending December 31, 2017 and the quarter ending March 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 future quarter.

 

(in thousands, except per share data)

   Quarter Ended
March 31,
2018
 

Total investment income

   $ 48,700  

Net investment income

     26,063  

Net increase (decrease) in net assets resulting from operations

     5,946  

Change in net assets resulting from operations per common share (basic)

   $ 0.07  

 

     Quarter Ended  

(in thousands, except per share data)

   March 31,
2017
    June 30,
2017
     September 30,
2017
     December 31,
2017
 

Total investment income

   $ 46,365     $ 48,452      $ 45,865      $ 50,198  

Net investment income

     22,678       25,275        23,973        24,518  

Net increase (decrease) in net assets resulting from operations

     (5,588     33,149        33,072        18,365  

Change in net assets resulting from operations per common share (basic)

   $ (0.07   $ 0.40      $ 0.40      $ 0.22  

 

     Quarter Ended  
     March 31,
2016
     June 30,
2016
     September 30,
2016
     December 31,
2016
 

Total investment income

   $ 38,939      $ 43,538      $ 45,102      $ 47,472  

Net investment income

     20,097        23,354        23,776        33,117  

Net increase in net assets resulting from operations

     14,295        9,475        30,812        14,121  

Change in net assets resulting from operations per common share (basic)

   $ 0.20      $ 0.13      $ 0.41      $ 0.18  

 

13


Table of Contents
Index to Financial Statements

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 prospectus, including our financial statements and the related notes and the schedules and exhibits to this prospectus. 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. 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.

 

14


Table of Contents
Index to Financial Statements

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.

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

 

15


Table of Contents
Index to Financial Statements

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.

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 200% (or 150%, subject to certain approval and 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 March 31, 2018, portfolio investments, whose fair value is determined in good faith by the Board of Directors, were approximately 91.6% of our total assets. We expect our investments to continue to consist

 

16


Table of Contents
Index to Financial Statements

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 original issue discount, or OID, and payment-in-kind, or 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 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 Credit Facilities, our 2022 Notes, our 2024 Notes, our 2025 Notes, our 2021 Asset-Backed Notes, and our 2022 Convertible Notes (as each term is defined herein) 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 March 31, 2018, we had no borrowings outstanding under the $120.0 million revolving senior secured credit facility with Wells Fargo Capital Finance, LLC (the “Wells Facility”) and the $75.0 million revolving senior secured credit facility with MUFG Union Bank, N.A. (the “Union Bank Facility,” and together with the Wells Facility, the “Credit Facilities”). In addition, as of March 31, 2018, we had approximately $190.2 million of indebtedness outstanding incurred by our SBIC subsidiaries, approximately $150.0 million in aggregate principal amount of 4.625% notes due 2022 (the “2022 Notes”), approximately $183.5 million in aggregate

 

17


Table of Contents
Index to Financial Statements

principal amount of 2024 Notes, approximately $33.6 million in aggregate principal amount of fixed rate asset-backed notes (the “2021 Asset-Backed Notes”) in connection with our $237.4 million debt securitization (the “2014 Debt Securitization”) and approximately $230.0 million in aggregate principal amount of 4.375% convertible notes due 2022 (the “2022 Convertible Notes”). Additionally, subsequent to March 31, 2018, we had approximately $75.0 million in aggregate principal amount of 2025 Notes.

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.

As a business development company, under the 1940 Act, generally, we are 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). In addition, we may not be permitted to declare any cash 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 200% after deducting the amount of such distribution or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions. The Small Business Credit Availability Act, 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). As a result of this new law, we may be able to incur additional indebtedness subject to relevant approval and 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.”

As of March 31, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 238.2% 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 204.8% when including all SBA leverage.

Based on assumed leverage equal to 95.0% of our net assets as of March 31, 2018, our investment portfolio would have been required to experience an annual return of at least 2.6% 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 various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.

 

     Annual Return on Our Portfolio
(Net of Expenses)
 
     -10%     -5%     0%     5%     10%  

Corresponding return to stockholder(1)

     (24.59 %)      (14.82 %)      (5.05 %)      4.72     14.50

 

(1)

Assumes $1.6 billion in total assets, $787.3 million in debt outstanding, $828.7 million in stockholders’ equity, and an average cost of funds of 5.3%, which is the approximate average cost of borrowed funds, including our SBA debentures, 2022 Notes, 2024 Notes, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities for the period ended March 31, 2018. Actual interest payments may be different.

 

18


Table of Contents
Index to Financial Statements

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.

In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 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, 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, 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 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 “Management’s Discussion and Analysis of Financial Condition of Results of Operations—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.

 

19


Table of Contents
Index to Financial Statements

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.

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.

 

20


Table of Contents
Index to Financial Statements

The Wells Facility and the Union Bank Facility mature in August 2019 and May 2020, 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 March 31, 2018, we had two available secured credit facilities, the Wells Facility and the Union Bank Facility, which mature in August 2019 and May 2020, 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 2014 Debt Securitization and our equity interest in the 2014 Securitization Issuer.

On November 13, 2014, in connection with the 2014 Debt Securitization and the offering of the 2021 Asset-Backed Notes by Hercules Capital Funding Trust 2014-1 (the “2014 Securitization Issuer”), we sold and/or contributed to Hercules Capital Funding 2014-1 LLC, as trust depositor (the “2014 Trust Depositor”), certain senior loans made to certain of our portfolio companies (the “2014 Loans”), which the 2014 Trust Depositor in turn sold and/or contributed to the 2014 Securitization Issuer in exchange for 100% of the equity interest in the 2014 Securitization Issuer, cash proceeds and other consideration. Following these transfers, the 2014 Securitization Issuer, and not the 2014 Trust Depositor or us, held all of the ownership interest in the 2014 Loans.

As a result of the 2014 Debt Securitization, we hold, indirectly through the 2014 Trust Depositor, 100% of the equity interests in the 2014 Securitization Issuer. As a result, we consolidate the financial statements of the 2014 Trust Depositor and the 2014 Securitization Issuer, as well as our other subsidiaries, in our consolidated financial statements. Because the 2014 Trust Depositor and the 2014 Securitization Issuer is disregarded as an entity separate from its owners for U.S. federal income tax purposes, the sale or contribution by us to the 2014 Trust Depositor, and by the 2014 Trust Depositor to the 2014 Securitization Issuer, as applicable, did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service (“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 the 2014 Securitization Issuer to be treated as a disregarded entity for U.S. federal income tax purposes would constitute an event of default pursuant to the indenture under the 2014 Debt Securitization, upon which the trustee under the 2014 Debt Securitization (the “2014 Trustee”), may and will at the direction of a supermajority of the holders of the 2021 Asset-Backed Notes (the “2021 Noteholders”), declare the 2021 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 2021 Asset-Backed Notes, or under the applicable indenture, enforce any judgment obtained, and collect from the 2014 Securitization Issuer and any other obligor upon the 2021 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 2014 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 2014 Trustee and the 2021 Noteholders; or (iv) sell the property of the 2014 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 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 2014 Debt Securitization 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 the 2014 Debt Securitization. An event of

 

21


Table of Contents
Index to Financial Statements

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 2014 Securitization Issuer.

Apart from fees payable to us in connection with our role as servicer of the 2014 Loans and the reimbursement of related amounts under the documents governing the 2014 Debt Securitization, we receive cash in connection with the 2014 Debt Securitization only to the extent that the 2014 Trust Depositor receives payments in respect of its equity interests in the 2014 Securitization Issuer. The respective holders of the equity interests in the 2014 Securitization Issuer are the residual claimants on distributions, if any, made by the 2014 Securitization Issuer after the respective 2021 Noteholders and other claimants have been paid in full on each payment date or upon maturity of the 2021 Asset-Backed Notes, subject to the priority of payments under the 2014 Debt Securitization documents governing the 2014 Debt Securitization. To the extent that the value of a 2014 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 the 2014 Securitization Issuer to make cash distributions in respect of the 2014 Trust Depositor’s equity interests would be negatively affected and consequently, the value of the equity interests in the 2014 Securitization Issuer would also be reduced. In the event that we fail to receive cash indirectly from the 2014 Securitization Issuer, 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 2021 Noteholders may not be aligned with our interests.

The 2021 Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holder of the equity interests in the 2014 Securitization Issuer, as residual claimants in respect of distributions, if any, made by the 2014 Securitization Issuer. As such, there are circumstances in which the interests of the 2021 Noteholders may not be aligned with the interests of holders of the equity interests in the 2014 Securitization Issuer. For example, under the terms of the documents governing the 2014 Debt Securitization, the 2021 Noteholders have the right to receive payments of principal and interest prior to holders of the equity interests.

For as long as the 2021 Asset-Backed Notes remain outstanding, the respective 2021 Noteholders have the right to act in certain circumstances with respect to the 2014 Loans in ways that may benefit their interests but not the interests of the respective holders of the equity interests in the 2014 Securitization Issuer, including by exercising remedies under the documents governing the 2014 Debt Securitization.

If an event of default occurs, the 2021 Noteholders will be entitled to determine the remedies to be exercised, subject to the terms of the documents governing the 2014 Debt Securitization. For example, upon the occurrence of an event of default with respect to the 2021 Asset-Backed Notes, the 2014 Trustee may and will at the direction of the holders of a supermajority of the applicable 2021 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 2014 Securitization Issuer. The 2021 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 2014 Loans or through the proceeds of the sale of the 2014 Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the 2021 Asset-Backed Notes, or to make any distribution to holders of the equity interests in the 2014 Securitization Issuer.

Remedies pursued by the 2021 Noteholders could be adverse to our interests as the indirect holder of the equity interests in the 2014 Securitization Issuer. The 2021 Noteholders have no obligation to consider any

 

22


Table of Contents
Index to Financial Statements

possible adverse effect on such other interests. Thus, there can be no assurance that any remedies pursued by the 2021 Noteholders will be consistent with the best interests of the 2014 Trust Depositor or that we will receive, indirectly through the 2014 Trust Depositor, any payments or distributions upon an acceleration of the 2021 Asset-Backed Notes. Any failure of the 2014 Securitization Issuer 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 2021 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.

Certain events related to the performance of 2014 Loans could lead to the acceleration of principal payments on the 2021 Asset-Backed Notes.

The following constitute rapid amortization events (“Rapid Amortization Events”) under the documents governing the 2014 Debt Securitization: (i) the aggregate outstanding principal balance of delinquent 2014 Loans, and restructured 2014 Loans that would have been delinquent 2014 Loans had such loans not become restructured loans exceeds 10% of the current aggregate outstanding principal balance of the 2014 Loans for a period of three consecutive months; (ii) the aggregate outstanding principal balance of defaulted 2014 Loans exceeds 5% of the initial outstanding principal balance of the 2014 Loans determined as November 13, 2014 for a period of three consecutive months; (iii) the aggregate outstanding principal balance of the 2021 Asset-Backed Notes exceeds the borrowing base for a period of three consecutive months; (iv) the 2014 Securitization Issuer’s pool of 2014 Loans contains 2014 Loans to ten or fewer obligors; and (v) the occurrence of an event of default under the documents governing the 2014 Debt Securitization. After a Rapid Amortization Event has occurred, subject to the priority of payments under the documents governing the 2014 Debt Securitization, principal collections on the 2014 Loans will be used to make accelerated payments of principal on the 2021 Asset-Backed Notes until the principal balance of the 2021 Asset-Back Notes is reduced to zero. Such an event could delay, reduce or eliminate the ability of the 2014 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 2014 Loans transferred in connection with the 2014 Debt Securitization.

As part of the 2014 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 2014 Loan (or participation interest therein) which was sold to the 2014 Securitization Issuer in breach of certain customary representations and warranty made by us or by the 2014 Trust Depositors with respect to such 2014 Loan or the legal structure of the 2014 Debt Securitization. To the extent that there is a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, a 2014 Trustee may, on behalf of the 2014 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 (“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.

 

23


Table of Contents
Index to Financial Statements

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. Under the 1940 Act, we are 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). In addition, we may not be permitted to declare any cash 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 200% after deducting the amount of such distribution or purchase price. Our ability to pay distributions or issue additional senior securities would be restricted if our asset coverage ratio were not at least 200%. The Small Business Credit Availability Act, 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). As a result of this new law, we may be able to incur additional indebtedness subject to relevant approval and 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.”

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.

 

24


Table of Contents
Index to Financial Statements

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 “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 “Regulation.”

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.

 

25


Table of Contents
Index to Financial Statements
   

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

 

26


Table of Contents
Index to Financial Statements

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.

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 “passive foreign investment companies” (“PFICs”) and/or “controlled foreign corporations” (“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 (collectively, “FATCA”) generally requires us to withhold U.S. tax (at a 30% rate) on payments of interest and taxable dividends as well as, effective January 1, 2019, redemption proceeds and certain capital gain dividends made to a foreign financial institution or non-financial

 

27


Table of Contents
Index to Financial Statements

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.

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

 

28


Table of Contents
Index to Financial Statements

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 March 31, 2018, approximately 96.5% of our loans were at floating rates or floating rates with a floor and 3.5% 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.

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 March 31, 2018, we did not engage in any hedging activities.

Recently passed legislation may allow us to incur additional leverage.

Historically, as a business development company, under the 1940 Act generally we are 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 Small Business Credit Availability Act, 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

 

29


Table of Contents
Index to Financial Statements

board of directors and a majority of directors who are not interested persons). As a result of this new law, we may be able to incur additional indebtedness subject to relevant approval and 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.”

Two of our wholly-owned subsidiaries are 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 subsidiaries HT II and HT III are licensed to act as SBICs and are regulated by the SBA. HT II and HT III hold approximately $113.1 million and $285.8 million in assets, respectively, and they accounted for approximately 5.7% and 14.4% of our total assets, respectively, prior to consolidation at March 31, 2018. The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures.

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 either HT II or HT III fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/ or limit HT II or HT III from making new investments. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries.

HT II and HT III were in compliance with the terms of the SBIC’s leverage as of March 31, 2018 as a result of having sufficient capital as defined under the SBA regulations. Compliance with SBA requirements may cause HT II and HT III to forego attractive investment opportunities that are not permitted under SBA regulations. See “Regulation—Small Business Administration Regulations.”

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 $150.0 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 March 31, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries, which is the maximum combined capacity for our SBIC subsidiaries under our existing licenses. 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 subsidiaries as SBICs does not automatically assure that our SBIC subsidiaries will continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding available to SBICs 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 subsidiaries.

 

30


Table of Contents
Index to Financial Statements

The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. HT II and HT III have debentures outstanding that become due starting in March 2019 and September 2020, respectively. Our SBIC subsidiaries will need to generate sufficient cash flow to make required interest payments on the debentures. If our SBIC subsidiaries are unable to meet their financial obligations under the debentures, 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 such debentures as the result of a default by us.

Our wholly-owned SBIC subsidiaries 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 subsidiaries. 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 ability to be subject to tax 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 ability to be subject to tax as a RIC. 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 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.

 

31


Table of Contents
Index to Financial Statements

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 recently enacted 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 new legislation also makes extensive changes to the U.S. international tax system. The impact of this new 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 new 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.

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 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.

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

 

32


Table of Contents
Index to Financial Statements

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

 

33


Table of Contents
Index to Financial Statements

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.

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

 

34


Table of Contents
Index to Financial Statements

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 shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

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, uncertainty regarding the United Kingdom referendum decision to leave the European Union (“Brexit”), continuing signs of deteriorating sovereign debt conditions in Europe and an economic slowdown in China create uncertainty that could lead to further disruptions, instability and weakening consumer, corporate and financial confidence. 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, European sovereign debt, Chinese economic slowdown 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

 

35


Table of Contents
Index to Financial Statements

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 March 31, 2018, we had approximately $51.9 million of unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones.

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 (“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

 

36


Table of Contents
Index to Financial Statements

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 March 31, 2018, approximately 78.1% of the fair value of our portfolio was composed of investments in five industries: 26.5% investments in the software industry, 26.1% investments in the drug discovery & development industry, 12.0% investments in the internet consumer & business services industry, 7.8% investments in the sustainable and renewable technology industry, and 5.7% investments in the drug delivery.

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.

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

 

37


Table of Contents
Index to Financial Statements

investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies March 31, 2018 that represent greater than 5% of our net assets:

 

     March 31, 2018  
(in thousands)    Fair Value      Percentage of
Net Assets
 

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

   $ 60,893        7.3

Axovant Sciences Ltd.

     53,842        6.5

Fuze, Inc.

     50,418        6.1

Emma, Inc.

     47,785        5.8

Snagajob.com, Inc.

     42,572        5.1

 

   

Paratek Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of innovative therapies based upon its expertise in novel tetracycline chemistry

 

   

Axovant Sciences Ltd. is a clinical-stage biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutics for the treatment of dementia.

 

   

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.

 

   

Emma, Inc. is a technology company that offers software to enable organizations to create, send and track email marketing campaigns and online surveys.

 

   

Snagajob.com, Inc. is a technology company that offers an array of services designed to simplify the hourly job recruiting process for both job seekers and employers.

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.

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 initial public offering (“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

 

38


Table of Contents
Index to Financial Statements

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 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.

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.

 

39


Table of Contents
Index to Financial Statements

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.

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’

 

40


Table of Contents
Index to Financial Statements

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 Food and Drug Administration, or 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

 

41


Table of Contents
Index to Financial Statements

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.

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.

 

42


Table of Contents
Index to Financial Statements

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.

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.

 

43


Table of Contents
Index to Financial Statements

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.

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 (“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

 

44


Table of Contents
Index to Financial Statements

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.

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

 

45


Table of Contents
Index to Financial Statements

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.

At March 31, 2018, approximately 85.6% of the Company’s debt investments were in a senior secured first lien position, with 48.0% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 33.3% 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, 1.7% of the Company’s debt investments were senior secured by the equipment of the portfolio company and 2.6% 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, including its intellectual property. Another 13.4% of the Company’s debt investments were secured by a second priority security interest in all of the portfolio company’s assets, other than intellectual property, and 1.0% were unsecured as a result of the terms of the acquisition of two of our portfolio companies.

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

 

46


Table of Contents
Index to Financial Statements

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.

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

 

47


Table of Contents
Index to Financial Statements

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.

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

 

48


Table of Contents
Index to Financial Statements

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 $209.4 million or 14.0% of total investments at March 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.

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.

 

49


Table of Contents
Index to Financial Statements

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.

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

 

50


Table of Contents
Index to Financial Statements

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 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 three-months ended March 31, 2018, we received debt investment early principal repayments and pay down of working capital debt investments of approximately $273.3 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 9.9% of the outstanding value of our investment portfolio as of March 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

 

51


Table of Contents
Index to Financial Statements

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.

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

 

52


Table of Contents
Index to Financial Statements

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.

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.

 

53


Table of Contents
Index to Financial Statements

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 three-months ended March 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.

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

 

54


Table of Contents
Index to Financial Statements

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 or convertible debt 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 the Company 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 the Company 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. Further, on February 9, 2018, our Board of Directors approved a redemption of $100.0 million of the remaining outstanding aggregate principal amount of the 2024 Notes, which were redeemed on April 2, 2018. We may redeem the remaining 2024 Notes at any time prior to maturity, the 2022 Notes after September 23, 2022, and the 2025 Notes after April 30, 2021 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, 2024 Notes, or 2025 Notes when the fair market value of the 2022 Notes, 2024 Notes, or 2025 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.

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

 

55


Table of Contents
Index to Financial Statements

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 pursuant to this prospectus.

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 pursuant to this prospectus 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.

 

56


Table of Contents
Index to Financial Statements

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 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.

 

57


Table of Contents
Index to Financial Statements

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.

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 pursuant to this prospectus, 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,

 

58


Table of Contents
Index to Financial Statements

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, 2024 Notes, 2025 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, 2024 Notes, 2025 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, 2024 Notes, 2025 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, 2024 Notes, 2025 Notes and 2022 Convertible Notes.

The 2022 Notes, 2024 Notes, 2025 Notes and 2022 Convertible Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The 2022 Notes, 2024 Notes, 2025 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, 2024 Notes, 2025 Notes and 2022 Convertible Notes and the 2022 Notes, 2024 Notes, 2025 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 subsidiaries. The assets of any such subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2022 Notes, 2024 Notes, 2025 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, 2024 Notes, 2025 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, 2024 Notes, 2025 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

 

59


Table of Contents
Index to Financial Statements

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, 2024 Notes, 2025 Notes and 2022 Convertible Notes.

The respective indentures under which the 2022 Notes, 2024 Notes, 2025 Notes and 2022 Convertible Notes were issued contain limited protections for the holders of the 2022 Notes, 2024 Notes, 2025 Notes and 2022 Convertible Notes.

The indenture under which 2022 Notes, 2024 Notes, 2025 Notes and 2022 Convertible Notes were issued offers limited protections to the holders of the 2022 Notes, 2024 Notes, 2025 Notes and 2022 Convertible Notes. The terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 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, 2024 Notes, 2025 Notes or 2022 Convertible Notes. In particular, the terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 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, 2024 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, 2024 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, 2024 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, 2024 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 200% (or 150%, subject to certain approval and disclosure requirements) 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, 2024 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 regulated investment company under Subchapter M of the Code (currently, these provisions generally prohibit us from declaring any cash distributions 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 200% (or 150%, subject to certain approval and disclosure requirements) at the time of the declaration of the distribution or the purchase and after deducting the amount of such 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;

 

60


Table of Contents
Index to Financial Statements
   

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 2024 Notes and 2025 Notes do not require us to purchase the 2024 Notes or 2025 Notes in connection with a change of control or any other event.

Furthermore, the terms of the respective indentures and the 2022 Notes, 2024 Notes, 2025 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, 2024 Notes, 2025 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, 2024 Notes, 2025 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, 2024 Notes, 2025 Notes and 2022 Convertible Notes. See “—In addition to regulatory requirements that restrict our ability to raise capital, our 2022 Notes, 2024 Notes, 2025 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, 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, 2024 Notes, 2025 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, 2024 Notes, 2025 Notes and 2022 Convertible Notes.

An active trading market for the 2024 Notes or 2025 Notes may not develop or be sustained, which could limit the market price of the 2024 Notes and 2025 Notes or your ability to sell them.

Although the 2024 Notes and 2025 Notes are listed on the NYSE under the symbols “HTGX” and “HCXZ,” respectively, we cannot provide any assurances that an active trading market will develop or be sustained for the 2024 Notes or 2025 Notes or that the 2024 Notes or 2025 Notes will be able to be sold. At various times, the 2024 Notes or 2025 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 2024 Notes or 2025 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, 2024 Notes, 2025 Notes or 2022 Convertible Notes.

Any default under the agreements governing our indebtedness, including a default under the Wells Facility, the Union Bank Facility, 2022 Notes, 2024 Notes, 2025 Notes, 2022 Convertible Notes, 2021 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, 2024 Notes, 2025 Notes, 2022 Convertible Notes or 2021 Asset-Backed Notes and substantially decrease the market value of the 2022 Notes,

 

61


Table of Contents
Index to Financial Statements

2024 Notes, 2025 Notes, 2022 Convertible Notes and 2021 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, 2024 Notes, 2025 Notes, 2022 Convertible Notes, or 2021 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, 2024 Notes, 2025 Notes, 2022 Convertible Notes, 2021 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, 2024 Notes, 2025 Notes, 2022 Convertible Notes, 2021 Asset-Backed Notes or other debt, the 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, 2024 Notes, 2025 Notes, 2022 Convertible 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.

 

62


Table of Contents
Index to Financial Statements

FORWARD-LOOKING STATEMENTS

The matters discussed in this prospectus, 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 prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus 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 prospectus, please see the discussion under “Risk Factors.” You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus 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 prospectus.

 

63


Table of Contents
Index to Financial Statements

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus 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 “Risk Factors” and “Forward-Looking Statements.”

 

64


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We intend to use the net proceeds from selling our securities to fund investments in debt and equity securities in accordance with our investment objectives, to make acquisitions, to retire certain debt obligations and for other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.

We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within twelve months, but in no event longer than two years. Pending such uses and investments, we will invest the net proceeds primarily in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. Our ability to achieve our investment objective may be limited to the extent that the net proceeds of any offering, pending full investment, are held in lower yielding short-term instruments.

 

65


Table of Contents
Index to Financial Statements

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on the NYSE under the symbol “HTGC.”

The following table sets forth the range of high and low sales prices of our common stock, the sales price as a percentage of NAV and the distributions declared by us for each fiscal quarter. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions.

 

          Price Range     Premium/
Discount of
High Sales
Price to NAV
    Premium/
Discount of
Low Sales
Price to NAV
    Cash
Distribution
per Share
 
    NAV(1)     High     Low  

2016

           

First quarter

  $ 9.81     $ 12.39     $ 10.03       26.3     2.2   $ 0.310  

Second quarter

  $ 9.66     $ 12.43     $ 11.74       28.7     21.6   $ 0.310  

Third quarter

  $ 9.86     $ 14.00     $ 12.42       41.9     25.9   $ 0.310  

Fourth quarter

  $ 9.90     $ 14.25     $ 12.90       43.9     30.2   $ 0.310  

2017

           

First quarter

  $ 9.76     $ 15.43     $ 14.12       58.1     44.7   $ 0.310  

Second quarter

  $ 9.87     $ 15.56     $ 12.66       57.6     28.3   $ 0.310  

Third quarter

  $ 10.00     $ 13.50     $ 12.04       35.0     20.4   $ 0.310  

Fourth quarter

  $ 9.96     $ 13.94     $ 12.44       39.9     24.9   $ 0.310  

2018

           

First quarter

  $ 9.72     $ 13.25     $ 11.89       36.3     22.3   $ 0.310  

Second quarter (through May 29, 2018)

    *     $ 12.64     $ 11.99       *       *       **  

 

(1)

NAV per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.

*

Net asset value has not yet been calculated for this period.

**

Cash distribution per share has not yet been determined for this period.

The last reported price for our common stock on May 29, 2018 was $12.40 per share.

Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility 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 and at times our shares of common stock have traded at a discount to the net assets attributable to those shares. It is not possible to predict whether the shares offered hereby will trade at, above, or below NAV.

 

66


Table of Contents
Index to Financial Statements

Distributions

The following table summarizes our distributions declared and paid, to be paid or reinvested on all shares, including restricted stock, to date:

 

Date Declared

   Record Date      Payment Date      Amount Per Share  

Cumulative distributions declared and paid prior to January 1, 2016

         $ 11.23  

February 17, 2016

     March 7, 2016        March 14, 2016        0.31  

April 27, 2016

     May 16, 2016        May 23, 2016        0.31  

July 27, 2016

     August 15, 2016        August 22, 2016        0.31  

October 24, 2016

     November 14, 2016        November 21, 2016        0.31  

February 16, 2017

     March 6, 2017        March 13, 2017        0.31  

April 26, 2017

     May 15, 2017        May 22, 2017        0.31  

July 26, 2017

     August 14, 2017        August 21, 2017        0.31  

October 25, 2017

     November 13, 2017        November 20, 2017        0.31  

February 14, 2018

     March 5, 2018        March 12, 2018        0.31  

April 25, 2018

     May 14, 2018        May 21, 2018        0.31  
        

 

 

 
         $ 14.33  
        

 

 

 

On April 25, 2018, the Board of Directors declared a cash distribution of $0.31 per share to be paid on May 21, 2018 to stockholders of record as of May 14, 2018. This distribution represents our fifty-first consecutive distribution since our IPO, bringing the total cumulative distribution to date to $14.33 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. As a result, any determination of the tax attributes of our distributions made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. Of the distributions declared during the fiscal years ended December 31, 2017, 2016, and 2015, 100% were distributions derived from our current and accumulated earnings and profits.

During the three months ended March 31, 2018, we declared a distribution of $0.31 per share. If we had determined the tax attributes of our distributions year-to-date as of March 31, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of the what tax attributes of our 2018 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.

 

67


Table of Contents
Index to Financial Statements

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 the IRS and 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 U.S. 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 generally at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding years (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. See “Regulation.” 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, which consists of ordinary income, from the year ended December 31, 2017 to our stockholders during 2018.

 

68


Table of Contents
Index to Financial Statements

RATIO OF EARNINGS TO FIXED CHARGES

The following contains our ratio of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our consolidated financial statements, including the notes to those statements, included in this prospectus.

 

    For the three
months ended
March 31,
2018
    For the year
ended
December 31,
2017
    For the year
ended
December 31,
2016
    For the year
ended
December 31,
2015
    For the year
ended
December 31,
2014
    For the year
ended
December 31,
2013
 

Earnings to Fixed Charges(1)

    1.56       2.70       2.85       2.16       3.10       3.83  

 

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in stockholders’ equity resulting from operations plus fixed charges. Fixed charges include interest and credit facility fees expense and amortization of debt issuance costs.

 

(1)

Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

 

69


Table of Contents
Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus 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 “Risk Factors” and “Forward-Looking Statements” appearing elsewhere herein.

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, 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’s 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 our two wholly-owned SBICs. Our SBIC subsidiaries, HT II and HT III, hold approximately $113.1 million and $285.8 million in assets, respectively, and accounted for approximately 5.7% and 14.4% of our total assets, respectively, prior to consolidation at March 31, 2018. In aggregate, at March 31, 2018, with our net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At March 31, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries.

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

 

70


Table of Contents
Index to Financial Statements

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 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.

Portfolio and Investment Activity

The total fair value of our investment portfolio was approximately $1.5 billion at both March 31, 2018 and December 31, 2017. The fair value of our debt investment portfolio at March 31, 2018 was approximately $1.3 billion, compared to a fair value of approximately $1.4 billion December 31, 2017. The fair value of the equity portfolio at March 31, 2018 was approximately $114.0 million, compared to a fair value of approximately $89.4 million at December 31, 2017. The fair value of the warrant portfolio at March 31, 2018 was approximately $33.3 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

 

71


Table of Contents
Index to Financial Statements

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 three months ended March 31, 2018 and the year ended December 31, 2017 was comprised of the following:

 

(in millions)

   March 31, 2018      December 31, 2017  

Debt Commitments(1)

     

New portfolio company

   $ 232.6      $ 773.2  

Existing portfolio company

     5.0        98.8  
  

 

 

    

 

 

 

Total

   $ 237.6      $ 872.0  
  

 

 

    

 

 

 

Funded and Restructured Debt Investments(2)

     

New portfolio company

   $ 162.6      $ 578.9  

Existing portfolio company

     45.0        175.9  
  

 

 

    

 

 

 

Total

   $ 207.6      $ 754.8  
  

 

 

    

 

 

 

Funded Equity Investments

     

New portfolio company

   $ 27.4        7.1  

Existing portfolio company

     1.3        2.9  
  

 

 

    

 

 

 

Total

   $ 28.7      $ 10.0  
  

 

 

    

 

 

 

Unfunded Contractual Commitments(3)

     

Total

   $ 51.9      $ 73.6  
  

 

 

    

 

 

 

Non-Binding Term Sheets

     

New portfolio company

   $ 146.0      $ 122.0  

Existing portfolio company

     28.0        —    
  

 

 

    

 

 

 

Total

   $ 174.0      $ 122.0  
  

 

 

    

 

 

 

 

(1)

Includes restructured loans and renewals in addition to new commitments.

(2)

Funded amounts include borrowings on revolving facilities.

(3)

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.

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 three months ended March 31, 2018, we received approximately $273.3 million in aggregate principal repayments. Of the approximately $273.3 million of aggregate principal repayments, approximately $29.8 million were scheduled principal payments and approximately $243.5 million were early principal repayments related to 12 portfolio companies. Of the approximately $243.5 million early principal repayments, approximately $18.5 million were early repayments due to merger and acquisition transactions for two portfolio companies.

 

72


Table of Contents
Index to Financial Statements

Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable, and escrow receivables) as of and for the three months ended March 31, 2018 and the year ended December 31, 2017 was as follows:

 

(in millions)

   March 31, 2018     December 31, 2017  

Beginning portfolio

   $ 1,542.2     $ 1,423.9  

New fundings and restructures

     236.3       764.8  

Warrants not related to current period fundings

     (0.10     0.6  

Principal payments received on investments

     (29.8     (119.5

Early payoffs

     (243.5     (505.6

Accretion of loan discounts and paid-in-kind principal

     8.2       36.5  

Net acceleration of loan discounts and loan fees due to early payoff or restructure

     (5.3     (8.1

New loan fees

     (2.8     (9.8

Sale of investments

     —         (11.0

Loss on investments due to write offs

     (6.5     (39.6

Net change in unrealized appreciation (depreciation)

     (15.1     10.0  
  

 

 

   

 

 

 

Ending portfolio

   $ 1,483.6     $ 1,542.2  
  

 

 

   

 

 

 

As of March 31, 2018, we held warrants or equity positions in three companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. All three companies filed confidentially under the JOBS Act. There can be no assurance that companies that have yet to complete their initial public offerings 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 March 31, 2018, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from 5.1% to 14.5%. 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, payment-in-kind (“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 $33.0 million of unamortized fees at March 31, 2018, of which approximately $28.8 million was included as an offset to the cost basis of our current debt investments and approximately $4.2 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

 

73


Table of Contents
Index to Financial Statements

$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.

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 March 31, 2018, we had approximately $22.9 million in exit fees receivable, of which approximately $20.4 million was included as a component of the cost basis of our current debt investments and approximately $2.5 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 $2.3 million and $2.2 million in PIK income in the three months ended March 31, 2018 and 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 11.9% and 12.2% during the three months ended March 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 14.3% and 13.4% for the three months ended March 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 quarter, 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 12.5% and 12.3% during the three months ended March 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 quarter, including non-interest earning assets such as warrants and equity investments at amortized cost.

The total return for our investors was approximately -5.4% and 9.5% during the three months ended March 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 prospectus.

Portfolio Composition

Our portfolio companies are primarily privately held companies and public companies which are active in the software, drug discovery & development, internet consumer & business services, sustainable and renewable technology, drug delivery, healthcare services, medical devices & equipment, media/content/info, diversified financial services, information services, electronics & computer hardware, consumer & business products, surgical devices, communications & networking, biotechnology tools, semiconductors, diagnostic and specialty pharmaceuticals 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 March 31, 2018, approximately 78.1% of the fair value of our portfolio was composed of investments in five industries: 26.5% investments in the software industry, 26.1% investments in the drug discovery & development industry, 12.0% investments in the internet consumer & business services industry, 7.8% investments in the sustainable and renewable technology industry, and 5.7% investments in the drug delivery.

 

74


Table of Contents
Index to Financial Statements

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 three months ended March 31, 2018 and the year ended December 31, 2017, our ten largest portfolio companies represented approximately 29.7% and 34.6% of the total fair value of our investments in portfolio companies, respectively. At March 31, 2018 and December 31, 2017, we had five and seven investments, respectively, that represented 5% or more of our net assets. At March 31, 2018, we had seven equity investments representing approximately 64.9% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. At December 31, 2017, we had nine equity investments which represented approximately 67.1% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments.

As of March 31, 2018, approximately 96.5% 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.

As of March 31, 2018, 85.6% of our debt investments were in a senior secured first lien position, 13.4% were secured by a senior second priority security interest in all of the portfolio company’s assets, other than intellectual property, and the remaining 1.0% were unsecured as a result of the terms of the acquisition of two of our portfolio companies. In the majority of 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.

At March 31, 2018, of the approximately 85.6% of our debt investments in a senior secured first lien position, 48.0% were secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 33.3% were 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, or subject to a negative pledge. Another 1.7% of the Company’s debt investments were senior secured by the equipment of the portfolio company, and 2.6% were in a first lien “last-out” senior secured position with security interest in all 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.

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 March 31, 2018, we held warrants in 134 portfolio companies, with a fair value of approximately $33.3 million. The fair value of our warrant portfolio decreased by approximately $3.5 million, as compared to a fair value of $36.8 million at December 31, 2017 primarily related to the slight decrease in portfolio companies and valuation of the portfolio.

Our existing warrant holdings would require us to invest approximately $84.0 million to exercise such warrants as of March 31, 2018. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance 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.

 

75


Table of Contents
Index to Financial Statements

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. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of March 31, 2018 and December 31, 2017, respectively:

 

(in thousands)

   March 31, 2018     December 31, 2017  

Investment Grading

   Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
    Number of
Companies
     Debt Investments
at Fair Value
     Percentage of
Total Portfolio
 

1

     10      $ 141,761        10.6     12      $ 345,191        24.4

2

     36        599,767        44.9     32        583,017        41.2

3

     30        548,038        41.0     32        443,775        31.3

4

     4        33,573        2.5     4        41,744        2.9

5

     5        13,187        1.0     5        2,257        0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     85      $ 1,336,326        100.0     85      $ 1,415,984        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of March 31, 2018, our debt investments had a weighted average investment grading of 2.43 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 decline in weighted average investment grading at March 31, 2018 from December 31, 2017 is primarily due to the payoff of our credit rating 1 positions, including Machine Zone, Inc. and Alimera Sciences, Inc., as well as the downgrade of Fuze, Inc., Clarabridge and Proterra, Inc., from a credit rating 2 to a credit rating 3. In addition, two positions were downgraded to a credit rating 5, while two positions that were rated 5 as of December 31, 2017 were sold or liquidated during the period.

At March 31, 2018, we had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $12.3 million and $0, respectively. At December 31, 2017, we had five debt investments on non-accrual with cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cumulative cost of debt investments on non-accrual between March 31, 2018 and December 31, 2017 is the result of the liquidation of one debt investment that was on non-accrual at December 31, 2017. We recognized a realized loss of approximately $1.7 million on the write-off of the investment.

Results of Operations

Comparison of the three months ended March 31, 2018 and 2017

Investment Income

Interest Income

Total investment income for the three months ended March 31, 2018 was approximately $48.7 million as compared to approximately $46.4 million for the three months ended March 31, 2017.

Interest income for the three months ended March 31, 2018 totaled approximately $43.0 million as compared to approximately $42.9 million for the three months ended March 31, 2017. The increase in interest income for the three months ended March 31, 2018 as compared to the same period ended March 31, 2017 is primarily attributable to an increase in interest accelerations due to early loan repayments and other one-time events, offset by a decrease in recurring interest income.

 

76


Table of Contents
Index to Financial Statements

Of the $43.0 million in interest income for the three months ended March 31, 2018, approximately $39.3 million represents recurring income from the contractual servicing of our loan portfolio and approximately $3.7 million represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $40.0 million and $2.9 million, respectively, of the $42.9 million interest income for the three months ended March 31, 2017.

The following table shows the PIK-related activity for the three months ended March 31, 2018 and 2017, at cost:

 

     Three Months
Ended March 31,
 

(in thousands)

   2018      2017  

Beginning PIK interest receivable balance

   $ 15,487      $ 9,930  

PIK interest income during the period

     2,308        2,215  

PIK accrued (capitalized) to principal but not recorded as income during the period

     —          —    

Payments received from PIK loans

     (7,983      (46

Realized gain (loss)

     —          —    
  

 

 

    

 

 

 

Ending PIK interest receivable balance

   $ 9,812      $ 12,099  
  

 

 

    

 

 

 

The increase in PIK interest income during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 is due to an increase in the weighted average principal outstanding of loans which bear PIK interest. This increase is partially offset by an increase in the number of PIK loans that paid off during the period.

Fee Income

Fee income from commitment, facility and loan related fees for the three months ended March 31, 2018 totaled approximately $5.7 million as compared to approximately $3.5 million for the three months ended March 31, 2017. The increase in fee income for the three months ended March 31, 2018 is primarily due to an increase in the acceleration of unamortized fees due to early repayments and one-time fees between periods.

Of the $5.7 million in fee income for the three months ended March 31, 2018, approximately $1.3 million represents income from recurring fee amortization and approximately $4.4 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $3.2 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $2.1 million and $1.4 million, respectively, of the $3.5 million in income for the three months ended March 31, 2017.

In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three months ended March 31, 2018 or 2017.

Operating Expenses

Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Our operating expenses totaled approximately $22.6 million and $23.7 million during the three months ended March 31, 2018 and 2017, respectively.

Interest and Fees on our Borrowings

Interest and fees on our borrowings totaled approximately $10.6 million and $12.4 million for the three months ended March 31, 2018 and 2017, respectively. Interest and fee expense for the three months ended

 

77


Table of Contents
Index to Financial Statements

March 31, 2018, as compared to March 31, 2017, decreased due to the partial redemption of our 2024 Notes and the redemption of our 2019 Notes in February 2017, which resulted in a one-time, non-cash acceleration of our unamortized fees and a thirty day interest overlap related to our Convertible Note issuance in January 2017.

We had a weighted average cost of debt, comprised of interest and fees, of approximately 5.3% and 6.3% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the weighted average cost of debt for the three months ended March 31, 2018 as compared to the same period ended March 31, 2017 is primarily attributable to the redemption of our 2019 Notes between periods.

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 decreased to $4.0 million from $4.1 million for the three months ended March 31, 2018 and 2017. The decrease for the three months ended March 31, 2018 was primarily attributable to a reduction in corporate legal and other expenses.

Employee Compensation

Employee compensation and benefits totaled $5.8 million for the three months ended March 31, 2018 as compared to $5.3 million for the three months ended March 31, 2017. The increase between the comparative periods was primarily due to increased salaries and changes in variable compensation expenses due to company performance objectives.

Employee stock-based compensation totaled $2.3 million for the three months ended March 31, 2018 as compared to $1.8 million for the three months ended March 31, 2017. The increase for the three-month comparative period was primarily related to restricted stock award 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 three months ended March 31, 2018 and 2017 is as follows:

 

     Three Months
Ended March 31,
 

(in thousands)

   2018     2017  

Realized gains

   $ 1,108     $ 6,470  

Realized losses

     (6,028     (3,233
  

 

 

   

 

 

 

Net realized gains (losses)

   $ (4,920   $ 3,237  
  

 

 

   

 

 

 

During the three months ended March 31, 2018 we recognized net realized losses of $4.9 million. During the three months ended March 31, 2018, we recorded gross realized gains of $1.1 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $6.0 million primarily from the liquidation or write-off of our warrant and equity investments in six portfolio companies and our debt investments in two portfolio companies.

 

78


Table of Contents
Index to Financial Statements

During the three months ended March 31, 2017, we recognized net realized gains of $3.2 million. During the three months ended March 31, 2017, we recorded gross realized gains of $6.4 million primarily from the sale of our holdings in three portfolio companies. These gains were offset by gross realized losses of $3.2 million primarily from the liquidation or write-off of our warrant and equity investments in two portfolio companies and the sale of our public bond position in one portfolio company.

The following table summarizes the change in net unrealized appreciation/depreciation of investments for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  

(in thousands)

   2018     2017  

Gross unrealized appreciation on portfolio investments

   $ 7,797     $ 19,478  

Gross unrealized depreciation on portfolio investments

     (29,548     (48,270

Reversal of prior period net unrealized appreciation (depreciation) upon a realization event

     6,666       (2,405
  

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on debt, equity, and warrant investments

     (15,085     (31,197

Other net unrealized appreciation (depreciation)

     (112     (306
  

 

 

   

 

 

 

Total net unrealized depreciation on investments

   $ (15,197   $ (31,503
  

 

 

   

 

 

 

During the three months ended March 31, 2018, we recorded $15.2 million of net unrealized depreciation, of which $15.1 million was net unrealized depreciation from our debt, equity and warrant investments. We recorded $8.3 million of net unrealized depreciation on our debt investments which was primarily related to $13.5 million of unrealized depreciation on the debt portfolio including $9.0 million of unrealized depreciation on collateral-based impairments on seven portfolio companies. This unrealized depreciation was partially offset by $5.2 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon write-off of two portfolio companies.

We recorded $4.1 million of net unrealized depreciation on our equity investments and $2.7 million of net unrealized depreciation on our warrant investments during the three months ended March 31, 2018. This net unrealized depreciation of $6.8 million was due to $8.2 million of unrealized depreciation on the equity and warrant portfolio partially offset by $1.4 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon being realized as a gain or loss due to the acquisition or liquidation of our equity and warrant investments.

During the three months ended March 31, 2017, we recorded $31.5 million of net unrealized depreciation, of which $31.2 million was net unrealized depreciation from our debt, equity and warrant investments. We recorded $31.2 million of net unrealized depreciation on our debt investments, which was primarily related to $39.8 million of unrealized depreciation for collateral-based impairments on ten portfolio companies offset by the reversal of $3.2 million unrealized depreciation for the prior period collateral-based impairments on one portfolio company.

We recorded $2.8 million of net unrealized depreciation on our equity investments primarily due to the reversal of approximately $4.7 million of unrealized appreciation for one portfolio company upon being realized as a gain. We also recorded $2.8 million of net unrealized appreciation on our warrant investments during the three months ended March 31, 2017.

Income and Excise Taxes

We account for income taxes in accordance with the provisions of Topic 740 of the FASB’s Accounting Standards Codification, as amended (“ASC”), “Income Taxes”, under which income taxes are provided for

 

79


Table of Contents
Index to Financial Statements

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, 2017 to our stockholders in 2018.

Net Change in Net Assets Resulting from Operations and Earnings Per Share

For the three months ended March 31, 2018 we had a net increase in net assets resulting from operations of approximately $5.9 million and for the three months ended March 31, 2017 we had a net decrease in net assets resulting from operations of approximately $5.6 million.

Both the basic and fully diluted net change in net assets per common share were $0.07 per share for the three months ended March 31, 2018. Both the basic and fully diluted net change in net assets per common share were $(0.07) per share for the three months ended March 31, 2017.

For the purpose of calculating diluted earnings per share for three months ended March 31, 2018 and 2017, the 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 three months ended March 31, 2018 and 2017 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.

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 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 $152.1 million and $6.6 million, respectively, of the $158.7 million interest income for the year ended December 31, 2016.

 

80


Table of Contents
Index to Financial Statements

The following table shows the PIK-related activity, for the years ended December 31, 2017 and 2016, at cost:

 

     Year Ended
December 31,
 

(in thousands)

   2017      2016  

Beginning PIK interest receivable balance

   $ 9,930      $ 5,149  

PIK interest income during the period

     9,960        7,825  

PIK accrued (capitalized) to principal but not recorded as income during the period

     129        (2,146

Payments received from PIK loans

     (2,349      (632

Realized loss

     (2,183      (266
  

 

 

    

 

 

 

Ending PIK interest receivable balance

   $ 15,487      $ 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.

 

81


Table of Contents
Index to Financial Statements

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.

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 award 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 as and 2016 is as follows:

 

     Year Ended
December 31,
 

(in thousands)

   2017     2016  

Realized gains

   $ 14,163     $ 15,202  

Realized losses

     (40,874     (10,626
  

 

 

   

 

 

 

Net realized gains (losses)

   $ (26,711   $ 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 from the

 

82


Table of Contents
Index to Financial Statements

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/depreciation of investments for the years ended December 31, 2017, and 2016:

 

     Year Ended December 31,  

(in thousands)

   2017     2016  

Gross unrealized appreciation on portfolio investments

   $ 130,272     $ 75,264  

Gross unrealized depreciation on portfolio investments

     (148,345     (115,867

Reversal of prior period net unrealized appreciation upon a realization event

     42,967       (8,525

Reversal of prior period net unrealized depreciation upon a realization event

     (14,925     13,186  
  

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on debt, equity, and warrant investments

     9,969       (35,942

Other net unrealized appreciation (depreciation)

     (704     (275
  

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on portfolio investments

   $ 9,265     $ (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 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

 

83


Table of Contents
Index to Financial Statements

portfolio companies, offset by $2.9 million unrealized depreciation on our public portfolio companies related to individual portfolio company performance.

The following table summarizes the change in net unrealized appreciation (depreciation) in the investment portfolio by investment type, excluding other net unrealized appreciation (depreciation) for the years ended December 31, 2017 and December 31, 2016:

 

     Year Ended December 31, 2017  

(in millions)

   Debt     Equity     Warrants     Total  

Collateral Based Impairments(1)

   $ (49.6   $ (51.9   $ (0.6   $ (102.1

Reversals of Prior Period Collateral Based Impairments

     53.7       —         0.1       53.8  

Reversals due to Debt Payoffs & Warrant/Equity Sales

     31.0       2.8       (3.4     30.4  

Fair Value Market/Yield Adjustments(2)

        

Level 1 & 2 Assets

     —         9.7       5.2       14.9  

Level 3 Assets

     (3.0     6.6       9.4       13.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     (3.0     16.3       14.6       27.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation (Depreciation)

   $ 32.1     $ (32.8   $ 10.7     $ 10.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended December 31, 2016  

(in millions)

   Debt     Equity     Warrants     Total  

Collateral Based Impairments(1)

   $ (50.0   $ (7.4   $ (1.1   $ (58.5

Reversals of Prior Period Collateral Based Impairments

     17.3       —         0.5       17.8  

Reversals due to Debt Payoffs & Warrant/Equity Sales

     13.1       (5.4     (1.0     6.7  

Fair Value Market/Yield Adjustments(2)

        

Level 1 & 2 Assets

     (1.3     (6.6     (2.9     (10.8

Level 3 Assets

     6.9       (2.8     4.8       8.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     5.6       (9.4     1.9       (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation (Depreciation)

   $ (14.0   $ (22.2   $ 0.3     $ (35.9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The unrealized appreciation (depreciation) attributable to collateral based impairments include all changes in estimated fair value on positions whose fair value remains impaired relative to cost as of the period end date. As such, this may include current period improvements in estimated fair value that do not represent reversals to prior period collateral based impairments.

(2)

Level 1 assets are generally equities listed in active markets and Level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing Level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, Level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC Topic 820 (“Fair Value Measurements”).

Income and Excise Taxes

We account for income taxes in accordance with the provisions of Topic 740 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”), 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, 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.

 

84


Table of Contents
Index to Financial Statements

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.

Comparison of periods ended December 31, 2016 and 2015

Investment Income

Interest Income

Total investment income for the year ended December 31, 2016 was approximately $175.1 million as compared to approximately $157.1 million for the year ended December 31, 2015.

Interest income for the year ended December 31, 2016 totaled approximately $158.7 million as compared to approximately $140.3 million for the year ended December 31, 2015. The increase in interest income for the year ended December 31, 2016 as compared to the year ended December 31, 2015 is primarily attributable to debt investment portfolio growth, specifically an increase in the weighted average principal outstanding between the periods, slightly offset by a reduction in the acceleration of income due to early repayments and other one-time events during the period.

Of the $158.7 million in interest income for the year ended December 31, 2016, approximately $152.1 million represents recurring income from the contractual servicing of our loan portfolio and approximately $6.6 million represents income related to the acceleration of income due to early loan repayments and other one-time events during the period. Income from recurring interest and the acceleration of interest income due to early loan repayments represented $130.4 million and $9.9 million, respectively, of the $140.3 million interest income for the year ended December 31, 2015.

The following table shows the PIK-related activity, for the years ended December 31, 2016 and 2015, at cost:

 

     Year Ended
December 31,
 

(in thousands)

   2016      2015  

Beginning PIK interest receivable balance

   $ 5,149      $ 6,250  

PIK interest income during the period

     7,825        4,658  

PIK accrued (capitalized) to principal but not recorded as income during the period

     (2,146      —    

Payments received from PIK loans

     (632      (5,483

Realized loss

     (266      (276
  

 

 

    

 

 

 

Ending PIK interest receivable balance

   $ 9,930      $ 5,149  
  

 

 

    

 

 

 

The increase in PIK interest income during the year ended December 31, 2016 as compared to the year ended December 31, 2015 is due to overall portfolio growth, or more specifically, an increase in the weighted average principal outstanding for loans which bear PIK interest and a decrease in the number of PIK loans which paid-off during the period. PIK receivable represents less than 1% of total debt investments as of December 31, 2016 and December 31, 2015, respectively

 

85


Table of Contents
Index to Financial Statements

Fee Income

Income from commitment, facility and loan related fees for the year ended December 31, 2016 totaled approximately $16.3 million as compared to approximately $16.9 million for the year ended December 31, 2015. 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 $16.3 million in income from commitment, facility and loan related fees for the year ended December 31, 2016, approximately $9.5 million represents income from recurring fee amortization and approximately $6.8 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 $5.8 million and $11.1 million, respectively, of the $16.9 million income for the year ended December 31, 2015.

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, 2016 and 2015, 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 $82.7 million and $83.6 million during the years ended December 31, 2016 and 2015, respectively.

Interest and Fees on our Borrowings

Interest and fees on our borrowings totaled approximately $37.1 million and $36.9 million for the years ended December 31, 2016 and 2015, respectively. Interest and fee expense for the year ended December 31, 2016 as compared to December 31, 2015 increased primarily due to higher weighted average principal balances outstanding on our 2024 Notes related to the issuance of $149.9 million of aggregate principal during the period. The increase in interest and fee expense incurred related to our 2024 notes was partially offset by principal pay-offs and paydowns on our 2016 Convertible Notes, Asset Backed Notes and Credit Facilities during the period.

We had a weighted average cost of debt, comprised of interest and fees and loss on debt extinguishment (long-term liabilities—convertible notes), of approximately 5.8% and 6.0% for the years ended December 31, 2016 and 2015, respectively. The 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 due to the full impact of redemptions on our 2019 Notes and 2016 Convertible Notes which occurred in the prior period, offset by the incremental issuance of our 2024 Notes in fiscal year 2016.

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 decreased to $16.1 million from $16.7 million for the years ended December 31, 2016 and 2015, respectively. This decrease was primarily attributable to a reduction in costs related to strategic hiring objectives and travel and entertainment, slightly offset by an increase in corporate legal and other expenses.

Employee Compensation

Employee compensation and benefits totaled approximately $22.5 million for the year ended December 31, 2016 as compared to approximately $20.7 million for the year ended December 31, 2015. The increase between comparative periods was primarily due to changes in variable incentive compensation related to the achievement of origination and strategic corporate objectives.

 

86


Table of Contents
Index to Financial Statements

Employee stock-based compensation totaled approximately $7.0 million for the year ended December 31, 2016 as compared to approximately $9.4 million for the year ended December 31, 2015. The decrease between comparative periods was primarily related to the number and amount of restricted stock award vesting, specifically the vesting of retention grants issued in 2014 which occurred in the first half of 2016.

Other Income (Loss)

Other income (loss) generally consists of income or losses generated from sources other than our investment portfolio. For the years ended December 31, 2016 and December 31, 2015 it consists of $8.0 million of litigation settlement proceeds and $1,000 of loss on extinguishment of debt, respectively.

Litigation Settlement Proceeds

On December 19, 2016, we entered into a Confidential Settlement Agreement (the “Settlement Agreement”) with all defendants in connection with a litigation matter (“the Action”) filed in November 2014. In connection with the Settlement Agreement, the Action was settled among the parties and we received a settlement payment in the amount of $8.0 million. The Settlement Agreement also provides a mutual release by us and the defendants of any and all claims and cross-claims that were asserted in the Action, the circumstances and events underlying the Action and attorney’s fees and costs related thereto. The Settlement Agreement does not constitute an admission of liability, fault, or wrongdoing by any party. The settlement payment was classified as a component of net investment income in our Consolidated Statement of Operations.

Loss on Extinguishment of Convertible Notes

Our 6.00% convertible notes due 2016 (the “2016 Convertible Notes”) were fully settled on or before their contractual maturity date of April 15, 2016. Throughout their life, 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 2016 Convertible Notes and approximately 1.6 million shares of our common stock, or $24.3 million.

We recorded a loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and OID. The loss was partially offset by a gain in the amount of the difference between the outstanding principal balance of the converted notes and the fair value of the debt instrument. The net loss on extinguishment of debt we recorded for the year ended December 31, 2015 was approximately $1,000. We did not record a loss on extinguishment of debt for the year ended December 31, 2016. The loss on extinguishment of debt was classified as a component of net investment income in our Consolidated Statements of Operations.

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, 2016 and 2015 is as follows:

 

     Year Ended
December 31,
 

(in thousands)

   2016      2015  

Realized gains

   $ 15,202      $ 12,677  

Realized losses

     (10,626      (7,530
  

 

 

    

 

 

 

Net realized gains

   $ 4,576      $ 5,147  
  

 

 

    

 

 

 

 

87


Table of Contents
Index to Financial Statements

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.

During the year ended December 31, 2015, we recognized net realized gains of approximately $5.1 million on the portfolio. These net realized gains included gross realized gains of approximately $12.6 million from the sale of investments in seven portfolio companies and $1.5 million from subsequent recoveries on two previously written-off debt investments. These gains were partially offset by gross realized losses of approximately $7.5 million primarily from the liquidation or write off of our investments in sixteen portfolio companies.

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/depreciation of investments for the years ended December 31, 2016 and 2015:

 

    Year Ended
December 31,
 

(in thousands)

  2016     2015  

Gross unrealized appreciation on portfolio investments

  $ 75,264     $ 78,991  

Gross unrealized depreciation on portfolio investments

    (115,867     (111,926

Reversal of prior period net unrealized appreciation upon a realization event

    (8,525     (8,707

Reversal of prior period net unrealized depreciation upon a realization event

    13,186       4,599  
 

 

 

   

 

 

 

Net unrealized depreciation on debt, equity, and warrant investments

    (35,942     (37,043

Other net unrealized appreciation (depreciation)

    (275     1,311  
 

 

 

   

 

 

 

Net unrealized depreciation on portfolio investments

  $ (36,217   $ (35,732
 

 

 

   

 

 

 

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.

During the year ended December 31, 2015, we recorded approximately $35.7 million of net unrealized depreciation, of which $37.1 million is net unrealized depreciation from our debt, equity and warrant investments. Of the $37.1 million, approximately $14.0 million is attributed to net unrealized depreciation on our debt investments which primarily related to $20.4 million unrealized depreciation for collateral based impairments on ten portfolio companies offset by the reversal of collateral based impairments of $5.6 million on

 

88


Table of Contents
Index to Financial Statements

three portfolio companies. Approximately $19.1 million is attributed to net unrealized depreciation on our equity investments which primarily related to $11.4 million unrealized depreciation on our public equity portfolio with the largest concentration in our investment in Box, Inc. and the reversal of $7.8 million of prior period net unrealized appreciation upon being realized as a gain for our sale of shares of Box, Inc., Atrenta, Inc., Cempra, Inc. Celladon Corporation, Egalet Corporation, Everyday Health, and Identiv, Inc. as discussed above. Finally, approximately $4.0 million is attributed to net unrealized depreciation on our warrant investments which primarily related to $6.0 million of unrealized depreciation on our private portfolio companies related to declining industry performance offset by the reversal of $3.2 million of prior period net unrealized depreciation upon being realized as a loss on the liquidation of our investments in thirteen portfolio companies.

The following table summarizes the change in net unrealized appreciation (depreciation) in the investment portfolio by investment type, excluding other net unrealized appreciation (depreciation) for the years ended December 31, 2016 and December 31, 2015:

 

     Year Ended December 31, 2016  

(in millions)

   Debt     Equity     Warrants     Total  

Collateral Based Impairments(1)

   $ (50.0   $ (7.4   $ (1.1   $ (58.5

Reversals of Prior Period Collateral based impairments

     17.3       —         0.5       17.8  

Reversals due to Debt Payoffs & Warrant/Equity sales

     13.1       (5.4     (1.0     6.7  

Fair Value Market/Yield Adjustments(2)

        

Level 1 & 2 Assets

     (1.3     (6.6     (2.9     (10.8

Level 3 Assets

     6.9       (2.8     4.8       8.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     5.6       (9.4     1.9       (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation (Depreciation)

   $ (14.0   $ (22.2   $ 0.3     $ (35.9
  

 

 

   

 

 

   

 

 

   

 

 

 
     Year Ended December 31, 2015  

(in millions)

   Debt     Equity     Warrants     Total  

Collateral Based Impairments(1)

   $ (20.4   $ (0.2   $ (0.4   $ (21.0

Reversals of Prior Period Collateral based impairments

     5.6       —         0.4       6.0  

Reversals due to Debt Payoffs & Warrant/Equity sales

     6.2       (7.8     3.2       1.6  

Fair Value Market/Yield Adjustments(2)

        

Level 1 & 2 Assets

     (1.1     (11.4     (1.2     (13.7

Level 3 Assets

     (4.3     0.3       (6.0     (10.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Fair Value Market/Yield Adjustments

     (5.4     (11.1     (7.2     (23.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Unrealized Appreciation (Depreciation)

   $ (14.0   $ (19.1   $ (4.0   $ (37.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The unrealized appreciation (depreciation) attributable to collateral based impairments include all changes in estimated fair value on positions whose fair value remains impaired relative to cost as of the period end date. As such, this may include current period improvements in estimated fair value that do not represent reversals to prior period collateral based impairments.

(2)

Level 1 assets are generally equities listed in active markets and Level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing Level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, Level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC Topic 820 (“Fair Value Measurements”).

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

 

89


Table of Contents
Index to Financial Statements

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, 2016 to our stockholders during 2017.

Net Change in Net Assets Resulting from Operations and Earnings Per Share

For the years ended December 31, 2016 and 2015, the net increase in net assets resulting from operations totaled approximately $68.7 million and approximately $42.9 million, respectively.

The basic and fully diluted net change in net assets per common share for the year ended December 31, 2016 was $0.91, whereas the basic and fully diluted net change in net assets per common share for the year ended December 31, 2015 were $0.60 and $0.59, respectively.

For the purpose of calculating diluted earnings per share for year ended December 31, 2015, the dilutive effect of the 2016 Convertible Notes under the treasury stock method is included in this calculation as our share price was greater than the conversion price in effect ( $11.03 as of December 31, 2015) for the 2016 Convertible Notes for such period. The 2016 Convertible Notes were fully settled on or before their contractual maturity date of April 15, 2016, as such, there is no potential additional dilutive effect for the year ended December 31, 2016.

Financial Condition, Liquidity, and Capital Resources

Our liquidity and capital resources are derived from our SBA debentures, 2022 Notes, 2024 Notes, 2021 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, 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 (the “Prior Equity Distribution Agreement”) with 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 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 the 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 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 three months ended March 31, 2018, we sold 478,000 shares of common stock, which were issued under the Equity Distribution Agreement, for a total accumulated net proceeds of approximately $6.0 million, including $312,000 of offering expenses. As of March 31, 2018, approximately 9.9 million shares remain available for issuance and sale under the Equity Distribution Agreement.

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

 

90


Table of Contents
Index to Financial Statements

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 into the Union Bank Facility with MUFG 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 our credit facility (the “Prior Union Bank Facility”) entered into on August 14, 2014 (as amended and restated from time to time) with MUFG Union Bank, as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility 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 the three months ended March 31, 2018. During the year ended December 31, 2017, we sold 225,457 notes for approximately $5.6 million in aggregate principal amount. As of March 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 the Fourth Supplemental Indenture to the Base Indenture, dated October 23, 2017 (the “2022 Notes Indenture”), between us and U.S. Bank, National Association, as trustee (the “2022 Trustee”). The sale of the 2022 Notes generated net proceeds of approximately $147.5 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 $1.7 million.

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.

 

91


Table of Contents
Index to Financial Statements

At March 31, 2018, we had $190.2 million of SBA debentures, $150.0 million of 2022 Notes, $183.5 million of 2024 Notes, $33.6 million of 2021 Asset-Backed Notes, and $230.0 million of 2022 Convertible Notes payable. We had no borrowings outstanding under the Wells Facility or the Union Bank Facility.

At March 31, 2018, we had $313.2 million in available liquidity, including $118.2 million in cash and cash equivalents. We had available borrowing capacity of $120.0 million under the Wells Facility and $75.0 million under the Union Bank Facility, both subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts.

At March 31, 2018, we had $118.5 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 investments of $44.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At March 31, 2018, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries.

At March 31, 2018, we had approximately $3.6 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 2021 Asset-Backed Notes, based on current characteristics of the securitized debt investment portfolios, 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 three months ended March 31, 2018, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of debt investments and the sale of debt and equity investments.

During the three months ended March 31, 2018, our operating activities provided $63.0 million of cash and cash equivalents, compared to $11.7 million provided during the three months ended March 31, 2017. This $51.3 million increase in cash provided by operating activities is primarily related to an increase in investment repayments of $138.4 million and an increase in net realized losses on investments of $8.2 million, partially offset by an increase in investment purchases of $82.6 million and a decrease in net unrealized depreciation of $16.3 million.

During the three months ended March 31, 2018, our investing activities used approximately $72,000 of cash, compared to $39,000 used during the three months ended March 31, 2017.

During the three months ended March 31, 2018, our financing activities used $36.1 million of cash, compared to $128.0 million provided during the three months ended March 31, 2017. The $164.1 million decrease in cash provided by financing activities was primarily due to a decrease in the issuance of our common stock under the equity distribution agreement of $41.0 million, the net issuance of $225.5 million of the 2022 Convertible Notes, offset by the repayment of $110.4 million of 2019 Notes during the three months ended March 31, 2017.

As of March 31, 2018, net assets totaled $828.7 million, with a NAV per share of $9.72. 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.

As required by the 1940 Act, our asset coverage must be at least 200% (or 150%, subject to certain approval and disclosure requirements) after each issuance of senior securities. As of March 31, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 238.2% excluding our SBA debentures as a result of our exemptive order from the SEC that allows us to exclude all SBA leverage from our

 

92


Table of Contents
Index to Financial Statements

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 200% (or 150%, subject to certain approval and disclosure requirements), which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage ratio when including our SBA debentures was 204.8% at March 31, 2018.

Outstanding Borrowings

At March 31, 2018 and December 31, 2017, we had the following available borrowings and outstanding amounts:

 

     March 31, 2018      December 31, 2017  

(in thousands)

   Total
Available
     Principal      Carrying
Value (1)
     Total
Available
     Principal      Carrying
Value (1)
 

SBA Debentures(2)

   $ 190,200      $ 190,200      $ 188,299      $ 190,200      $ 190,200      $ 188,141  

2022 Notes

     150,000        150,000        147,698        150,000        150,000        147,572  

2024 Notes

     183,510        183,510        179,161        183,510        183,510        179,001  

2021 Asset-Backed Notes

     33,575        33,575        33,156        49,153        49,153        48,650  

2022 Convertible Notes

     230,000        230,000        223,878        230,000        230,000        223,488  

Wells Facility(3)

     120,000        —          —          120,000        —          —    

Union Bank Facility(3)

     75,000        —          —          75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 982,285      $ 787,285      $ 772,192      $ 997,863      $ 802,863      $ 786,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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.

(2)

At both March 31, 2018 and 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.

(3)

Availability subject to us meeting the borrowing base requirements.

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 March 31, 2018 and December 31, 2017 were as follows:

 

(in thousands)

   March 31, 2018      December 31, 2017  

SBA Debentures

   $ 1,901      $ 2,059  

2022 Notes

     1,548        1,633  

2024 Notes

     4,417        4,591  

2021 Asset-Backed Notes

     420        503  

2022 Convertible Notes

     3,492        3,715  

Wells Facility(1)

     726        227  

Union Bank Facility(1)

     306        379  
  

 

 

    

 

 

 

Total

   $ 12,810      $ 13,107  
  

 

 

    

 

 

 

 

(1)

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.

 

93


Table of Contents
Index to Financial Statements

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 March 31, 2018, we had approximately $51.9 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 $174.0 million of non-binding term sheets outstanding to three 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 March 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

   Unfunded
Commitments(1)
 

Chemocentryx, Inc.

   $ 10,000  

Evernote Corporation

     10,000  

Proterra, Inc.

     10,000  

Impact Radius Holdings, Inc.

     5,000  

Wrike, Inc.

     5,000  

Achronix Semiconductor Corporation

     5,000  

Oak Street Health

     5,000  

Lithium Technologies, Inc.

     878  

Greenphire

     500  

Insurance Technologies Corp.

     500  
  

 

 

 

Total

   $ 51,878  
  

 

 

 

 

(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.

 

94


Table of Contents
Index to Financial Statements

Contractual Obligations

The following table shows our contractual obligations as of March 31, 2018:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less than
1 year
     1 - 3 years      3 - 5 years      After 5
years
 

Borrowings(2)(3)(5)

   $ 787,285      $ 151,975      $ 61,550      $ 490,250      $ 83,510  

Operating Lease Obligations(4)

     17,290        2,436        5,005        5,912        3,937  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 804,575      $ 154,411      $ 66,555      $ 496,162      $ 87,447  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to our portfolio companies.

(2)

Includes $190.2 million in principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $183.5 million of the 2024 Notes, $33.6 million of the 2021 Asset-Backed Notes and $230.0 million of the 2022 Convertible Notes as of March 31, 2018.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to our consolidated financial statements.

(4)

Facility leases and licenses.

(5)

Reflects announced redemption of a portion of the 2024 Notes in April 2018.

Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense amounted to approximately $451,000 and $444,000 during the three months ended March 31, 2018 and 2017, 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.

Borrowings

Long-Term SBA Debentures

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With our net investment of $44.0 million in HT II as of March 31, 2018, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of March 31, 2018. As of March 31, 2018, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of March 31, 2018, we held investments in HT II in 34 companies with a fair value of approximately $84.9 million, accounting for approximately 5.7% of our total investment portfolio at March 31, 2018. HT II held approximately $113.1 million in assets and accounted for approximately 5.7% of our total assets prior to consolidation at March 31, 2018.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With

 

95


Table of Contents
Index to Financial Statements

our net investment of $74.5 million in HT III as of March 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 March 31, 2018. As of March 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 March 31, 2018, we held investments in HT III in 47 companies with a fair value of approximately $236.0 million, accounting for approximately 15.9% of our total investment portfolio at March 31, 2018. HT III held approximately $285.8 million in assets and accounted for approximately 14.4% of our total assets prior to consolidation at March 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 our wholly owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of March 31, 2018 as a result of having sufficient capital as defined under the SBA regulations.

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 March 2009, the initial maturity of SBA debentures will occur in March 2019. 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 II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. 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 our SBA debentures range from 3.05% to 5.53% when including these annual fees.

The average amount of debentures outstanding for the three months ended March 31, 2018 for HT II was approximately $41.2 million with an average interest rate of approximately 4.56%. The average amount of debentures outstanding for the three months ended March 31, 2018 for HT III was approximately $149.0 million with an average interest rate of approximately 3.46%.

 

96


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the SBA debentures are as follows:

 

     Three Months Ended March 31,  

(in thousands)

   2018      2017  

Interest expense

   $ 1,718      $ 1,719  

Amortization of debt issuance cost (loan fees)

     158        168  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 1,876      $ 1,887  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 3,442      $ 3,442  

In aggregate, at March 31, 2018, with our net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At March 31, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries.

We reported the following SBA debentures outstanding principal balances as of March 31, 2018 and December 31, 2017:

 

(in thousands)

Issuance/Pooling Date

   Maturity Date      Interest
Rate(1)
    March 31,
2018
     December 31,
2017
 

March 25, 2009

     March 1, 2019        5.53   $ 18,400      $ 18,400  

September 23, 2009

     September 1, 2019        4.64     3,400        3,400  

September 22, 2010

     September 1, 2020        3.62     6,500        6,500  

September 22, 2010

     September 1, 2020        3.50     22,900        22,900  

March 29, 2011

     March 1, 2021        4.37     28,750        28,750  

September 21, 2011

     September 1, 2021        3.16     25,000        25,000  

March 21, 2012

     March 1, 2022        3.28     25,000        25,000  

March 21, 2012

     March 1, 2022        3.05     11,250        11,250  

September 19, 2012

     September 1, 2022        3.05     24,250        24,250  

March 27, 2013

     March 1, 2023        3.16     24,750        24,750  
       

 

 

    

 

 

 

Total SBA Debentures

        $ 190,200      $ 190,200  
       

 

 

    

 

 

 

 

(1)

Interest rate includes annual charge

2019 Notes

In April and July 2012, we issued $84.5 million in aggregate principal amount of 7.00% notes due 2019 (the “April 2019 Notes”). In September and October 2012, we 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, we 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, we 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.

 

97


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2019 Notes are as follows:

 

     Three Months Ended March 31,  

(in thousands)

   2018      2017  

Interest expense

   $ —        $ 1,159  

Amortization of debt issuance cost (loan fees)

     —          1,546  
  

 

 

    

 

 

 

Total interest expense and fees

   $ —        $ 2,705  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ 1,911  

2022 Notes

On October 23, 2017, we issued $150.0 million in aggregate principal amount of the 2022 Notes. The 2022 Notes were issued pursuant to the 2022 Notes Indenture. The sale of the 2022 Notes generated net proceeds of approximately $147.5 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 $1.7 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 ours that rank senior in right of payment to all of our 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 our current or future subsidiaries. The 2022 Notes rank pari passu, or equally, in right of payment with all of our existing and future liabilities that are not so subordinated, or junior. The 2022 Notes effectively rank subordinated, or junior, to any of our secured indebtedness (including unsecured indebtedness that we later secure) 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 ours.

We 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 March 31, 2018, we were in compliance with the terms of the 2022 Notes Indenture.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Notes were as follows:

 

(in thousands)

   March 31, 2018      December 31, 2017  

Principal amount of debt

   $ 150,000      $ 150,000  

Unamortized debt issuance cost

     (1,548      (1,633

Original issue discount, net of accretion

     (754      (795
  

 

 

    

 

 

 

Carrying value of 2022 Notes

   $ 147,698      $ 147,572  
  

 

 

    

 

 

 

 

98


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2022 Notes are as follows:

 

     Three Months Ended March 31,  

(in thousands)

   2018      2017  

Interest expense

   $ 1,734      $ —    

Amortization of debt issuance cost (loan fees)

     84        —    

Accretion of original issue discount

     41        —    
  

 

 

    

 

 

 

Total interest expense and fees

   $ 1,859      $ —    
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —    

2024 Notes

On July 14, 2014, we and U.S. Bank, N.A. (the “2024 Trustee”), entered into the Third Supplemental Indenture (the “Third Supplemental Indenture”) to the Base Indenture between us and the 2024 Trustee, dated July 14, 2014, relating to our issuance, offer and sale of $100.0 million aggregate principal amount of 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, we 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, 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.

On October 11, 2016, we 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 the 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.

On October 24, 2017, our 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. We redeemed this portion of the 2024 Notes on April 2, 2018.

The 2024 Notes Agent receives a commission from us 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 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.

 

99


Table of Contents
Index to Financial Statements

During the three months ended March 31, 2018, we did not sell any notes under the debt distribution agreement. During the year ended December 31, 2017, we sold 225,457 notes for approximately $5.6 million in aggregate principal amount. As of March 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 our 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.”

The 2024 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we 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 our subsidiaries.

The Base Indenture, as supplemented by the Third Supplemental Indenture, contains certain covenants including covenants requiring us 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 we provide financial information to the holders of the 2024 Notes and the 2024 Trustee if we should no longer be subject to the reporting requirements under 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 March 31, 2018, we were in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2024 Notes were as follows:

 

(in thousands)

   March 31,
2018
     December 31,
2017
 

Principal amount of debt

   $ 183,510      $ 183,510  

Unamortized debt issuance cost

     (4,417      (4,591

Original issue premium, net of amortization

     68        82  
  

 

 

    

 

 

 

Carrying value of 2024 Notes

   $ 179,161      $ 179,001  
  

 

 

    

 

 

 

 

100


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows:

 

     Three Months Ended March 31,  

(in thousands)

           2018                        2017            

Interest expense

   $ 2,881      $ 3,987  

Amortization of debt issuance cost (loan fees)

     174        249  

Amortization of original issue premium

     (13      (16
  

 

 

    

 

 

 

Total interest expense and fees

   $ 3,042      $ 4,220  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 2,867      $ 3,977  

2021 Asset-Backed Notes

On November 13, 2014, we completed a $237.4 million term debt securitization in connection with which an affiliate of ours made an offer of $129.3 million in aggregate principal amount of the 2021 Asset-Backed Notes, which were rated A(sf) by Kroll Bond Rating Agency, Inc. 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 us, the 2014 Trust Depositor, the 2014 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. 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.

As part of this transaction, we entered into a sale and contribution agreement with the 2014 Trust Depositor under which we have agreed to sell or have contributed to the 2014 Trust Depositor the 2014 Loans. We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor.

In connection with the issuance and sale of the 2021 Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to us. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rules 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Section 2(a)(51)(A) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S under the Securities Act. The 2014 Securitization Issuer is not registered under the 1940 Act in reliance on an exemption provided by Section 3(c)(7) thereof and Rule 3a-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants.

The 2014 Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the 2014 Loans. We are entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related

 

101


Table of Contents
Index to Financial Statements

collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). We also serve as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At March 31, 2018 and December 31, 2017, the 2021 Asset-Backed Notes had an outstanding principal balance of $33.6 million and $49.2 million, respectively.

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2021 Asset-Backed Notes are as follows:

 

     Three Months
Ended March 31,
 

(in thousands)

   2018      2017  

Interest expense

   $ 341      $ 888  

Amortization of debt issuance cost (loan fees)

     83        210  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 424      $ 1,098  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 387      $ 940  

Under the terms of the 2021 Asset-Backed Notes, we are 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. We have segregated these funds and classified them as restricted cash. There was approximately $3.6 million and $3.7 million of restricted cash as of March 31, 2018 and December 31, 2017, respectively, funded through interest collections.

Convertible Notes

2022 Convertible Notes

On January 25, 2017, we 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 us and U.S. Bank, National Association, as trustee (the “2022 Convertible Notes 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 ours and rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2022 Convertible Notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) 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 our 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

 

102


Table of Contents
Index to Financial Statements

preceding the maturity date, holders may convert their 2022 Convertible Notes at any time. Upon conversion, we 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, we 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 March 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).

We 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 us 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 us 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 Convertible Notes Trustee if we cease 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. We 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. We 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, we 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, we record 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%.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Convertible Notes were as follows:

 

(in thousands)

   March 31, 2018      December 31, 2017  

Principal amount of debt

   $ 230,000      $ 230,000  

Unamortized debt issuance cost

     (3,492      (3,715

Original issue discount, net of accretion

     (2,630      (2,797
  

 

 

    

 

 

 

Carrying value of 2022 Convertible Notes

   $ 223,878      $ 223,488  
  

 

 

    

 

 

 

 

103


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the components of interest expense, fees and cash paid for interest expense for the 2022 Convertible notes were as follows:

 

     Three Months
Ended March 31,
 

(in thousands)

   2018      2017  

Interest expense

   $ 2,516      $ 1,758  

Amortization of debt issuance cost (loan fees)

     223        133  

Accretion of original issue discount

     168        112  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 2,907      $ 2,003  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 5,031      $ —    

As of March 31, 2018, we are in compliance with the terms of the indentures governing the 2022 Convertible Notes.

Credit Facilities

As of March 31, 2018 and December 31, 2017, we have two available secured credit facilities, the Wells Facility and the Union Bank Facility.

Wells Facility

On June 29, 2015, we, through a special purpose wholly owned subsidiary, Hercules Funding II LLC (“Hercules Funding II”), entered into the Wells Facility 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.

The Wells Facility matures on August 2, 2019, unless terminated sooner in accordance with its terms.

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. The Wells Facility contains an accordion feature, in which we 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. We expect 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 three months ended March 31, 2018 and 2017, this non-use fee was $150,000 and $145,000, respectively.

The Wells Facility also includes various financial and other covenants applicable to us and our subsidiaries, in addition to those applicable to Hercules Funding II, including covenants relating to certain changes of control of us and Hercules Funding II. Among other things, these covenants also require us 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.

As of March 31, 2018, the minimum tangible net worth covenant increased to $742.7 million as a result of the public offering of 18.2 million shares of common stock issued for a total gross proceeds of approximately $242.8 million under the Prior Equity Distribution Agreement through February 2017, and the Equity

 

104


Table of Contents
Index to Financial Statements

Distribution Agreement for the issuance of 1.6 million shares for gross proceeds of $20.5 million during 2017, and the issuance of 478,000 shares for gross proceeds of $6.3 million during the three months ended March 31, 2018. See “Note 6—Stockholder’s Equity” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus.

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, we 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, we paid an additional $750,000 in structuring fees and in connection with the amendment in December 2015, we paid an additional $188,000 in structuring fees. These fees are being amortized through the end of the term of the Wells Facility.

We did not make any draws or repayments on the available facility during the three months ended March 31, 2018. We had aggregate draws of $8.5 million on the available facility during the three months ended March 31, 2017 offset by repayments of $13.5 million. There were no borrowings outstanding on the facility as of March 31, 2018 and December 31, 2017.

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the Wells Facility are as follows:

 

     Three Months Ended March 31,  

(in thousands)

   2018      2017  

Interest expense

   $ —        $ 2  

Amortization of debt issuance cost (loan fees)

     44        107  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 44      $ 109  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ 256  

Union Bank Facility

On May 5, 2016, we, through a special purpose wholly owned subsidiary, Hercules Funding III LLC (“Hercules Funding III”), as borrower, entered into the Union Bank Facility with MUFG 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, we entered into the First Amendment to the Loan and Security Agreement, dated as of May 5, 2016 with MUFG Union Bank, N.A. 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.

Under the Union Bank Facility, MUFG Union Bank made commitments of $75.0 million. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $200.0 million, funded by additional lenders and with the agreement of MUFG 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 MUFG 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.

 

105


Table of Contents
Index to Financial Statements

We 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 three months ended March 31, 2018, the company incurred non-use fees of $94,000. For the three months ended March 31, 2017, the company incurred non-use fees under the Prior Union Bank Facility of $94,000.

The Union Bank Facility also includes various financial and other covenants applicable to us and our 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 us 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 that is in excess of $500.0 million plus 90% of the cumulative amount of equity raised after June 30, 2014.

As of March 31, 2018, the minimum tangible net worth covenant increased to $789.2 million as a result the public offering of 18.2 million shares of common stock issued for a total net proceeds of approximately $239.8 million under the Prior Equity Distribution Agreement through February 2017, and the issuance of 1.6 million shares for net proceeds of $20.0 million during 2017, and the issuance of 478,000 shares for net proceeds of $6.0 million during the three months ended March 31, 2018 under the Equity Distribution Agreement. See “Note 6—Stockholder’s Equity” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus.

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, we and Hercules Funding III also entered into the Sale and Servicing Agreement, dated May 5, 2016 (the “Sale Agreement”), by and among Hercules Funding III, as borrower, us, as originator and servicer, and MUFG Union Bank, as agent. Under the Sale Agreement, we agree to (i) sell or transfer certain loans to Hercules Funding III under the MUFG Union Bank Facility and (ii) act as servicer for the loans sold or transferred.

We did not make any draws or repayments on the available facility during the three months ended March 31, 2018 and 2017. At March 31, 2018 and December 31, 2017, there were no borrowings outstanding on the Union Bank Facility.

For the three months ended March 31, 2018 and 2017, 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:

 

     Three Months Ended March 31,  

(in thousands)

   2018      2017  

Interest expense

   $ —        $ —    

Amortization of debt issuance cost (loan fees)

     74        112  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 74      $ 112  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —    

 

106


Table of Contents
Index to Financial Statements

Distributions

The following table summarizes our distributions declared and paid, to be paid or reinvested on all shares, including restricted stock, to date:

 

Date Declared

   Record Date      Payment Date      Amount Per Share  

Cumulative distributions declared and paid prior to January 1, 2016

         $ 11.23  

February 17, 2016

     March 7, 2016        March 14, 2016        0.31  

April 27, 2016

     May 16, 2016        May 23, 2016        0.31  

July 27, 2016

     August 15, 2016        August 22, 2016        0.31  

October 24, 2016

     November 14, 2016        November 21, 2016        0.31  

February 16, 2017

     March 6, 2017        March 13, 2017        0.31  

April 26, 2017

     May 15, 2017        May 22, 2017        0.31  

July 26, 2017

     August 14, 2017        August 21, 2017        0.31  

October 25, 2017

     November 13, 2017        November 20, 2017        0.31  

February 14, 2018

     March 5, 2018        March 12, 2018        0.31  

April 25, 2018

     May 14, 2018        May 21, 2018        0.31  
        

 

 

 
         $ 14.33  
        

 

 

 

On April 25, 2018, the Board of Directors declared a cash distribution of $0.31 per share to be paid on May 21, 2018 to stockholders of record as of May 14, 2018. This distribution represents our fifty-first consecutive distribution since our IPO, bringing the total cumulative distribution to date to $14.33 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. As a result, any determination of the tax attributes of our distributions made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. Of the distributions declared during the fiscal years ended December 31, 2017, 2016, and 2015, 100% were distributions derived from our current and accumulated earnings and profits.

During the three months ended March 31, 2018, we declared a distribution of $0.31 per share. If we had determined the tax attributes of our distributions year-to-date as of March 31, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2018 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

 

107


Table of Contents
Index to Financial Statements

reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.

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 U.S. 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 generally 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, which consists of ordinary income, from the year ended December 31, 2017 to our stockholders during 2018.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts

 

108


Table of Contents
Index to Financial Statements

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.

Reclassification

Certain balances from prior years have been reclassified in order to conform to the current year presentation.

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 March 31, 2018, approximately 91.6% 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.

We may from time to time engage an independent valuation firm 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.

Refer to “Note 2—Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this prospectus for a discussion of our valuation policies for the three months ended March 31, 2018.

 

109


Table of Contents
Index to Financial Statements

Income Recognition

See “—Changes in Portfolio” for a discussion of our income recognition policies and results during the three months ended March 31, 2018. See “—Results of Operations” for a comparison of investment income for the three months ended March 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 our 2004 Equity Incentive Plan and to Board members under our 2006 Equity Incentive Plan prior to its expiration on June 21, 2017. 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.

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. We have adopted this standard, which did not have a material impact, on our 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 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. We anticipate an increase in the recognition of right-of-use assets and lease liabilities, however, we do not believe that ASU 2016-02 will have a material impact on our consolidated financial statements and disclosures.

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. We have adopted this standard, which did not have a material impact, on our consolidated financial statements and related disclosures for the periods presented.

In October 2016, the SEC adopted new rules and forms and amended other rules to enhance the reporting and disclosure of information by registered investment companies. As part of these changes, the SEC amended Regulation S-X to standardize and enhance disclosures in investment company financial statements. Implementation of the new or amended rules is required for reporting periods ending after August 1, 2017. We have reviewed the requirements and adopted the amendments to Regulation S-X on our consolidated financial statements and related disclosures for the periods presented.

 

110


Table of Contents
Index to Financial Statements

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. We have adopted this standard, which did not have a material impact, on our consolidated financial statements and related disclosures for the periods presented.

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 March 31, 2018, approximately 96.5% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. 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 March 31, 2018, the following table shows the approximate annualized increase (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

   Interest
Income
     Interest
Expense
     Net
Income
     EPS(1)  

25

   $ 3,088      $ —        $ 3,088      $ 0.04  

50

   $ 6,197      $ —        $ 6,197      $ 0.07  

75

   $ 9,394      $ —        $ 9,394      $ 0.11  

100

   $ 12,591      $ —        $ 12,591      $ 0.15  

200

   $ 25,791      $ —        $ 25,791      $ 0.30  

300

   $ 38,578      $ —        $ 38,578      $ 0.46  

 

(1)

Earnings per share impact calculated based on basic weighted average shares outstanding of 84,596.

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 three months ended March 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, 2021 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

 

111


Table of Contents
Index to Financial Statements

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, 2021 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” in this prospectus.

 

112


Table of Contents
Index to Financial Statements

BUSINESS

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 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’s 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 our two wholly-owned SBICs. Our SBIC subsidiaries, HT II and HT III hold approximately $113.1 million and $285.8 million in assets, respectively, and accounted for approximately 5.7% and 14.4% of our total assets, respectively, prior to consolidation at March 31, 2018. At March 31, 2018, we have issued $190.2 million in SBA-guaranteed debentures in our SBIC subsidiaries. See “Regulation—Small Business Administration Regulations” for additional information regarding our SBIC subsidiaries.

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

 

113


Table of Contents
Index to Financial Statements

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. A business development company also must 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 200% (or 150%, subject to certain approval and disclosure requirements) 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. 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 RIC under 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 of FASB’s 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 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

 

114


Table of Contents
Index to Financial Statements

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 SEC. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Exchange Act. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. 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.

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.

 

115


Table of Contents
Index to Financial Statements

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.

OUR BUSINESS STRATEGY

Our strategy to achieve our investment objective includes the following key elements:

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 15 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 420 technology-related companies, representing more than $7.6 billion in commitments from inception to March 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.

 

116


Table of Contents
Index to Financial Statements

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.

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 SQL database system to track various aspects of our investment process including sourcing, originations, transaction monitoring and post-investment performance. As of March 31, 2018, our proprietary SQL-based database system included approximately 48,810 technology-related companies and approximately 10,400 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.

 

117


Table of Contents
Index to Financial Statements

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 5.1% to 14.5% as of March 31, 2018. As of March 31, 2018, approximately 96.5% of our loans were at floating rates or floating rates with a floor and 3.5% 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 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 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 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.

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 14.5% 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

 

118


Table of Contents
Index to Financial Statements
 

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.

 

   

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 March 31, 2018, we held warrant and equity-related securities in 161 portfolio companies.

 

119


Table of Contents
Index to Financial Statements

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   Senior secured, either first out or last out, or second lien   Senior / First lien   Secured only by underlying equipment   None/unsecured
Covenants   Less restrictive; mostly financial   Generally borrowing base and financial   None   None
Risk Tolerance   Medium / High   Low   High   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 March 31, 2018, approximately 78.1% of the fair value of our portfolio was composed of investments in five industries: 26.5% investments in the software industry, 26.1% investments in the drug discovery & development industry, 12.0% investments in the internet consumer & business services industry, 7.8% investments in the sustainable and renewable technology industry, and 5.7% investments in the drug delivery.

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.

 

120


Table of Contents
Index to Financial Statements

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 twelve 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.

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.

 

121


Table of Contents
Index to Financial Statements

Our investment process is summarized in the following chart:

 

LOGO

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 March 31, 2018, our investment origination team, which consists of approximately 33 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.

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.

 

122


Table of Contents
Index to Financial Statements

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 members of our investment committee are our Chief Executive Officer, our Chief Financial Officer, and our Chief Investment Officer. The investment committee generally meets weekly and more frequently 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.

 

123


Table of Contents
Index to Financial Statements

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 March 31, 2018, our investments had a weighted average investment grading of 2.43.

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,

 

124


Table of Contents
Index to Financial Statements

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.

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. Additionally, competition is especially intense from commercial venture banks. 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 “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.

EMPLOYEES

As of March 31, 2018, we had 64 employees, including approximately 33 investment and portfolio management professionals, all of whom have extensive experience working on financing transactions for technology-related companies.

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.

 

125


Table of Contents
Index to Financial Statements

PORTFOLIO COMPANIES

(dollars in thousands)

The following tables set forth certain information as of March 31, 2018 regarding each portfolio company in which we had a debt or equity investment. The general terms of our loans and other investments are described in “Business—Our Investments and Operations.” Other than these investments, our only formal relationship with our portfolio companies is the offer to make available significant managerial assistance. In addition, we may receive rights to observe the Board of Directors’ meetings of our portfolio companies. Amounts are presented in thousands.

 

(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Debt Investments

             

Biotechnology Tools

             

1-5 Years Maturity

             

Exicure, Inc.(12)

8045 Lamon Avenue, Suite 410

Skokie, IL 60077

  Biotechnology Tools   Senior Secured   September 2019   Interest rate PRIME + 6.45%
or Floor rate of 9.95%, 3.85% Exit Fee
  $ 4,999     $ 5,135     $ 5,151  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,135       5,151  
   

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.62%)*

 

    5,135       5,151  
   

 

 

   

 

 

 

Communications & Networking

           

Under 1 Year Maturity

             

OpenPeak, Inc.(8)

One Riverfront Plaza,

1037 Raymond Boulevard,

Sixteenth Floor

Newark, NJ 07102

  Communications & Networking   Senior Secured   April 2018   Interest rate PRIME + 8.75%
or Floor rate of 12.00%
  $ 11,464       8,228       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    8,228       —    
   

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    8,228       —    
   

 

 

   

 

 

 

Consumer & Business Products

     

Under 1 Year Maturity

     

Gadget Guard (p.k.a. Antenna79)(15)

709N 400 W #3

North Salt Lake, UT 84054

  Consumer & Business Products   Senior Secured   December 2018   Interest rate PRIME + 6.00%
or Floor rate of 9.50%
  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
   

 

 

   

 

 

 

1-5 Years Maturity

     

Gadget Guard (p.k.a. Antenna79)(15)

709N 400 W #3

North Salt Lake, UT 84054

  Consumer & Business Products   Senior Secured   December 2019   Interest rate PRIME + 7.45%
or Floor rate of 10.95%, 2.95% Exit Fee
  $ 18,043       18,245       18,133  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    18,245       18,133  
   

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.31%)*

 

    19,245       19,133  
   

 

 

   

 

 

 

Diversified Financial Services

           

1-5 Years Maturity

             

Gibraltar Business Capital, LLC(7)

400 Skokie Blvd #375

Northbrook, IL 60062

  Diversified Financial Services   Unsecured   March 2023   Interest rate FIXED 14.50%   $ 10,000       9,802       9,802  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,802       9,802  
   

 

 

   

 

 

 

Subtotal: Diversified Financial Services (1.18%)*

 

    9,802       9,802  
   

 

 

   

 

 

 

Drug Delivery

             

Under 1 Year Maturity

             

Agile Therapeutics, Inc.(11)

101 Poor Farm Road

Princeton, NJ 08540

  Drug Delivery   Senior Secured   December 2018   Interest rate PRIME + 4.75%
or Floor rate of 9.00%, 3.70% Exit Fee
  $ 9,272       9,746       9,747  

 

126


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Pulmatrix Inc.(9)(11)

99 Hayden Avenue, Suite 390

Lexington, MA 02421

  Drug Delivery   Senior Secured  

July

2018

  Interest rate PRIME + 6.25%
or Floor rate of 9.50%, 3.50% Exit Fee
  $ 2,540     $ 2,764     $ 2,764  

ZP Opco, Inc (p.k.a. Zosano Pharma)(11)

34790 Ardentech Court

Fremont, CA 94555

  Drug Delivery   Senior Secured   December 2018   Interest rate PRIME + 2.70%
or Floor rate of 7.95%, 2.87% Exit Fee
  $ 4,789       5,108       5,108  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    17,618       17,619  
   

 

 

   

 

 

 

1-5 Years Maturity

             

AcelRx Pharmaceuticals, Inc.(10)(11)(15)

351 Galveston Drive

Redwood City, CA 94063

  Drug Delivery   Senior Secured   March 2020   Interest rate PRIME + 6.05%
or Floor rate of 9.55%, 11.69% Exit Fee
  $ 16,791       17,275       17,199  

Antares Pharma Inc.(10)(15)

100 Princeton South, Suite 300

Ewing, NJ 08628

  Drug Delivery   Senior Secured  

July

2022

  Interest rate PRIME + 4.50%
or Floor rate of 9.25%, 4.25% Exit Fee
  $ 25,000       25,079       24,970  

Edge Therapeutics, Inc.(12)

300 Connell Dr., Suite 4000

Berkeley Heights, NJ 07922

  Drug Delivery   Senior Secured   August 2020   Interest rate PRIME + 4.65%
or Floor rate of 9.15%, 4.95% Exit Fee
  $ 20,000       20,401       20,167  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    62,755       62,336  
   

 

 

   

 

 

 

Subtotal: Drug Delivery (9.65%)*

 

    80,373       79,955  
   

 

 

   

 

 

 

Drug Discovery & Development

           

Under 1 Year Maturity

             

CytRx Corporation(11)(15)

11726 San Vicente Blvd., Suite 650

Los Angeles, CA 90049

  Drug Discovery & Development   Senior Secured   August 2018   Interest rate PRIME + 6.00%
or Floor rate of 9.50%, 7.09% Exit Fee
  $ 8,946       10,393       10,393  

Epirus Biopharmaceuticals, Inc.(8)

99 High Street

Boston, MA 02110-2320

  Drug Discovery & Development   Senior Secured   April 2018   Interest rate PRIME + 4.70%
or Floor rate of 7.95%, 3.00% Exit Fee
  $ 2,277       2,561       —    

Genocea Biosciences, Inc.(11)

100 Acorn Park Drive, 5th Floor

Cambridge, MA 02140

  Drug Discovery & Development   Senior Secured   January 2019   Interest rate PRIME + 2.25%
or Floor rate of 7.25%, 4.95% Exit Fee
  $ 13,316       14,005       14,005  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    26,959       24,398  
   

 

 

   

 

 

 

1-5 Years Maturity

             

Auris Medical Holding, AG(5)(10)

Dornacherstrasse 210

CH-4053, Basel Switzerland

  Drug Discovery & Development   Senior Secured   January 2020   Interest rate PRIME + 6.05%
or Floor rate of 9.55%, 5.75% Exit Fee
  $ 8,836       9,199       9,204  

Aveo Pharmaceuticals, Inc.(10)(13)

One Broadway, 9th Floor

Cambridge, MA 02142

  Drug Discovery & Development   Senior Secured  

July

2021

  Interest rate PRIME + 4.70%
or Floor rate of 9.45%, 5.40% Exit
  $ 10,000       9,936       9,818  
  Drug Discovery & Development   Senior Secured  

July 2021

  Fee Interest rate PRIME + 4.70%
or Floor rate of 9.45%, 3.00% Exit Fee
  $ 10,000       9,990       9,948  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       19,926       19,766  

Axovant Sciences Ltd.(5)(10)

11 Times Square, 33rd Floor

New York, NY 10036

  Drug Discovery & Development   Senior Secured   March 2021   Interest rate PRIME + 6.80%
or Floor rate of 10.55%
  $ 55,000       53,783       53,670  

Brickell Biotech, Inc.(12)

5777 Central Ave, Suite 102

Boulder, CO 80301

  Drug Discovery & Development   Senior Secured   September 2019   Interest rate PRIME + 5.70%
or Floor rate of 9.20%, 7.49% Exit Fee
  $ 5,834       6,178       6,166  

Chemocentryx, Inc.(10)(15)(17)

850 Maude Avenue

Mountain View, CA 94043

  Drug Discovery & Development   Senior Secured   December 2021   Interest rate PRIME + 3.30%
or Floor rate of 8.05%, 6.25% Exit Fee
  $ 5,000       4,973       4,973  

 

127


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Mesoblast(5)(10)

55 Collins Street, Level 38

Melbourne, Victoria, Australia 3000

  Drug Discovery & Development   Senior Secured   March 2022   Interest rate PRIME + 4.95%
or Floor rate of 9.45%, 6.95% Exit Fee
  $ 35,000     $ 34,682     $ 34,682  

Metuchen Pharmaceuticals LLC(12)(14)

11 Commerce Drive, First Floor

Cranford, NJ 07016

  Drug Discovery & Development   Senior Secured   October 2020   Interest rate PRIME + 7.25%
or Floor rate of 10.75%,
PIK Interest 1.35%, 2.25% Exit Fee
  $ 25,648       25,923       25,793  

Motif BioSciences Inc.(15)

125 Park Avenue., 25th Floor

New York, NY 10017

  Drug Discovery & Development   Senior Secured   September 2021   Interest rate PRIME + 5.50%
or Floor rate of 10.00%, 2.15% Exit Fee
  $ 15,000       14,711       14,711  

Myovant Sciences, Ltd.(5)(10)(13)

2000 Sierra Point Parkway, 9th Floor

Brisbane, CA 94005

  Drug Discovery & Development   Senior Secured  

May

2021

  Interest rate PRIME + 4.00%
or Floor rate of 8.25%, 6.55% Exit Fee
  $ 40,000       39,445       39,444  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(15)

75 Park Plaza, 4th Floor

Boston, MA 02116

  Drug Discovery & Development   Senior Secured   September 2020   Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 4.50% Exit Fee
  $ 40,000       40,347       39,931  
  Drug Discovery & Development   Senior Secured   September 2020   Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 4.50% Exit Fee
  $ 10,000       10,094       9,984  
  Drug Discovery & Development   Senior Secured   September 2020   Interest rate PRIME + 2.75%
or Floor rate of 8.50%, 2.25% Exit Fee
  $ 10,000       9,996       9,904  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,437       59,819  

Stealth Bio Therapeutics Corp.(5)(10)(12)

275 Grove Street, Suite 3-107

Newton, MA 02466

  Drug Discovery & Development   Senior Secured   January 2021   Interest rate PRIME + 5.50%
or Floor rate of 9.50%, 5.00% Exit Fee
  $ 20,000       19,910       19,672  

Tricida, Inc.(15)

7000 Shoreline Ct #201

South San Francisco, CA 94080

  Drug Discovery & Development   Senior Secured   March 2022   Interest rate PRIME + 3.35%
or Floor rate of 8.35%, 11.14% Exit Fee
  $ 25,000       24,607       24,607  

UniQure B.V.(5)(10)(11)

Paasheuvelweg 25A

Amsterdam, The Netherlands 1105 BP

  Drug Discovery & Development   Senior Secured   May 2020   Interest rate PRIME + 3.00%
or Floor rate of 8.25%, 5.48% Exit Fee
  $ 20,000       20,668       20,579  

Verastem, Inc.(12)

117 Kendrick Street, Suite 500

Needham, MA 02494

  Drug Discovery & Development   Senior Secured   December 2020   Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
  $ 5,000       4,980       4,942  
  Drug Discovery & Development   Senior Secured   December 2020   Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
  $ 5,000       5,016       4,978  
  Drug Discovery & Development   Senior Secured   December 2020   Interest rate PRIME + 6.00%
or Floor rate of 10.50%, 4.50% Exit Fee
  $ 5,000       4,978       4,939  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 15,000       14,974       14,859  
   

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    349,416       347,945  
   

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (44.93%)*

 

    376,375       372,343  
   

 

 

   

 

 

 

Electronics & Computer Hardware

           

1-5 Years Maturity

             

908 DEVICES INC.(15)

27 Drydock Avenue, 7th Floor

Boston, MA 02210

  Electronics & Computer Hardware   Senior Secured   September 2020   Interest rate PRIME + 4.00%
or Floor rate of 8.25%, 4.25% Exit Fee
  $ 10,000       10,061       9,864  

 

128


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Glo AB(5)(10)(14)

1225 Bordeaux Drive

Sunnyvale, CA 94089

  Electronics & Computer Hardware   Senior Secured   February 2021   Interest rate PRIME + 6.20%
or Floor rate of 10.45%,
PIK Interest 1.75%, 2.95% Exit Fee
  $ 12,030     $ 11,933     $ 11,933  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    21,994       21,797  
   

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (2.63%)*

 

    21,994       21,797  
   

 

 

   

 

 

 

Healthcare Services, Other

             

1-5 Years Maturity

             

Medsphere Systems Corporation(14)(15)

632 Commercial St.

San Francisco, CA 94111

  Healthcare Services, Other   Senior Secured   February 2021   Interest rate PRIME + 4.75%
or Floor rate of 9.00%,
PIK Interest 1.75%
  $ 17,685       17,536       17,536  
  Healthcare Services, Other   Senior Secured   February 2021   Interest rate PRIME + 4.75%
or Floor rate of 9.00%,
PIK Interest 1.75%
  $ 5,031       4,990       4,990  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,716       22,526       22,526  

Oak Street Health(12)(17)

327 West Belden Ave., Suite 3

Chicago, IL 60614

  Healthcare Services, Other   Senior Secured   September 2021   Interest rate PRIME + 5.00%
or Floor rate of 9.75%, 5.95% Exit Fee
  $ 20,000       20,083       19,836  

PH Group Holdings(13)

950 N Glebe Rd., Suite 4000

Arlington, VA 22203

  Healthcare Services, Other   Senior Secured   September 2020   Interest rate PRIME + 7.45%
or Floor rate of 10.95%
  $ 20,000       19,896       19,703  
  Healthcare Services, Other   Senior Secured   September 2020   Interest rate PRIME + 7.45%
or Floor rate of 10.95%
  $ 10,000       9,934       9,794  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,830       29,497  
   

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    72,439       71,859  
   

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.67%)*

 

    72,439       71,859  
   

 

 

   

 

 

 

Information Services

             

1-5 Years Maturity

             

MDX Medical, Inc.(14)(15)(19)

160 Chubb Avenue, Suite 301

Lyndhurst, NJ 07071

  Information Services   Senior Secured   December 2020   Interest rate PRIME + 4.00%
or Floor rate of 8.25%,
PIK Interest 1.70%
  $ 15,100       14,702       14,410  

Netbase Solutions, Inc.(13)(14)

3960 Freedom Circle, Suite 200

Santa Clara, CA 95054

  Information Services   Senior Secured   August 2020   Interest rate PRIME + 6.00%
or Floor rate of 10.00%,
PIK Interest 2.00%, 3.00% Exit Fee
  $ 9,096       8,855       8,815  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    23,557       23,225  
   

 

 

   

 

 

 

Subtotal: Information Services (2.80%)*

 

    23,557       23,225  
   

 

 

   

 

 

 

Internet Consumer & Business Services

           

Under 1 Year Maturity

             

The Faction Group

1660 Lincoln St., Floor 16

Denver, CO 80264

  Internet Consumer & Business Services   Senior Secured   January 2019   Interest rate PRIME + 4.75%
or Floor rate of 8.25%
  $ 2,000       2,000       2,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    2,000       2,000  
   

 

 

   

 

 

 

1-5 Years Maturity

             

AppDirect, Inc.(19)

650 California Street, Floor 25

San Francisco, CA 94108

  Internet Consumer & Business Services   Senior Secured   January 2022   Interest rate PRIME + 5.70%
or Floor rate of 9.95%, 3.45% Exit Fee
  $ 10,000       9,918       9,918  

Aria Systems, Inc.(11)(14)

575 Market Street, 32nd Floor

San Francisco, CA 94105

  Internet Consumer & Business Services   Senior Secured  

June

2019

  Interest rate PRIME + 3.20%
or Floor rate of 6.95%,
PIK Interest 1.95%, 1.75% Exit Fee
  $ 2,113       2,124       1,240  
  Internet Consumer & Business Services   Senior Secured  

June

2019

  Interest rate PRIME + 5.20%
or Floor rate of 8.95%,
PIK Interest 1.95%, 1.75% Exit Fee
  $ 18,924       19,019       11,108  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 21,037       21,143       12,348  

 

129


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Art.com, Inc.(14)(15)

2100 Powell Street 13th Floor

Emeryville, CA 94608

  Internet Consumer & Business Services   Senior Secured  

April

2021

  Interest rate PRIME + 5.40%
or Floor rate of 10.15%,
PIK Interest 1.70%, 1.50% Exit Fee
  $ 10,000     $ 9,812     $ 9,812  

Greenphire Inc.(17)

630 Allendale Road., Suite 250

King of Prussia, PA 19406

  Internet Consumer & Business Services   Senior Secured   January 2021   Interest rate 3-month LIBOR + 8.00% or Floor rate of 9.00%   $ 3,658       3,658       3,658  
  Internet Consumer & Business Services   Senior Secured   January 2021   Interest rate PRIME + 3.75%
or Floor rate of 7.00%
  $ 1,500       1,500       1,500  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 5,158       5,158       5,158  

Intent Media, Inc.(14)(15)

315 Hudson St., 9th Floor

New York, NY 10013

  Internet Consumer & Business Services   Senior Secured  

May

2019

  Interest rate PRIME + 5.25%
or Floor rate of 8.75%,
PIK Interest 1.00%, 2.00% Exit Fee
  $ 5,063       5,053       5,056  
  Internet Consumer & Business Services   Senior Secured  

May

2019

  Interest rate PRIME + 5.50%
or Floor rate of 9.00%,
PIK Interest 2.35%, 2.00% Exit Fee
  $ 2,032       2,014       2,014  
  Internet Consumer & Business Services   Senior Secured  

May

2019

  Interest rate PRIME + 5.50%
or Floor rate of 9.00%,
PIK Interest 2.50%, 2.00% Exit Fee
  $ 2,034       2,016       2,016  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,129       9,083       9,086  

Interactions Corporation(19)

31 Hayward Street., Suite E

Franklin, MA 02038

  Internet Consumer & Business Services   Senior Secured   March 2021   Interest rate 3-month LIBOR + 8.60% or Floor rate of 9.85%, 1.75% Exit Fee   $ 25,000       25,032       25,032  

LogicSource(15)

20 Marshall Street

South Norwalk, CT 06854

  Internet Consumer & Business Services   Senior Secured   October 2019   Interest rate PRIME + 6.25%
or Floor rate of 9.75%, 5.00% Exit Fee
  $ 5,645       5,935       5,933  

Snagajob.com, Inc.(13)(14)

1919 N Lynn Street, 7th Floor

Arlington, VA 22209

  Internet Consumer & Business Services   Senior Secured  

July

2020

  Interest rate PRIME + 5.15%
or Floor rate of 9.15%,
PIK Interest 1.95%, 2.55% Exit Fee
  $ 41,223       41,010       41,166  

Tectura Corporation(7)(8)(9)(14)

951 Old County Road, Suite 2-317

Belmont, CA 94002

  Internet Consumer & Business Services   Senior Secured  

June

2021

  Interest rate FIXED 6.00%,
PIK Interest 3.00%
  $ 20,450       20,450       17,095  
  Internet Consumer & Business Services   Senior Secured  

June

2021

  PIK Interest 8.00%   $ 10,680       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,130       20,690       17,095  

The Faction Group

1660 Lincoln St., Floor 16

Denver, CO 80264

  Internet Consumer & Business Services   Senior Secured   January 2021   Interest rate 3-month LIBOR + 9.25% or Floor rate of 10.25%   $ 8,000       8,000       8,000  

Wheels Up Partners LLC

220 West 42nd Street, 16th Floor

New York, NY 10036

  Internet Consumer & Business Services   Senior Secured  

July

2022

  Interest rate 3-month LIBOR + 8.55% or Floor rate of 9.55%   $ 22,406       22,191       22,191  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    177,972       165,739  
   

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (20.24%)*

 

    179,972       167,739  
   

 

 

   

 

 

 

Media/Content/Info

             

1-5 Years Maturity

             

Bustle(14)(15)

315 Park Avenue South, 12th Floor

New York, NY 10010

  Media/Content/Info   Senior Secured  

June

2021

  Interest rate PRIME + 4.10%
or Floor rate of 8.35%,
PIK Interest 1.95%, 1.95% Exit Fee
  $ 15,089       15,032       15,032  

 

130


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

FanDuel, Inc.(9)(12)(14)

300 Park Avenue South, 14th Floor

New York, NY 10005

  Media/Content/Info   Senior Secured   November 2019   Interest rate PRIME + 7.25%
or Floor rate of 10.75%, 10.41% Exit Fee
  $ 19,354     $ 20,072     $ 19,941  
  Media/Content/Info   Convertible Debt   September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       21,072       20,941  
   

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    36,104       35,973  
   

 

 

   

 

 

 

Subtotal: Media/Content/Info (4.34%)*

 

    36,104       35,973  
   

 

 

   

 

 

 

Medical Devices & Equipment

           

Under 1 Year Maturity

             

Aspire Bariatrics, Inc.(15)

3200 Horizon Drive, Suite 100

King of Prussia, PA 19406

  Medical Devices & Equipment   Senior Secured   October 2018   Interest rate PRIME + 4.00%
or Floor rate of 9.25%, 6.85% Exit Fee
  $ 1,793       2,148       839  

Quanterix Corporation(11)

113 Hartwell Avenue

Lexington, MA 02421

  Medical Devices & Equipment   Senior Secured   March 2019   Interest rate PRIME + 2.75%
or Floor rate of 8.00%, 4.00% Exit Fee
  $ 8,591       8,569       8,569  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    10,717       9,408  
   

 

 

   

 

 

 

1-5 Years Maturity

             

Intuity Medical, Inc.(15)

3500 West Warren Avenue

Fremont, CA 94538

  Medical Devices & Equipment   Senior Secured   June 2021   Interest rate PRIME + 5.00%
or Floor rate of 9.25%, 4.95% Exit Fee
  $ 17,500       17,132       17,132  

Micell Technologies, Inc.(12)

801 Capitola Drive, Suite 1

Durham, NC 27713

  Medical Devices & Equipment   Senior Secured   August 2019   Interest rate PRIME + 7.25%
or Floor rate of 10.50%, 5.00% Exit Fee
  $ 4,715       5,030       4,981  

Quanta Fluid Solutions(5)(10)(11)

Tything Road

Alcester, UK B49 6EU

  Medical Devices & Equipment   Senior Secured   April 2020   Interest rate PRIME + 8.05%
or Floor rate of 11.55%, 5.00% Exit Fee
  $ 8,848       9,220       9,150  

Sebacia, Inc.(15)

2905 Premiere Parkway, Suite 150

Duluth, GA 30097

  Medical Devices & Equipment   Senior Secured   July 2020   Interest rate PRIME + 4.35%
or Floor rate of 8.85%, 6.05% Exit Fee
  $ 8,000       7,988       7,979  

Tela Bio, Inc.(15)

One Great Valley Pkwy, Suite 24

Malvern, PA 19355

  Medical Devices & Equipment   Senior Secured   December 2020   Interest rate PRIME + 4.95%
or Floor rate of 9.45%, 3.15% Exit Fee
  $ 5,000       5,004       4,989  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    44,374       44,231  
   

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (6.47%)*

 

    55,091       53,639  
   

 

 

   

 

 

 

Software

             

Under 1 Year Maturity

             

Clickfox, Inc.(13)

3445 Peachtree Road, Suite 450

Atlanta, GA 30326

  Software   Senior Secured  

May

2018

  Interest rate PRIME + 8.00%
or Floor rate of 11.50%, 12.01% Exit Fee
  $ 2,592       4,012       4,012  

Digital Train Limited(15)

21250 Hawthorne Boulevard, Suite 380

Torrance, CA 90503

  Software   Unsecured  

July

2018

  Interest rate 12-month LIBOR + 2.50%   $ 5,671       5,671       4,073  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    9,683       8,085  
   

 

 

   

 

 

 

1-5 Years Maturity

             

Banker’s Toolbox, Inc(18)

4, 12331-B Riata Trace Pkwy, #200

Austin, TX 78727

  Software   Senior Secured   March 2023   Interest rate 3-month LIBOR + 7.94% or Floor rate of 8.94%   $ 16,500       16,139       16,139  

 

131


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Clarabridge, Inc.(12)(14)

11400 Commerce Park Drive., Suite 500

Reston, VA 20191

  Software   Senior Secured  

April

2021

  Interest rate PRIME + 4.80%
or Floor rate of 8.55%,
PIK Interest 3.25%
  $ 41,226     $ 41,205     $ 41,164  

Emma, Inc.

9 Lea Avenue

Nashville, TN 37210

  Software   Senior Secured   September 2022   Interest rate daily LIBOR + 7.75%
or Floor rate of 8.75%
  $ 50,000       48,629       47,785  

Evernote Corporation(14)(15)(17)(19)

305 Walnut Street

Redwood City, CA 94063

  Software   Senior Secured   October 2020   Interest rate PRIME + 5.45%
or Floor rate of 8.95%
  $ 6,000       5,976       6,065  
  Software   Senior Secured   July 2021   Interest rate PRIME + 6.00%
or Floor rate of 9.50%,
PIK Interest 1.25%
  $ 4,035       4,013       3,988  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 10,035       9,989       10,053  

Fuze, Inc.(13)(14)(15)(19)

2 Copley Place, Floor 7

Boston, MA 02116

  Software   Senior Secured  

July

2021

  Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.55%, 3.55% Exit Fee
  $ 50,528       50,776       50,413  

Impact Radius Holdings, Inc.(14)(17)

223 East De La Guerra Street

Santa Barbara, CA 93101

  Software   Senior Secured   December 2020   Interest rate PRIME + 4.25%
or Floor rate of 8.75%,
PIK Interest 1.55%, 1.75% Exit Fee
  $ 10,073       10,091       9,945  

Insurance Technologies Corp.(17)

1415 Halsey Way, #314

Carrollton, TX 75007

  Software   Senior Secured   March 2023   Interest rate 3-month LIBOR + 7.75% or Floor rate of 8.75%   $ 12,500       12,250       12,250  

Lightbend, Inc.(14)(15)

625 Market St

San Francisco, CA 94105

  Software   Senior Secured   August 2021   Interest rate PRIME + 4.25%
or Floor rate of 8.50%,
PIK Interest 2.00%
  $ 11,009       10,806       10,806  

Lithium Technologies, Inc.(17)

225 Bush St.

San Francisco, CA 94104

  Software   Senior Secured   October 2022   Interest rate 1-month LIBOR + 8.00% or Floor rate of 9.00%   $ 12,000       11,751       11,751  

Microsystems Holding Company, LLC(19)

535 Madison Ave., Floor 4

New York, NY 10022

  Software   Senior Secured  

July

2022

  Interest rate 3-month LIBOR + 8.25% or Floor rate of 9.25%   $ 12,000       11,829       11,829  

OneLogin, Inc.(14)(15)

150 Spear Street, Suite 1400

San Francisco, CA 94105

  Software   Senior Secured   August 2019   Interest rate PRIME + 6.45%
or Floor rate of 9.95%,
PIK Interest 3.25%
  $ 16,012       15,953       16,113  

PerfectServe, Inc.

10024 Investment Drive

Knoxville, TN 37932

  Software   Senior Secured  

April

2021

  Interest rate 3-month LIBOR + 9.00% or Floor rate of 10.00%, 2.50% Exit Fee   $ 16,000       16,057       16,057  
  Software   Senior Secured  

April

2021

  Interest rate 3-month LIBOR + 9.00% or Floor rate of 10.00%, 2.50% Exit Fee   $ 4,000       4,013       4,013  
         

 

 

   

 

 

   

 

 

 

Total PerfectServe, Inc.

  $ 20,000       20,070       20,070  

Pollen, Inc.(15)

2000 Shawnee Mission Parkway, Suite 200

Mission Woods, KS 66205

  Software   Senior Secured  

April

2019

  Interest rate PRIME + 4.25%
or Floor rate of 8.50%, 4.00% Exit Fee
  $ 7,000       7,023       7,000  

Poplicus, Inc.(8)(14)

19 South Park St.

San Francisco, CA 94107

  Software   Senior Secured  

May

2022

  Interest rate FIXED 6.00%,
PIK Interest 3.00%
  $ 1,250       1,250       —    

Quid, Inc.(14)(15)

600 Harrison Street, Suite 400

San Francisco, CA 94107

  Software   Senior Secured   October 2019   Interest rate PRIME + 4.75%
or Floor rate of 8.25%,
PIK Interest 2.25%, 3.00% Exit Fee
  $ 8,350       8,480       8,494  

 

132


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

RapidMiner, Inc.(14)

10 Milk Street., 11th Floor

Boston, MA 02108

  Software   Senior Secured   December 2020   Interest rate PRIME + 5.50%
or Floor rate of 9.75%,
PIK Interest 1.65%
  $ 7,030     $ 7,004     $ 7,004  

Regent Education(14)

340 East Patrick Street, Suite 210 Frederick, MD 21701

  Software   Senior Secured   January 2021   Interest rate FIXED 10.00%,
PIK Interest 2.00%, 6.35% Exit Fee
  $ 3,302       3,316       3,316  

Signpost, Inc.(14)

127 W 26th St., Floor 2

New York, NY 10001

  Software   Senior Secured   February 2020   Interest rate PRIME + 4.15%
or Floor rate of 8.15%,
PIK Interest 1.75%, 3.75% Exit Fee
  $ 15,578       15,742       15,612  

Vela Trading Technologies(18)

211 East 43rd Street, 5th Floor

New York, NY 10017

  Software   Senior Secured  

July

2022

  Interest rate daily LIBOR + 9.50%
or Floor rate of 10.50%
  $ 20,000       19,518       19,143  

Wrike, Inc.(14)(17)(19)

10 Almaden Blvd, Suite 1000

San Jose, CA 95113

  Software   Senior Secured   February 2021   Interest rate PRIME + 6.00%
or Floor rate of 9.50%,
PIK Interest 2.00%, 3.00% Exit Fee
  $ 10,215       10,062       10,043  

ZocDoc(19)

568 Broadway Floor 9

New York, NY 10012

  Software   Senior Secured  

April

2021

  Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 20,000       20,026       20,026  
  Software   Senior Secured   November 2021   Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%, 1.00% Exit Fee   $ 10,000       10,012       10,012  
         

 

 

   

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,038       30,038  
   

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    361,921       358,968  
   

 

 

   

 

 

 

Subtotal: Software (44.29%)*

 

    371,604       367,053  
   

 

 

   

 

 

 

Surgical Devices

             

1-5 Years Maturity

             

Transmedics, Inc.(13)

200 Minuteman Road, Suite 302

Andover, MA 01810

  Surgical Devices   Senior Secured   February 2020   Interest rate PRIME + 5.30%
or Floor rate of 9.55%, 6.70% Exit Fee
  $ 7,608       7,927       7,912  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    7,927       7,912  
   

 

 

   

 

 

 

Subtotal: Surgical Devices (0.95%)*

 

    7,927       7,912  
   

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Under 1 Year Maturity

             

Kinestral Technologies, Inc.

3955 Trust Way

Hayward, CA 94545

  Sustainable and Renewable Technology   Senior Secured   October 2018   Interest rate 3-month LIBOR + 7.75% or Floor rate of 8.75%, 3.23% Exit Fee   $ 2,707       2,739       2,739  

Rive Technology, Inc.(15)

1 Deer Park Drive, Suite A

Monmouth Junction, NJ 08852

  Sustainable and Renewable Technology   Senior Secured   January 2019   Interest rate PRIME + 6.20%
or Floor rate of 9.45%, 4.00% Exit Fee
  $ 3,318       3,583       3,583  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    6,322       6,322  
   

 

 

   

 

 

 

1-5 Years Maturity

     

ChargePoint Inc.(19)

254 East Hacienda Avenue

Campbell, CA 95008

  Sustainable and Renewable Technology   Senior Secured   August 2020   Interest rate 3-month LIBOR + 8.75% or Floor rate of 9.75%, 2.00% Exit Fee   $ 17,576       17,630       17,630  

FuelCell Energy, Inc.(12)

3 Great Pasture Road

Danbury, CT 06810

  Sustainable and Renewable Technology   Senior Secured  

April

2020

  Interest rate PRIME + 5.40%
or Floor rate of 9.90%, 6.68% Exit Fee
  $ 13,091       12,827       12,824  
  Sustainable and Renewable Technology   Senior Secured  

April

2020

  Interest rate PRIME + 5.40%
or Floor rate of 9.90%, 8.50% Exit Fee
  $ 11,909       13,452       13,452  
         

 

 

   

 

 

   

 

 

 

Total FuelCell Energy, Inc.

  $ 25,000       26,279       26,276  

 

133


Table of Contents
Index to Financial Statements
(dollars in thousands)                                  

Portfolio Company

 

Sub-Industry

 

Type of
Investment(1)

 

Maturity

Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

66 Franklin Street, Suite 310

Oakland, CA 94607

 

 

Sustainable and Renewable Technology

 

 

Senior Secured

 

 

August 2019

 

 

Interest rate PRIME + 8.70%
or Floor rate of 12.95%, 4.50% Exit Fee

 

 

$

 

12,000

 

 

 

 

$

 

11,770

 

 

 

 

$

 

11,683

 

 

Metalysis Limited(5)(10)

Unit 2, Farfield Park Manvers Way,

Wath upon Dearne Rotherham,

South Yorkshire, UK S63 5DB

  Sustainable and Renewable Technology   Senior Secured   March 2021   Interest rate PRIME + 5.00%
or Floor rate of 9.25%, 6.95% Exit Fee
  $ 7,500       7,418       7,418  

Proterra, Inc.(11)(14)(17)

1 Whitlee Ct.

Greenville, SC 29607

  Sustainable and Renewable Technology   Senior Secured   November 2020   Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.75%, 5.95% Exit Fee
  $ 25,146       26,185       26,197  
  Sustainable and Renewable Technology   Senior Secured   November 2020   Interest rate PRIME + 3.70%
or Floor rate of 7.95%,
PIK Interest 1.75%, 7.00% Exit Fee
  $ 5,029       5,224       5,219  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,175       31,409       31,416  
   

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    94,506       94,423  
   

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (12.16%)*

 

    100,828       100,745  
   

 

 

   

 

 

 

Total: Debt Investments (161.25%)*

 

    1,368,674       1,336,326  
   

 

 

   

 

 

 

 

134


Table of Contents
Index to Financial Statements
(dollars in thousands)                                      

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
    Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Equity Investments

             

Biotechnology Tools

             

NuGEN Technologies, Inc.(15)

  Biotechnology Tools     Equity       0.69   Common Stock     55,780     $ 500     $ —    

201 Industrial Road, Suite 310

             

San Carlos, CA 94070

             
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
           

 

 

   

 

 

 

Communications & Networking

             

Achilles Technology Management Co II, Inc.(7)(15)

  Communications & Networking     Equity       100.00   Common Stock     100       3,100       117  

1441 Knightsbridge Drive

           

Blue Bell, PA 19422

             

GlowPoint, Inc.(4)

  Communications & Networking     Equity       0.25   Common Stock     114,192       102       25  

1776 Lincoln Street, 13th Floor

           

Denver, CO 80203

             

Peerless Network Holdings, Inc.

  Communications & Networking     Equity       3.01   Preferred Series A     1,000,000       1,000       6,060  

222 South Riverside Plaza, Suite 2730

           

Chicago, IL 60606

             
           

 

 

   

 

 

 

Subtotal: Communications & Networking (0.75%)*

 

    4,202       6,202  
           

 

 

   

 

 

 

Diagnostic

             

Singulex, Inc.

  Diagnostic     Equity       0.36   Common Stock     937,998       750       911  

1701 Harbor Way Parkway, Suite 200

             

Alameda, CA 94502

             
           

 

 

   

 

 

 

Subtotal: Diagnostic (0.11%)*

 

    750       911  
           

 

 

   

 

 

 

Diversified Financial Services

             

Gibraltar Business Capital, LLC(7)

400 Skokie Blvd, #375

Northbrook, IL 60062

  Diversified Financial Services     Equity       92.74   Preferred Series A     10,602,752       25,538       25,538  
  Diversified Financial Services     Equity       7.26   Common Stock     830,000       1,861       1,861  
           
         

 

 

   

 

 

   

 

 

 

Total Gibraltar Business Capital, LLC

    11,432,752       27,399       27,399  
           

 

 

   

 

 

 

Subtotal: Diversified Financial Services (3.31%)*

 

    27,399       27,399  
           

 

 

   

 

 

 

Drug Delivery

             

AcelRx Pharmaceuticals, Inc.(4)(10)

  Drug Delivery     Equity       0.11   Common Stock     54,240       108       114  

351 Galveston Drive

             

Redwood City, CA 94063

             

BioQ Pharma Incorporated(15)

  Drug Delivery     Equity       0.47   Preferred Series D     165,000       500       891  

185 Berry St., Ste 160

             

San Francisco, CA 94107

             

Edge Therapeutics, Inc.(4)

  Drug Delivery     Equity       0.16   Common Stock     49,965       309       59  

300 Connell Dr., Suite 4000

             

Berkeley Heights, NJ 07922

             

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery     Equity       0.43   Common Stock     125,000       1,500       1,038  

2940 N. Highway 360, Suite 400

             

Grand Prarie, TX 75050

             
           

 

 

   

 

 

 

Subtotal: Drug Delivery (0.25%)*

 

    2,417       2,102  
           

 

 

   

 

 

 

Drug Discovery & Development

             

Aveo Pharmaceuticals, Inc.(4)(10)(15)

  Drug Discovery & Development     Equity       1.60   Common Stock     1,901,791       1,715       5,558  

One Broadway, 9th Floor

           

Cambridge, MA 02142

             

Axovant Sciences Ltd. (4)(5)(10)

  Drug Discovery & Development     Equity       0.12   Common Stock     129,827       1,269       172  

11 Times Square, 33rd Floor

           

New York, NY 10036

             

 

135


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Cerecor, Inc.(4)

  Drug Discovery & Development   Equity     0.38   Common Stock     119,087     $ 1,000     $ 511  

400 East Pratt Street, Suite 606

           

Baltimore, MD 21202

             

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Equity     0.12   Common Stock     13,550       1,000       11  

35 Gatehouse Drive

           

Waltham, MA 02451

             

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Equity     0.28   Common Stock     142,858       1,000       1,365  

87 Cambridge Park Dr

           

Cambridge, MA 02140

             

Dynavax Technologies(4)(10)

  Drug Discovery & Development   Equity     0.03   Common Stock     20,000       550       398  

2929 Seventh Street, Suite 100

           

Berkeley, CA 94710

             

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Equity     0.76   Common Stock     200,000       1,000       —    

99 High Street

           

Boston, MA 02110-2320

             

Genocea Biosciences, Inc.(4)

100 Acorn Park Drive, 5th Floor

Cambridge, MA 02140

  Drug Discovery & Development   Equity     0.27   Common Stock     223,463       2,000       235  

Insmed, Incorporated(4)

10 Finderne Avenue, Building 10

Bridgewater, NJ 08807

 

Drug Discovery & Development

 

  Equity     0.09   Common Stock     70,771       1,000       1,230  

Melinta Therapeutics(4)

300 TriState International, Suite 272

Lincolnshire, IL 60069

  Drug Discovery & Development   Equity     0.17   Common Stock     51,821       2,000       384  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.)(4)

75 Park Plaza, 4th Floor

Boston, MA 02116

 

Drug Discovery & Development

 

  Equity     0.24   Common Stock     76,362       2,744       992  

Rocket Pharmaceuticals, Ltd (p.k.a. Inotek Pharmaceuticals
Corporation)(4)

131 Hartwell Ave., Suite 105

Lexington, MA 02421

 

Drug Discovery & Development

 

  Equity     0.00   Common Stock     944       1,500       18  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.31%)*

 

    16,778       10,874  
           

 

 

   

 

 

 

Electronics & Computer Hardware

             

Identiv, Inc.(4)

2201 Walnut Avenue Suite 100

Fremont, CA 94538

  Electronics & Computer Hardware   Equity     0.04   Common Stock     6,700       34       25  
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       25  
         

 

 

   

 

 

 

Information Services

             

DocuSign, Inc.

  Information Services   Equity     0.24   Common Stock     385,000       6,081       8,379  

221 Main St., Suite 1000

           

San Francisco, CA 94105

             
           

 

 

   

 

 

 

Subtotal: Information Services (1.01%)*

 

    6,081       8,379  
           

 

 

   

 

 

 

Internet Consumer & Business Services

             

Blurb, Inc. (15)

580 California St., Suite 300

San Francisco, CA 94104

  Internet Consumer & Business Services   Equity     0.38   Preferred Series B     220,653       175       80  

Brigade Group, Inc. (p.k.a. Philotic, Inc.)

548 4th Street

San Francisco, CA 94107

  Internet Consumer & Business Services   Equity     0.05   Common Stock     9,023       93       —    

 

136


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Lightspeed POS, Inc.(5)(10)

700 St-Antoine Est, Suite 300

Montreal, Canada H2Y1A6

 

  Internet Consumer & Business Services   Equity     0.08   Preferred Series C     230,030     $ 250     $ 257  
  Internet Consumer & Business Services   Equity     0.07   Preferred Series D     198,677       250       235  
         

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

    428,707       500       492  

OfferUp, Inc.

701 5th Avenue, Suite 5100

Seattle, WA 98104

 

  Internet Consumer & Business Services   Equity     0.15   Preferred Series A     286,080       1,663       1,889  
  Internet Consumer & Business Services   Equity     0.06   Preferred Series A-1     108,710       632       718  
         

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

    394,790       2,295       2,607  

Oportun (p.k.a. Progress Financial)

1600 Seaport Blvd., Suite 250

Redwood City, CA 94063

 

  Internet Consumer & Business Services   Equity     0.08   Preferred Series G     218,351       250       416  
  Internet Consumer & Business Services   Equity     0.03   Preferred Series H     87,802       250       233  
         

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

    306,153       500       649  

RazorGator Interactive Group, Inc.

4216 3/4 Glencoe Ave

Marina Del Rey, CA 90292

  Internet Consumer & Business Services   Equity     0.11   Preferred Series AA     34,783       15       —    

Tectura Corporation(7)

  Internet Consumer & Business Services   Equity     0.12   Preferred Series BB     1,000,000       —         —    

951 Old County Road, Suite 2-317

           

Belmont, CA 94002

             
           

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.46%)*

 

    3,578       3,828  
         

 

 

   

 

 

 

Media/Content/Info

             

Pinterest, Inc.

  Media/Content/Info   Equity     0.04   Preferred Series Seed     620,000       4,085       4,389  

777 South Figueroa Street, Suite 3200

         

Los Angeles, CA 90017-5855

             
           

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.53%)*

 

    4,085       4,389  
           

 

 

   

 

 

 

Medical Devices & Equipment

             

AtriCure, Inc.(4)(15)

7555 Innovation Way

Mason, Ohio 45040

  Medical Devices & Equipment   Equity     0.02   Common Stock     7,536       266       155  

Flowonix Medical Incorporated

500 International Drive, Suite 200

Mount Olive, NJ 07828

  Medical Devices & Equipment   Equity     0.68   Preferred Series AA     221,893       1,500       —    

Gelesis, Inc.(15)

500 Boylston Street, Suite 1600

Boston, MA 02116

  Medical Devices & Equipment   Equity     1.21   Common Stock     198,202       —         996  
  Medical Devices & Equipment   Equity     1.16   Preferred Series A-1     191,210       425       1,056  
  Medical Devices & Equipment   Equity     1.17   Preferred Series A-2     191,626       500       1,009  
         

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

    581,038       925       3,061  

Medrobotics Corporation(15)

475 Paramount Drive

Raynham, MA 02767

  Medical Devices & Equipment   Equity     0.12   Preferred Series E     136,798       250       209  
  Medical Devices & Equipment   Equity     0.07   Preferred Series F     73,971       155       171  
  Medical Devices & Equipment   Equity     0.14   Preferred Series G     163,934       500       442  
         

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

    374,703       905       822  

 

137


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Optiscan Biomedical, Corp.(6)(15)

24590 Clawiter Road

Hayward, CA 94545

  Medical Devices & Equipment   Equity     0.36   Preferred Series B     6,185,567     $ 3,000     $ 345  
  Medical Devices & Equipment   Equity     0.11   Preferred Series C     1,927,309       655       100  
  Medical Devices & Equipment   Equity     3.21   Preferred Series D     55,103,923       5,257       3,193  
  Medical Devices & Equipment   Equity     1.82   Preferred Series E     31,199,131       2,609       2,618  
         

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    94,415,930       11,521       6,256  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

1830 Bering Drive

San Jose, CA 95112

  Medical Devices & Equipment   Equity     0.18   Preferred Series B     232,061       527       667  
             
             

Quanterix Corporation(4)

  Medical Devices & Equipment   Equity     0.39   Common Stock     84,778       1,000       1,445  

113 Hartwell Avenue

           

Lexington, MA 02421

             
           

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.50%)*

 

    16,644       12,406  
           

 

 

   

 

 

 

Software

             

CapLinked, Inc.

  Software   Equity     0.33   Preferred Series A-3     53,614       51       87  

2015 Manhattan Beach Blvd, #108

             

Redondo Beach, CA 90278

             

Druva, Inc.

  Software   Equity     0.30   Preferred Series 2     458,841       1,000       1,073  

150 Mathilda Place, Suite 450

  Software   Equity     0.06   Preferred Series 3     93,620       300       313  

Sunnyvale, CA 94041

             
         

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,386  

ForeScout Technologies, Inc.(4)

  Software   Equity     0.51   Common Stock     199,842       529       6,483  

900 E. Hamilton Avenue, Suite 300

             

Campbell, CA 95008

             

HighRoads, Inc.

  Software   Equity     0.00   Common Stock     190       307       —    

3 Burlington Woods Dr

             

Burlington, MA 01803

             

NewVoiceMedia Limited(5)(10)

  Software   Equity     0.30   Preferred Series E     669,173       963       1,392  

Viables Business Park, Jays Close

             

Basingstoke, UK RG22 4BS

             

Palantir Technologies

  Software   Equity     0.04   Preferred Series E     727,696       5,431       4,923  

100 Hamilton Avenue

  Software   Equity     0.02   Preferred Series G     326,797       2,211       2,211  

Palo Alto, CA 94301

             
         

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       7,134  

Sprinklr, Inc.

  Software   Equity     0.35   Common Stock     700,000       3,749       3,752  

29 West 35th Street, 7th Floor

             

New York, NY 10001

             

WildTangent, Inc.(15)

  Software   Equity     0.16   Preferred Series 3     100,000       402       172  

18578 NE 67th Court, Building 5

             

Redmond, WA 98052

             
           

 

 

   

 

 

 

Subtotal: Software (2.46%)*

 

    14,943       20,406  
           

 

 

   

 

 

 

Surgical Devices

             

Gynesonics, Inc.(15)

  Surgical Devices   Equity     0.04   Preferred Series B     219,298       250       48  

301 Galveston Drive

  Surgical Devices   Equity     0.12   Preferred Series C     656,538       282       65  

Redwood City, CA 94063

  Surgical Devices   Equity     0.38   Preferred Series D     1,991,157       711       822  
  Surgical Devices   Equity     0.53   Preferred Series E     2,786,367       429       542  
         

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,672       1,477  

 

138


Table of Contents
Index to Financial Statements
(dollars in thousands)                                      

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
    Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Transmedics, Inc.

  Surgical Devices     Equity       0.16   Preferred Series B     88,961     $ 1,100     $ 427  

200 Minuteman Road, Suite 302

  Surgical Devices     Equity       0.21   Preferred Series C     119,999       300       340  

Andover, MA 01810

  Surgical Devices     Equity       0.46   Preferred Series D     260,000       650       1,071  
  Surgical Devices     Equity       0.18   Preferred Series F     100,200       500       561  
         

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,399  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (0.47%)*

 

    4,222       3,876  
           

 

 

   

 

 

 

Sustainable and Renewable Technology

             

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and     Equity       0.00   Common Stock     192       761       —    

4100 Alpha Road, Suite 900

  Renewable Technology            

Dallas, TX 75244

             

Modumetal, Inc.

  Sustainable and Renewable Technology     Equity       0.72   Preferred Series C     3,107,520       500       360  

Northlake R&D Center, 1443 N. Northlake Way

           

Seattle, WA 98103

           

Proterra, Inc.

  Sustainable and     Equity       0.09   Preferred Series 5     99,280       500       527  

1 Whitlee Ct.

  Renewable Technology            

Greenville, SC 29607

             

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and     Equity       18.32   Common Stock     288       61,502       12,315  

66 Franklin Street, Suite 310

  Renewable Technology            

Oakland, CA 94607

             
           

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.59%)*

 

    63,263       13,202  
         

 

 

   

 

 

 

Total: Equity Investments (13.76%)*

 

    164,896       113,999  
           

 

 

   

 

 

 

Warrant Investments

             

Biotechnology Tools

             

Labcyte, Inc.(15)

  Biotechnology Tools     Warrant       0.84   Preferred Series C     1,127,624       323       494  

1190 Borregas Avenue

             

Sunnyvale, CA 94089

             
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.06%)*

 

    323       494  
           

 

 

   

 

 

 

Communications & Networking

             

Peerless Network Holdings, Inc.

222 South Riverside Plaza, Suite 2730

Chicago, IL 60606

  Communications & Networking     Warrant       0.01   Common Stock     3,328       —         16  
  Communications & Networking     Warrant       0.41   Preferred Series A     135,000       95       550  
             
         

 

 

   

 

 

   

 

 

 

Total Peerless Network Holdings, Inc.

    138,328       95       566  

Spring Mobile Solutions, Inc.

  Communications & Networking     Warrant       0.62   Common Stock     2,834,375       417       —    

11710 Plaza America Drive, Suite 2000

           

Reston, VA 20190

             
           

 

 

   

 

 

 

Subtotal: Communications & Networking (0.07%)*

 

    512       566  
           

 

 

   

 

 

 

Consumer & Business Products

             

Gadget Guard (p.k.a. Antenna79)(15)

  Consumer & Business Products     Warrant       0.46   Common Stock     1,662,441       228       —    

709N 400 W #3

           

North Salt Lake, UT 84054

             

Intelligent Beauty, Inc.(15)

  Consumer & Business Products     Warrant       0.35   Preferred Series B     190,234       230       233  

2301 Rosecrans Ave, Suite 4100

           

El Segundo, CA 90245

             

The Neat Company(15)

1601 Market St., Suite 3500

Philadelphia, PA 19103

  Consumer & Business Products     Warrant       0.01   Preferred Series C-1     540,540       365       —    
           
           
           

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.03%)*

 

    823       233  
           

 

 

   

 

 

 

 

139


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Drug Delivery

             

AcelRx Pharmaceuticals, Inc.(4)(10)(15)

  Drug Delivery   Warrant     0.35   Common Stock     176,730     $ 786     $ 66  

351 Galveston Drive

             

Redwood City, CA 94063

             

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant     0.53   Common Stock     180,274       730       44  

101 Poor Farm Road

             

Princeton, NJ 08540

             

BioQ Pharma Incorporated

  Drug Delivery   Warrant     1.30   Common Stock     459,183       1       1,155  

185 Berry St., Ste 160

             

San Francisco, CA 94107

             

Celsion Corporation(4)

  Drug Delivery   Warrant     0.08   Common Stock     13,927       428       —    

997 Lenox Drive, Suite 100

             

Lawrenceville, NJ 08648

             

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant     0.40   Common Stock     110,882       74       —    

150 North Hill Drive, Suite 24

             

Brisbane, CA 94005

             

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant     0.25   Common Stock     78,595       390       25  

300 Connell Dr., Suite 4000

             

Berkeley Heights, NJ 07922

             

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant     0.46   Preferred Series B     82,500       594       1,076  

111 Virginia St., Ste 300

             

Richmond, VA 23219

             

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant     0.24   Common Stock     70,833       285       71  

2940 N. Highway 360, Suite 400

             

Grand Prairie, TX 75050

             

Pulmatrix Inc.(4)

  Drug Delivery   Warrant     0.11   Common Stock     25,150       116       —    

99 Hayden Avenue, Suite 390

             

Lexington, MA 02421

             

ZP Opco, Inc (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant     0.18   Common Stock     3,618       266       —    

34790 Ardentech Court

             

Fremont, CA 94555

             
           

 

 

   

 

 

 

Subtotal: Drug Delivery (0.29%)*

 

    3,670       2,437  
           

 

 

   

 

 

 

Drug Discovery & Development

             

ADMA Biologics, Inc.(4)

  Drug Discovery & Development   Warrant     0.20   Common Stock     89,750       295       31  

465 Route 17 South

           

Ramsey, NJ 07446

             

Audentes Therapeutics, Inc(4)(10)(15)

  Drug Discovery & Development   Warrant     0.03   Common Stock     9,914       62       142  

600 California Street, 17th Floor

           

San Francisco, CA 94108

             

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery & Development   Warrant     0.26   Common Stock     15,672       249       2  

Dornacherstrasse 210

           

CH-4053, Basel Switzerland

             

Brickell Biotech, Inc.

  Drug Discovery & Development   Warrant     0.38   Preferred Series C     26,086       119       65  

5777 Central Ave, Suite 102

           

Boulder, CO 80301

             

Cerecor, Inc.(4)

  Drug Discovery & Development   Warrant     0.07   Common Stock     22,328       70       25  

400 East Pratt Street, Suite 606

           

Baltimore, MD 21202

             

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Warrant     0.61   Preferred Series D     325,261       490       —    

93 Innovation Drive, Milton Park

           

Abingdon Oxon, UK OX14 4RZ

             

Cleveland BioLabs, Inc.(4)(15)

  Drug Discovery & Development   Warrant     0.07   Common Stock     7,813       105       1  

73 High Street

           

Buffalo, NY 14203

             

 

140


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Concert Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant     0.56   Common Stock     132,069     $ 545     $ 1,091  

99 Hayden Avenue, Suite 500

           

Lexington, MA 02421-7966

             

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery & Development   Warrant     0.06   Common Stock     29,239       165       —    

3101 Western Avenue, Suite 600

           

Seattle, WA 98121

             

CytRx Corporation(4)(15)

  Drug Discovery & Development   Warrant     0.38   Common Stock     105,694       160       48  

11726 San Vicente Blvd., Suite 650

           

Los Angeles, CA 90049

             

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Warrant     0.15   Common Stock     17,190       369       —    

35 Gatehouse Drive

           

Waltham, MA 02451

             

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &   Warrant     0.00   Common Stock     200       28       —    

87 Cambridge Park Dr

  Development            

Cambridge, MA 02140

             

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Warrant     0.25   Common Stock     64,194       276       —    

99 High Street

           

Boston, MA 02110-2320

             

Evofem Biosciences, Inc (p.k.a Neothetics, Inc.)(4)(15)

9171 Towne Centre Drive, Suite 270

San Diego, CA 92122

  Drug Discovery & Development   Warrant     0.01   Common Stock     7,806       266       28  

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

2 Gansevoort Street, 9th Floor

New York, NY 10014

  Drug Discovery & Development   Warrant     0.14   Common Stock     73,009       142       43  

Genocea Biosciences, Inc.(4)

100 Acorn Park Drive, 5th Floor

Cambridge, MA 02140

  Drug Discovery & Development   Warrant     0.09   Common Stock     73,725       266       3  

Immune Pharmaceuticals(4)

430 East 29th St., Suite 940

New York, NY 10016

  Drug Discovery & Development   Warrant     0.03   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

300 TriState International, Suite 272

Lincolnshire, IL 60069

  Drug Discovery & Development   Warrant     0.13   Common Stock     40,545       626       1  

Motif BioSciences Inc.(4)(15)

125 Park Avenue., 25th Floor

New York, NY 10017

  Drug Discovery & Development   Warrant     0.03   Common Stock     73,452       282       254  

Myovant Sciences, Ltd.(4)(5)(10)

2000 Sierra Point Parkway, 9th Floor

Brisbane, CA 94005

  Drug Discovery & Development   Warrant     0.12   Common Stock     73,710       460       831  

Neuralstem, Inc.(4)(15)

20271 Goldenrod Lane, 2nd floor

Germantown, MD 20876

  Drug Discovery & Development   Warrant     0.04   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

13200 NW Nano Court

Alachua, FL 32615

  Drug Discovery & Development   Warrant     2.67   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept
Pharmaceuticals, Inc.)(4)(15)

75 Park Plaza, 4th Floor

Boston, MA 02116

 

 

Drug Discovery & Development

 

 

Warrant

 

 

 

 

0.24

 

 

 

Common Stock

 

 

 

 

75,214

 

 

 

 

 

 

178

 

 

 

 

 

 

82

 

 

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

900 S. Capital of Texas Highway, Suite 150

Austin, TX 78746

  Drug Discovery & Development   Warrant     0.11   Common Stock     32,467       203       93  

Sorrento Therapeutics, Inc.(4)(10)

9380 Judicial Dr

San Diego, CA 92121

  Drug Discovery & Development   Warrant     0.34   Common Stock     306,748       889       704  

Stealth Bio Therapeutics Corp.(5)(10)

275 Grove Street, Suite 3-107

Newton, MA 02466

  Drug Discovery & Development   Warrant     0.10   Preferred Series A     650,000       158       150  

 

141


Table of Contents
Index to Financial Statements
(dollars in thousands)                                      

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
    Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Tricida, Inc.(15)

7000 Shoreline Ct #201

South San Francisco, CA 94080

  Drug Discovery & Development     Warrant       0.16   Common Stock     212,765     $ 223     $ 217  

uniQure B.V.(4)(5)(10)

Paasheuvelweg 25A Amsterdam,

The Netherlands 1105 BP

  Drug Discovery & Development     Warrant       0.12   Common Stock     37,174       218       334  

XOMA Corporation(4)(10)(15)

2910 Seventh Street

Berkeley, CA 94710

  Drug Discovery & Development     Warrant       0.11   Common Stock     9,063       279       9  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.50%)*

 

    8,202       4,154  
           

 

 

   

 

 

 

Electronics & Computer Hardware

             

908 DEVICES INC.(15)

27 Drydock Avenue, 7th Floor

Boston, MA 02210

  Electronics & Computer Hardware     Warrant       0.25   Preferred Series D     79,856       100       84  

Clustrix, Inc.

201 Mission Street, Suite 800

San Francisco, CA 94105

  Electronics & Computer Hardware     Warrant       0.23   Common Stock     50,000       12       —    
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       84  
           

 

 

   

 

 

 

Healthcare Services, Other

             

Chromadex Corporation(4)(15)

10005 Muirlands Boulevard, Suite G,

First Floor Irvine, CA 92618

  Healthcare Services, Other     Warrant       0.25   Common Stock     139,673       157       182  
           

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.02%)*

 

    157       182  
           

 

 

   

 

 

 

Information Services

             

INMOBI Inc.(5)(10)

475 Brannan St., Suite 420

San Francisco, CA 94107

  Information Services     Warrant       0.16   Common Stock     65,587       82       —    

InXpo, Inc.(15)

770 N Halsted Street, Suite 6s

Chicago, IL 60642

  Information Services     Warrant       0.81   Preferred Series C-1     898,134       49       34  

MDX Medical, Inc.(15)

160 Chubb Avenue, Suite 301

Lyndhurst, NJ 07071

  Information Services     Warrant       0.87   Common Stock     2,812,500       283       185  

Netbase Solutions, Inc.

3960 Freedom Circle, Suite 200

Santa Clara, CA 95054

  Information Services     Warrant       0.02   Preferred Series 1     60,000       356       373  

RichRelevance, Inc.(15)

303 Second Street Suite 350

South San Francisco, CA 94107

  Information Services     Warrant       0.13   Preferred Series E     112,612       98       —    
           

 

 

   

 

 

 

Subtotal: Information Services (0.07%)*

 

    868       592  
           

 

 

   

 

 

 

Internet Consumer & Business Services

             

Aria Systems, Inc.

575 Market Street, 32nd Floor

San Francisco, CA 94105

  Internet Consumer & Business Services     Warrant       0.09   Preferred Series G     231,535       73       —    

Art.com, Inc.(15)

2100 Powell Street 13th Floor

Emeryville, CA 94608

  Internet Consumer & Business Services     Warrant       0.24   Preferred Series B     311,005       66       66  

Blurb, Inc.(15)

580 California St., Suite 300

San Francisco, CA 94104

  Internet Consumer & Business Services     Warrant       0.40   Preferred Series C     234,280       636       27  

 

142


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer & Business Services   Warrant     1.20   Preferred Series E     968,992     $ 19     $ 211  

8626 E 116th Street, Suite 300

           

Fishers, IN 46038

           

The Faction Group

  Internet Consumer & Business Services   Warrant     1.85   Preferred Series A     8,703       234       437  

1660 Lincoln St., Floor 16

           

Denver, CO 80264

           

Intent Media, Inc.(15)

  Internet Consumer & Business Services   Warrant     0.47   Common Stock     140,077       168       200  

315 Hudson St., 9th Floor

           

New York, NY 10013

           

Interactions Corporation

  Internet Consumer & Business Services   Warrant     0.07   Preferred Series G-3     68,187       204       413  

31 Hayward Street., Suite E

           

Franklin, MA 02038

           

Just Fabulous, Inc.

  Internet Consumer & Business Services   Warrant     0.35   Preferred Series B     206,184       1,102       1,812  

2301 Rosecrans Avenue, Suite 5000

           

El Segundo, CA 90245

           

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Warrant     0.09   Preferred Series C     245,610       20       99  

700 St-Antoine Est, Suite 300

           

Montreal, Canada H2Y1A6

           

LogicSource(15)

  Internet Consumer & Business Services   Warrant     0.39   Preferred Series C     79,625       30       28  

20 Marshall Street

           

South Norwalk, CT 06854

           

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Warrant     0.06   Preferred Series G     174,562       78       192  

1600 Seaport Blvd., Suite 250

           

Redwood City, CA 94063

           

ShareThis, Inc.(15)

  Internet Consumer & Business Services   Warrant     0.91   Preferred Series C     493,502       547       —    

4005 Miranda Avenue, Suite 100

Palo Alto, CA 94304

           

Snagajob.com, Inc.

1919 N Lynn Street, 7th Floor

Arlington, VA 22209

  Internet Consumer & Business Services   Warrant     0.89   Preferred Series A     1,800,000       782       1,406  

Tapjoy, Inc.

  Internet Consumer & Business Services   Warrant     0.40   Preferred Series D     748,670       316       15  

111 Sutter Street, 12th Floor

           

San Francisco, CA 94104

           

TraceLink, Inc.

  Internet Consumer & Business Services   Warrant     0.86   Preferred Series A-2     283,353       1,833       2,029  

400 Riverpark Dr. Suite 200

           

North Reading, MA 1864

           
           

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.84%)*

 

    6,108       6,935  
         

 

 

   

 

 

 

Media/Content/Info

             

FanDuel, Inc.

  Media/Content/Info   Warrant     0.15   Common Stock     15,570       —         —    

300 Park Avenue South, 14th Floor

  Media/Content/Info   Warrant     0.04   Preferred Series A     4,648       730       1,875  

New York, NY 10005

             
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.

  Media/Content/Info   Warrant     0.12   Common Stock     1,552,710       1,958       3,242  

1050 Page Mill Road

             

Palo Alto, CA 94304

             

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant     0.44   Common Stock     715,755       385       37  

701 5th Ave., Suite 3100

             

Seattle, WA 98104

             

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant     0.10   Common Stock     255,818       4       24  

4950 Yonge Street, Suite 208

             

Toronto, ON M2M 3V5

             

 

143


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant     0.44   Preferred Series A     1,204     $ 348     $ 29  

345 7th Avenue, Suite 1501

             

New York, NY 10001

             
           

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.63%)*

 

    3,425       5,207  
           

 

 

   

 

 

 

Medical Devices & Equipment

             

Amedica Corporation(4)(15)

  Medical Devices & Equipment   Warrant     0.20   Common Stock     8,603       459       —    

1885 West 2100 South

           

Salt Lake City, UT 84119

             

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Warrant     1.03   Preferred Series B-1     112,858       455       —    

3200 Horizon Drive, Suite 100

           

King of Prussia, PA 19406

             

Avedro, Inc.(15)

  Medical Devices & Equipment   Warrant     0.56   Preferred Series AA     300,000       401       300  

201 Jones Rd., 5th Floor

           

Waltham, MA 02451

             

Flowonix Medical Incorporated

  Medical Devices & Equipment   Warrant     0.47   Preferred Series AA     155,325       362       —    

500 International Drive, Suite 200

           

Mount Olive, NJ 07828

             

Gelesis, Inc.(15)

  Medical Devices & Equipment   Warrant     0.46   Preferred Series A-1     74,784       78       248  

500 Boylston Street, Suite 1600

           

Boston, MA 02116

             

InspireMD, Inc.(4)(5)(10)

  Medical Devices & Equipment   Warrant     0.03   Common Stock     1,124       242       —    

4 Menorat Hamaor Street, 3rd Floor

           

Tel Aviv, Israel 67448

             

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Warrant     0.73   Preferred Series 4     1,819,078       294       394  

3500 West Warren Avenue.

           

Fremont, CA 94538

             

Medrobotics Corporation(15)

  Medical Devices & Equipment   Warrant     0.40   Preferred Series E     455,539       370       264  

475 Paramount Drive

           

Raynham, MA 02767

             

Micell Technologies, Inc.

  Medical Devices & Equipment   Warrant     0.37   Preferred Series D-2     84,955       262       154  

801 Capitola Drive, Suite 1

           

Durham, NC 27713

             

NetBio, Inc.

  Medical Devices & Equipment   Warrant     0.75   Preferred Series A     7,841       408       43  

266 Second Avenue

           

Waltham, MA 02451

             

NinePoint Medical, Inc.(15)

  Medical Devices & Equipment   Warrant     0.30   Preferred Series A-1     587,840       170       104  

2 Oak Park Dr.

           

Bedford, MA 01730

             

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Warrant     0.61   Preferred Series E     10,535,275       1,252       271  

24590 Clawiter Road

           

Hayward, CA 94545

             

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Warrant     0.38   Preferred Series A     500,000       402       532  

1830 Bering Drive

           

San Jose, CA 95112

             

Quanterix Corporation(4)

  Medical Devices & Equipment   Warrant     0.30   Common Stock     66,039       204       326  

113 Hartwell Avenue

           

Lexington, MA 02421

             

Sebacia, Inc.(15)

  Medical Devices & Equipment   Warrant     0.45   Preferred Series D     778,301       133       159  

2905 Premiere Parkway, Suite 150

           

Duluth, GA 30097

             

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices & Equipment   Warrant     0.02   Preferred Series A     6,464       188       —    

10130 Perimeter Parkway, Suite 250

           

Charlotte, NC 28216

             

 

144


Table of Contents
Index to Financial Statements
(dollars in thousands)                                      

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
    Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(4)

100 Lakeside Drive, Suite 100

Horsham, PA 19044

 

Medical Devices & Equipment

   
Warrant
 
   
0.32

 

Common Stock

   
13,864
 
  $
401
 
  $
—  
 

Tela Bio, Inc.(15)

One Great Valley Pkwy, Suite 24

Malvern, PA 19355

  Medical Devices & Equipment     Warrant       0.39   Preferred Series B     387,930       62       128  

ViewRay, Inc.(4)(15)

2 Thermo Fisher Way

Oakwood Village, OH 44146

  Medical Devices & Equipment     Warrant       0.18   Common Stock     128,231       333       206  
           

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.38%)*

 

    6,476       3,129  
           

 

 

   

 

 

 

Semiconductors

             

Achronix Semiconductor Corporation(15)

2953 Bunker Hill Lane, Suite 101

Santa Clara, CA 95054

  Semiconductors     Warrant       0.11   Preferred Series C     360,000       160       434  
  Semiconductors     Warrant       0.23   Preferred Series D-2     750,000       99       648  
         

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       259       1,082  

Aquantia Corp.(4)

105 E. Tasman Drive

San Jose, CA 95134

 

Semiconductors

   
Warrant
 
   
0.06

 

Common Stock

   
19,683
 
   
4
 
   
41
 

Avnera Corporation

1600 NW Compton Drive, Ste 300.

Beaverton, OR 97006

 

Semiconductors

   
Warrant
 
   
0.28

 

Preferred Series E

   
141,567
 
   
46
 
   
219
 
           

 

 

   

 

 

 

Subtotal: Semiconductors (0.16%)*

 

    309       1,342  
           

 

 

   

 

 

 

Software

             

Actifio, Inc.

333 Wyman Street,

Waltham, MA 02451

  Software     Warrant       0.08   Common Stock     73,584       249       65  
  Software     Warrant       0.03   Preferred Series F     31,673       343       79  
             
         

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       144  

Braxton Technologies, LLC

6 North Tejon Street, Suite 220

Colorado Springs, CO 80903

  Software     Warrant       0.63   Preferred Series A     168,750       188       —    

CareCloud Corporation(15)

5200 Blue Lagoon Drive, Suite 900

Miami, FL 33126

 

Software

   
Warrant
 
   
0.43

 

Preferred Series B

   
413,433
 
   
258
 
   
44
 

Clickfox, Inc.(15)

3445 Peachtree Road, Suite 450

Atlanta, GA 30326

  Software     Warrant       0.64   Preferred Series B     1,038,563       330       35  
  Software     Warrant       0.37   Preferred Series C     592,019       730       38  
  Software     Warrant       1.37   Preferred Series C-A     2,218,214       230       1,441  
         

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       1,514  

DNAnexus, Inc.

1975 W El Camino Real #101

Mountain View, CA 94040

 

Software

   
Warrant
 
   
0.24

 

Preferred Series C

   
909,091
 
   
97
 
   
62
 

Evernote Corporation(15)

305 Walnut Street

Redwood City, CA 94063

 

Software

   
Warrant
 
   
0.06

 

Common Stock

   
62,500
 
   
106
 
   
218
 

Fuze, Inc.(15)

2 Copley Place, Floor 7

Boston, MA 02116

 

Software

   
Warrant
 
   
0.17

 

Preferred Series F

   
256,158
 
   
89
 
   
5
 

Lightbend, Inc.(15)

625 Market St

San Francisco, CA 94105

 

Software

   
Warrant
 
   
0.26

 

Preferred Series C-1

   
391,778
 
   
79
 
   
75
 

Mattersight Corporation(4)

200 W. Madison, Suite 3100

Chicago, IL 60606

 

Software

   
Warrant
 
   
1.08

 

Common Stock

   
357,143
 
   
538
 
   
88
 

 

145


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Message Systems, Inc.(15)

  Software   Warrant     1.05   Preferred Series C     503,718     $ 334     $ 464  

9130 Guilford Road

             

Columbia, MD 21046

             

Mobile Posse, Inc.(15)

  Software   Warrant     1.04   Preferred Series C     396,430       130       155  

1010 N. Glebe Road, Suite 200

             

Arlington, VA 22201

             

Neos, Inc.(15)

  Software   Warrant     0.10   Common Stock     221,150       22       —    

6210 Stoneridge Mall, Suite 450

             

Pleasanton, CA 94588

             

NewVoiceMedia Limited(5)(10)

  Software   Warrant     0.10   Preferred Series E     225,586       33       142  

Viables Business Park, Jays Close

             

Basingstoke, UK RG22 4BS

             

OneLogin, Inc.(15)

  Software   Warrant     0.34   Common Stock     228,972       150       172  

150 Spear Street, Suite 1400

             

San Francisco, CA 94105

             

PerfectServe, Inc.

  Software   Warrant     2.24   Preferred Series C     129,073       720       1,089  

10024 Investment Drive

             

Knoxville, TN 37932

             

Poplicus, Inc.

  Software   Warrant     0.56   Common Stock     132,168       —         —    

19 South Park St.

             

San Francisco, CA 94107

             

Quid, Inc.(15)

  Software   Warrant     0.06   Preferred Series D     71,576       1       6  

600 Harrison Street, Suite 400

             

San Francisco, CA 94107

             

RapidMiner, Inc.

  Software   Warrant     0.32   Preferred Series C-1     4,982       24       32  

10 Milk Street., 11th Floor

             

Boston, MA 02108

             

RedSeal Inc.(15)

940 Stewart Drive,

Sunnyvale, CA 94085

  Software   Warrant     0.13   Preferred Series C-Prime     640,603       66       38  

Signpost, Inc.

  Software   Warrant     0.78   Preferred Series C     324,005       314       108  

127 W 26th St., Floor 2

             

New York, NY 10001

             

Wrike, Inc.

10 Almaden Blvd, Suite 1000

San Jose, CA 95113

  Software   Warrant     0.87   Common Stock     698,760       462       1,273  
           

 

 

   

 

 

 

Subtotal: Software (0.68%)*

 

    5,493       5,629  
           

 

 

   

 

 

 

Specialty Pharmaceuticals

             

Alimera Sciences, Inc.(4)

6120 Windward Parkway, Suite 290

Alpharetta, GA 30005

  Specialty Pharmaceuticals   Warrant     2.46   Common Stock     1,717,709       861       256  
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.03%)*

 

    861       256  
           

 

 

   

 

 

 

Surgical Devices

             

Gynesonics, Inc.(15)

301 Galveston Drive

Redwood City, CA 94063

  Surgical Devices   Warrant     0.03   Preferred Series C     180,480       75       16  
  Surgical Devices   Warrant     0.30   Preferred Series D     1,575,965       320       307  
         

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       323  

Transmedics, Inc.

  Surgical Devices   Warrant     0.07   Preferred Series B     40,436       225       16  

200 Minuteman Road, Suite 302

  Surgical Devices   Warrant     0.31   Preferred Series D     175,000       100       474  

Andover, MA 01810

  Surgical Devices   Warrant     0.09   Preferred Series F     50,544       38       62  
         

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       552  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (0.11%)*

 

    758       875  
           

 

 

   

 

 

 

 

146


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

Sustainable and Renewable Technology

             

Agrivida, Inc.(15)

200 Boston Avenue

Medford, MA 02155

  Sustainable and Renewable Technology   Warrant     0.40   Preferred Series D     471,327     $ 120     $ —    

American Superconductor Corporation(4)

64 Jackson Rd.

Devens, MA 01434

  Sustainable and Renewable Technology   Warrant     0.28   Common Stock     58,823       39       41  

Calera, Inc.(15)

485 Alberto Way, #210

Los Gatos, CA 95032

  Sustainable and Renewable Technology   Warrant     0.17   Preferred Series C     44,529       513       —    

EcoMotors, Inc.(15)

17000 Federal Dr., Suite 200

Allen Park, MI 48101

  Sustainable and Renewable Technology   Warrant     0.68   Preferred Series B     437,500       308       —    

Fluidic, Inc.

8455 North 90th Street, Suite 4

Scottsdale, AZ 85258

  Sustainable and Renewable Technology   Warrant     0.11   Preferred Series D     61,804       102       —    

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

4100 Alpha Road, Suite 900

Dallas, TX 75244

  Sustainable and Renewable Technology   Warrant     0.00   Common Stock     5,310       181       —    
 

 

Sustainable and Renewable Technology

 

 

Warrant

 

 

 

 

0.00

 

 

 

Preferred Series 2-A

 

 

 

 

63

 

 

 

 

 

 

50

 

 

 

 

 

 

—  

 

 

         

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    5,373       231       —    

Fulcrum Bioenergy, Inc.

4900 Hopyard Road, Suite 220

Pleasanton, CA 94588

  Sustainable and Renewable Technology   Warrant     0.20   Preferred Series C-1     280,897       275       457  

GreatPoint Energy, Inc.(15)

2215 W. Harrison St.

Chicago, IL 60612

  Sustainable and Renewable Technology   Warrant     0.12   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

3955 Trust Way

Hayward, CA 94545

  Sustainable and Renewable Technology   Warrant     0.26   Preferred Series A     325,000       155       92  
 

 

Sustainable and Renewable Technology

 

 

Warrant

 

 

 

 

0.10

 

 

 

Preferred Series B

 

 

 

 

131,883

 

 

 

 

 

 

63

 

 

 

 

 

 

27

 

 

         

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       119  

Polyera Corporation(15)

8045 Lamon Avenue, #140

Skokie, IL 60077

  Sustainable and Renewable Technology   Warrant     0.97   Preferred Series C     311,609       338       —    

Proterra, Inc.

1 Whitlee Ct.

Greenville, SC 29607

  Sustainable and Renewable Technology   Warrant     0.42   Preferred Series 4     477,517       41       518  

Rive Technology, Inc.(15)

1 Deer Park Drive, Suite A

Monmouth Junction, NJ 08852

  Sustainable and Renewable Technology   Warrant     0.34   Preferred Series E     234,477       12       3  

Stion Corporation(6)

6321 San Ignacio Avenue

San Jose, CA 95119

  Sustainable and Renewable Technology   Warrant     7.89   Preferred Series Seed     2,154       1,378       —    

 

147


Table of Contents
Index to Financial Statements
(dollars in thousands)                                    

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
  Percentage
Ownership
   

Series

  Shares     Cost(2)     Value(3)  

TAS Energy, Inc.

6110 Cullen Blvd.

Houston, TX 77021

  Sustainable and Renewable Technology   Warrant     0.10   Preferred Series AA     428,571     $ 299     $ —    

Tendril Networks

  Sustainable and Renewable Technology   Warrant     0.46   Preferred Series 3-A     1,019,793       189       —    

2580 55th Street, Suite 100

           

Boulder, CO 80301

           
           

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.14%)*

 

    4,611       1,138  
         

 

 

   

 

 

 

Total: Warrant Investments (4.01%)*

 

    42,708       33,253  
           

 

 

   

 

 

 

Total Investments in Securities (179.02%)*

 

  $ 1,576,278     $ 1,483,578  
           

 

 

   

 

 

 

 

*

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 4.75% at March 31, 2018. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 1.70%, 1.88%, 2.31% and 2.66%, respectively, at March 31, 2018.

(3)

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $26.2 million, $128.1 million and $101.8 million respectively. The tax cost of investments is $1.6 billion.

(4)

Except for warrants in 41 publicly traded companies and common stock in 20 publicly traded companies, all investments are restricted at March 31, 2018 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 March 31, 2018, and is therefore considered non-income producing. Note that at March 31, 2018, only the $10.7 million PIK, or payment-in-kind, 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 March 31, 2018.

(17)

Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at March 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.

 

148


Table of Contents
Index to Financial Statements

SENIOR SECURITIES

Information about our senior securities is shown in the following table for the periods as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, and 2008. The information as of December 31, 2017, 2016, 2015, 2014, 2013, 2012, 2011 and 2010 has been derived from our audited financial statements for these periods, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The report of PricewaterhouseCoopers LLP on the senior securities table as of December 31, 2017 is attached as an exhibit to the registration statement of which this prospectus is a part. The “N/A” indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

Securitized Credit Facility with Wells Fargo Capital Finance

        

December 31, 2008

   $ 89,582,000      $ 6,689        N/A  

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011

   $ 10,186,830      $ 73,369        N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015

   $ 50,000,000      $ 26,352        N/A  

December 31, 2016

   $ 5,015,620      $ 290,234        N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of March 31, 2018, unaudited)(6)

     —          —          N/A  

Securitized Credit Facility with Union Bank, NA

        

December 31, 2009(6)

     —          —          N/A  

December 31, 2010(6)

     —          —          N/A  

December 31, 2011(6)

     —          —          N/A  

December 31, 2012(6)

     —          —          N/A  

December 31, 2013(6)

     —          —          N/A  

December 31, 2014(6)

     —          —          N/A  

December 31, 2015(6)

     —          —          N/A  

December 31, 2016(6)

     —          —          N/A  

December 31, 2017(6)

     —          —          N/A  

December 31, 2018 (as of March 31, 2018, unaudited)(6)

     —          —          N/A  

Small Business Administration Debentures (HT II)(4)

        

December 31, 2008

   $ 127,200,000      $ 4,711        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 150,000,000      $ 3,942        N/A  

December 31, 2011

   $ 125,000,000      $ 5,979        N/A  

December 31, 2012

   $ 76,000,000      $ 14,786        N/A  

December 31, 2013

   $ 76,000,000      $ 16,075        N/A  

December 31, 2014

   $ 41,200,000      $ 31,535        N/A  

December 31, 2015

   $ 41,200,000      $ 31,981        N/A  

December 31, 2016

   $ 41,200,000      $ 35,333        N/A  

December 31, 2017

   $ 41,200,000      $ 39,814        N/A  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 41,200,000      $ 39,143        N/A  

Small Business Administration Debentures (HT III)(5)

        

December 31, 2010

   $ 20,000,000      $ 29,564        N/A  

December 31, 2011

   $ 100,000,000      $ 7,474        N/A  

December 31, 2012

   $ 149,000,000      $ 7,542        N/A  

December 31, 2013

   $ 149,000,000      $ 8,199        N/A  

December 31, 2014

   $ 149,000,000      $ 8,720        N/A  

December 31, 2015

   $ 149,000,000      $ 8,843        N/A  

December 31, 2016

   $ 149,000,000      $ 9,770        N/A  

December 31, 2017

   $ 149,000,000      $ 11,009        N/A  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 149,000,000      $ 10,823        N/A  

 

149


Table of Contents
Index to Financial Statements

Class and Year

   Total Amount
Outstanding
Exclusive of
Treasury Securities(1)
     Asset Coverage
per Unit(2)
     Average
Market
Value
per Unit(3)
 

2016 Convertible Notes

        

December 31, 2011

   $ 75,000,000      $ 10,623      $ 885  

December 31, 2012

   $ 75,000,000      $ 15,731      $ 1,038  

December 31, 2013

   $ 75,000,000      $ 16,847      $ 1,403  

December 31, 2014

   $ 17,674,000      $ 74,905      $ 1,290  

December 31, 2015

   $ 17,604,000      $ 74,847      $ 1,110  

December 31, 2016

     —          —          —    

April 2019 Notes

        

December 31, 2012

   $ 84,489,500      $ 13,300      $ 986  

December 31, 2013

   $ 84,489,500      $ 14,460      $ 1,021  

December 31, 2014

   $ 84,489,500      $ 15,377      $ 1,023  

December 31, 2015

   $ 64,489,500      $ 20,431      $ 1,017  

December 31, 2016

   $ 64,489,500      $ 22,573      $ 1,022  

December 31, 2017

     —          —          —    

September 2019 Notes

        

December 31, 2012

   $ 85,875,000      $ 13,086      $ 1,003  

December 31, 2013

   $ 85,875,000      $ 14,227      $ 1,016  

December 31, 2014

   $ 85,875,000      $ 15,129      $ 1,026  

December 31, 2015

   $ 45,875,000      $ 28,722      $ 1,009  

December 31, 2016

   $ 45,875,000      $ 31,732      $ 1,023  

December 31, 2017

     —          —          —    

2024 Notes

        

December 31, 2014

   $ 103,000,000      $ 12,614      $ 1,010  

December 31, 2015

   $ 103,000,000      $ 12,792      $ 1,014  

December 31, 2016

   $ 252,873,175      $ 5,757      $ 1,016  

December 31, 2017

   $ 183,509,600      $ 8,939      $ 1,025  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 183,509,600      $ 8,788      $ 1,011  

2017 Asset-Backed Notes

        

December 31, 2012

   $ 129,300,000      $ 8,691      $ 1,000  

December 31, 2013

   $ 89,556,972      $ 13,642      $ 1,004  

December 31, 2014

   $ 16,049,144      $ 80,953      $ 1,375  

December 31, 2015

     —          —          —    

2021 Asset-Backed Notes

        

December 31, 2014

   $ 129,300,000      $ 10,048      $ 1,000  

December 31, 2015

   $ 129,300,000      $ 10,190      $ 996  

December 31, 2016

   $ 109,205,263      $ 13,330      $ 1,002  

December 31, 2017

   $ 49,152,504      $ 33,372      $ 1,001  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 33,575,408      $ 48,032      $ 1,000  

2022 Convertible Notes

        

December 31, 2017

   $ 230,000,000      $ 7,132      $ 1,028  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 230,000,000      $ 7,012      $ 1,015  

2022 Notes

        

December 31, 2017

   $ 150,000,000      $ 10,935      $ 1,014  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 150,000,000      $ 10,751      $ 1,011  

Total Senior Securities(7)

        

December 31, 2008

   $ 216,782,000      $ 2,764        N/A  

December 31, 2009

   $ 130,600,000      $ 3,806        N/A  

December 31, 2010

   $ 170,000,000      $ 3,478        N/A  

December 31, 2011

   $ 310,186,830      $ 2,409        N/A  

December 31, 2012

   $ 599,664,500      $ 1,874        N/A  

December 31, 2013

   $ 559,921,472      $ 2,182        N/A  

December 31, 2014

   $ 626,587,644      $ 2,073        N/A  

December 31, 2015

   $ 600,468,500      $ 2,194        N/A  

December 31, 2016

   $ 667,658,558      $ 2,180        N/A  

December 31, 2017

   $ 802,862,104      $ 2,043        N/A  

December 31, 2018 (as of March 31, 2018, unaudited)

   $ 787,285,008      $ 2,048        N/A  

 

(1)

Total amount of each class of senior securities outstanding at the end of the period presented.

 

150


Table of Contents
Index to Financial Statements
(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, including senior securities not subject to asset coverage requirements under the 1940 Act due to exemptive relief from the SEC, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage per Unit.

(3)

Not applicable because senior securities are not registered for public trading.

(4)

Issued by HT II, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(5)

Issued by HT III, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.

(6)

The Company’s Wells Facility and Union Bank Facility had no borrowings outstanding during the periods noted above.

(7)

The total senior securities and Asset Coverage per Unit shown for those securities do not represent the asset coverage ratio requirement under the 1940 Act because the presentation includes senior securities not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC. As of March 31, 2018, our asset coverage ratio under our regulatory requirements as a business development company was 238.2% excluding our SBA debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio.

 

151


Table of Contents
Index to Financial Statements

MANAGEMENT

Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors elects our officers who serve at the discretion of the Board of Directors. Our Board of Directors currently consists of eight members, one who is an “interested person” of the Company as defined in Section 2(a)(19) of the 1940 Act and seven who are not interested persons and who we refer to as our independent directors.

Directors, Executive Officers and Key Employees

Our executive officers, directors and key employees and their positions are set forth below. Information regarding our current Board of Directors is set forth below as of March 31, 2018. The address for each executive officer, director and key employee is c/o Hercules Capital, Inc., 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301.

 

Name

   Age     

Positions

Interested Director:

     

Manuel A. Henriquez(1)

     54      Chairman of the Board of Directors, President and Chief Executive Officer

Independent Directors:

     

Robert P. Badavas

     65      Director

Jorge Titinger

     57      Director

Allyn C. Woodward, Jr.

     77      Director

Thomas J. Fallon

     56      Director

Brad Koenig

     59      Director

Joseph F. Hoffman

     69      Director

Doreen Woo Ho

     70      Director

Executive Officers:

     

David Lund

     64      Interim Chief Financial Officer

Melanie Grace

     49      General Counsel and Chief Compliance Officer

Scott Bluestein

     40      Chief Investment Officer

Gerard R. Waldt, Jr.

     33      Interim Chief Accounting Officer

 

(1)

Mr. Henriquez is an interested person, as defined in section 2(a)(19) of the 1940 Act, of the Company due to his position as an executive officer of the Company.

Set forth below is information regarding our current directors, including each director’s (i) name and age; (ii) a brief description of their recent business experience, including present occupations and employment during at least the past five years; (iii) directorships, if any, that each director holds and has held during the past five years; and (iv) the year in which each person became a director of the Company. As the information that follows indicates, the nominee and each continuing director brings strong and unique experience, qualifications, attributes, and skills to the Board of Directors. This provides the Board of Directors, collectively, with competence, experience, and perspective in a variety of areas, including: (i) corporate governance and Board service; (ii) executive management, finance, and accounting; (iii) venture capital financing with a technology-related focus; (iv) business acumen; and (v) an ability to exercise sound judgment.

Moreover, the nominating and corporate governance committee believes that it is important to seek a broad diversity of experience, professions, skills, geographic representation and backgrounds. The nominating and corporate governance committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. We believe that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board of Directors to fulfill its responsibilities. Our Board of Directors does not have a specific diversity policy, but considers diversity of race, religion, national origin, gender, sexual orientation, disability, cultural background and professional experiences in evaluating candidates for Board membership.

 

152


Table of Contents
Index to Financial Statements

For each director, we have highlighted certain key areas of experience that qualify him or her to serve on the Board of Directors in each of their respective biographies below.

 

Name, Address, and Age(1)

 

Position(s)
held with
Company

 

Term of Office
and Length of
Time Served

 

Principal

Occupation(s) During Past
5 Years

 

Other Directorships
Held by Director
or Nominee for
Director
During the past 5
years(2)

Independent Directors

       

Robert P. Badavas (65)

  Director   Class I Director since 2006   Retired. Chairman and Chief Executive Officer of PlumChoice, provider of remote technical services and support, from 2011-2016.   Constant Contract, Inc., an online marketing company, from 2007-2016.

Jorge Titinger (57)

  Director   Class I Director since 2017   President and Founder of Titinger Consulting, a private consulting and advisory service provider, since 2016, and President and Chief Executive Officer of Silicon Graphics International, a leader in high-performance computing, from 2012-2016, which was acquired by Hewlett Packard Enterprise in 2016.   Xcerra, supplies products and services to the semiconductor and electronics manufacturing industry, since 2012, and CalAmp, a pure-play pioneer in the connected vehicle and broader Industrial Internet of Things marketplace, since 2015.

Thomas J. Fallon (56)

  Director   Class II Director since 2014   Chief Executive Officer of Infinera Corporation, manufacturer of high capacity optical transmission equipment, since 2010.   Infinera Corporation since 2014.

Brad Koenig (59)

  Director   Class II Director since 2017   Founder and Chief Executive Officer of FoodyDirect.com, an online marketplace that features foods from the top restaurants, bakeries and artisan purveyors around the country, since 2011. Head of Global Technology Investment Banking at Goldman Sachs, from 2011-2015.   GSV Capital Corporation, from 2015-2017.

Allyn C. Woodward, Jr. (77)

  Director   Class II Director since 2004   Retired. Vice Chairman and Director of Adams Harkness Financial Group, an institutional investment bank, from 2001-2006.   None.

Joseph F. Hoffman (69)

  Director   Class III Director since 2015   Retired. SEC Reviewing Partner and Silicon Valley Professional for KPMG from 1998-2009.   None.

Doreen Woo Ho (70)

  Director   Class III Director since 2016   Commissioner of the San Francisco Port Commission since May, 2011 and served as President from 2012 to 2014.   U.S. Bank since 2012.

Interested Director

       

Manuel A. Henriquez (54)(3)

  Director, Chief Executive Officer and Chairman of the Board of Directors   Class III Director since 2004   Hercules Capital, Inc. since 2004.   None.

 

(1)

The address for each officer and director is c/o Hercules Capital, Inc., 400 Hamilton Avenue., Suite 310, Palo Alto, California 94301.

(2)

No director otherwise serves as a director of an investment company subject to the 1940 Act.

(3)

Mr. Henriquez is an interested director due to his position as an officer of the Company.

 

153


Table of Contents
Index to Financial Statements

Interested Director

 

Manuel A. Henriquez

  

Board Committee:

   Independent:
  

N/A

   No

Mr. Henriquez, age 54, is a co-founder of Hercules and has been our Chairman and Chief Executive Officer since 2004 and our President (since 2005) and his term expires in 2019.

 

Business Experience:   

•         Partner, VantagePoint Venture Partners, a $2.5 billion multi-stage technology venture fund (2000-2003)

•         President and Chief Investment Officer, Comdisco Ventures, a division of Comdisco, Inc., a leading technology and financial services company (1999-2000)

•         Managing Director, Comdisco Ventures (1997-1999)

•         Senior Member, Investment Team, Comdisco Ventures (1997-2000)

Non-Profit Leadership:   

•         Northeastern University, a global, experiential research university;

•        Member of the Northeastern Corporation (since 2011)

•        Member of the Academic Affairs and Student Experience Committee (since 2012)

•        Member of the President West Coast Counsel (since 2012)

•         Lucile Packard Foundation for Children’s Health, an independent public charity, devoted exclusively to elevating the priority of children’s health and increasing the quality and accessibility of children’s healthcare through leadership and direct investment:

•        Vice Chairman, Board of Directors

•        Chairman, Compensation Committee

•        Chairman, Executive Search Committee

•        Member, Investment Committee

•        Member, Executive Committee

•         Children’s Health Council, which specializes in working with children with ADHD, learning differences, anxiety, depression, autism spectrum disorders and teen mental health therapy:

•        Corporate Treasurer

•        Chairman, Finance Committee

•        Chairman, Investment Committee

•        Member, Executive Committee

Prior Non-Profit Leadership:   

•         Board Member, Charles Armstrong School, an independent, non-profit, co-educational lower- and middle-day school specializing in teaching students with language-based learning differences, such as dyslexia

Education:   

•         Bachelor’s degree in Business Administration from Northeastern University

Skills/ Qualifications:   

In particular, Mr. Henriquez’ key areas of skills/qualifications include, but are not limited to:

 

•         Client Industries—vast array of knowledge in venture capital financing, including software, life sciences and clean tech

•         Banking/Financial Services—extensive experience with equity and debt financings as well SEC rules and regulations and business development companies

•         Leadership/Strategy—current role as chairman and CEO as well as officer and director experience in several private and public companies and knowledge of financial risk assessment

•         Finance/IT and Other Business Processes—extensive experience in IT and supervising IT internal control and procedures

•         Governance—extensive experience as an executive and director of private and public companies with governance matters

•         Strategic Planning-experience with senior executive level strategic planning for publicly-traded companies, private companies and/or non-profit companies

•         Mergers and Acquisitions-experience with public and/or private company M&A both in identifying targets and evaluating potential targets, as well as post-acquisition integration activities

 

154


Table of Contents
Index to Financial Statements

Independent Directors

 

Joseph F. Hoffman

  

Board Committee:

   Independent:
  

•   Audit, Chair

•   Nominating

   Yes

Mr. Hoffman, age 69, is retired from KPMG LLP after 26 years as a partner and senior executive with that firm. He has served as a director on our Board of Directors since April 2015 and his term expires in 2019.

 

Business Experience:   

•        SEC Reviewing Partner and Silicon Valley Professional Practice Partner, KPMG LLP (1998-2009)

•        Audit Partner and Business Unit Partner in Charge, KPMG LLP (1983-1998)

Private Directorships:   

•        LiveOps, Inc., a call center services company (since 2013)

•        KPMG LLP, an audit, tax, and advisory professional services firm. (2005-2009)

Audit Committees:   

•        LiveOps, Inc. (since 2013)

•        KPMG LLP (2005-2009)

•        Willamette University (since 2014)

Non-Profit Leadership:   

•        Board of Trustees, Willamette University (since 2011)

Memberships:   

•        California Society of Certified Public Accountants

•        National Association of Corporate Directors

•        American College of Corporate Directors

•        Association of Governing Boards of Universities and Colleges

Education:   

•        Bachelor’s degree in Mathematics and Economics, Willamette University

•        Master’s degree in Business Administration, Stanford Graduate School of Business

•        Certified public accountant, State of California

Skills/ Qualifications:   

In particular, Mr. Hoffman’s key areas of skill/qualifications include, but are not limited to:

 

        Client Industries—extensive experience in the technology, manufacturing, and financial services industries

        Finance and Enterprise Risk Management—extensive experience as an advisor to senior management and audit committees on complex accounting, financial reporting, internal controls, and enterprise risk management

         Leadership/Strategy—significant experience as a business executive and director

         Governance—experience as the chairman of the governance committee with corporate governance issues, particularly in a publicly-traded company

         Banking/Financial Services—experience with banking, mutual funds, or other financial services industries, including regulatory experience and specific knowledge of the Securities Act

•        Strategic Planning—experience with senior executive level strategic planning for publicly-traded companies, private companies and/or non-profit companies

 

155


Table of Contents
Index to Financial Statements

Brad Koenig

  

Board Committee:

   Independent:
  

•   Audit

•   Nominating

   Yes

Mr. Koenig, age 59, currently serves as Founder and CEO of FoodyDirect.com, (since 2011), an online marketplace that features foods from the top restaurants, bakeries and artisan purveyors around the country. He has served as a director on our Board of Directors since October 2017 and his term expires in 2018.

 

Business Experience:   

•        Head of Global Technology Investment Banking at Goldman Sachs, a leading global investment banking, securities and investment management firm (1990-2005)

•        Co-Head of Global Technology, Media and Telecommunications at Goldman Sachs (2002-2005)

Private Directorships:   

•        Theragenics Corporation, medical device company serving the surgical products and prostate cancer treatment markets

•        NGP/VAN Software, the leading technology provider to Democratic and progressive campaigns and organizations, offering clients an integrated platform of the best fundraising, compliance, field, organizing, digital, and social networking products

Prior Directorships:   

•        GSV Capital Corporation (2015-2017)

Other Experience:   

•        Adviser to Oak Hill Capital Management, a private equity firm

•        Dartmouth President’s Leadership Council

•        Chair, Dartmouth Athletic Advisory Board

Education:   

•        Bachelor’s degree in Economics from Dartmouth College

•        Master’s degree from Harvard Business School

Skills/ Qualifications:   

In particular, Mr. Koenig’s key areas of skill/qualifications include, but are not limited to:

 

        Client Industries—significant experience in venture capital and technology

         Leadership/Strategy—extensive experience as a director and executive in both public and private companies

        Finance, IT and Other Business Processes—extensive experience as a manager and CEO related to finance, accounting, IT, treasury, human resources, or other key business processes

        Banking/Financial Services—experience with banking, mutual funds, or other financial services industries, including regulatory experience and specific knowledge of the Securities Act

        Mergers and Acquisitions—experience with public and/or private company M&A both in identifying targets and evaluating potential targets, as well as post-acquisition integration activities

 

156


Table of Contents
Index to Financial Statements

Jorge Titinger

  

Board Committee:

   Independent:
  

•   Compensation, Chair

   Yes

Mr. Titinger, age 56, currently serves as Principal and Founder of Titinger Consulting (since 2016), a private consulting and advisory service provider focusing on strategy development and execution, board governance, operational transformations, and culture changes. He has served as a director on our Board of Directors since December 2017 and his term expires in 2020.

 

Business

Experience:

  

•        President and Chief Executive Officer of Silicon Graphics International, leader in high performance computing (2012-2016)

•        President and Chief Executive Officer of Verigy, Inc., provider of advanced automated test systems and solutions to the semiconductor industry (2008-2011)

•        Senior Vice President and General Manager, Product Business Groups of FormFactor, Inc., the leading provider of essential test and measurement technologies along the full IC life cycle—from characterization, modeling, reliability, and design de-bug, to qualification and production test (2007-2008)

•        Senior Vice President, Global Operations & Corporate Support Groups of KLA-Tencor Corporation, a provider of process control and yield management solutions (2002-2007)

•        Vice President, Global Operations, Silicon Business Sector (SBS) Products of Applied Materials, Inc., a leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world (1998 – 2002)

•        President and Chief Operating Officer of Insync Systems, Inc., a gas delivery systems manufacturer (1995-1998)

•        Vice President, Operations/Co-Founder of NeTpower, Inc., a high-performance computer workstations and servers manufacturer (1992-1995)

•        Director, Manufacturing Engineering of MIPS Computer Systems, Inc./Silicon Graphics, Inc., a Graphics Computing Company (1989-1992)

•        Test Engineering Manager, Networked Computers Manufacturing Operations of Hewlett-Packard Company, a Graphics Computing Company (1985-1989)

Public

Directorships:

  

•        Xcerra, parent company of four brands that have been supplying innovative products and services to the semiconductor and electronics manufacturing industry

•        CalAmp, a pure-play pioneer in the connected vehicle and broader Industrial Internet of Things marketplace with its extensive portfolio of intelligent communications devices, robust and capable cloud platform, and targeted software applications

Private

Directorships:

  

•        Transtech Glass Investment Ltd., a specialty glass company for the transportation market

Prior

Directorships:

  

•        Semiconductor Equipment & Material International (Semi), North America, global industry association serving the manufacturing supply chain for the micro- and nano-electronics industries

•        Silicon Graphics International

•        Verigy, Inc.

•        Electroglas, Inc., provides advanced wafer probers, device handlers, test floor management software and services

•        Thermawave acquired and integrated into Kla-Tencor Corporation

Other

Experience:

  

•        Board Member, Unidad de Negocios Transaccionales (Grupo El Comercio)

•        Chairman of the Board, Hispanic Foundation of Silicon Valley (HFSV)

•        Board Member, Information Technology & Audit Committees, Stanford Children’s Hospital

•        Advisory Board Member, Hispanic IT Executive Council (HITEC), Silicon Valley Education Foundation

Education:

  

•        Bachelor’s degree in Electrical Engineering from Stanford University

•        Master’s degree in Electrical Engineering and Engineering Management and Business from Stanford University

Skills/

Qualifications:

  

•        In particular, Mr. Titinger’s key areas of skill/qualifications include, but are not limited to:

        Client Industries—significant experience in venture capital and technology

         Leadership/Strategy—extensive experience as a director and executive in both public and private companies

        Finance, IT and Other Business Processes—extensive experience as a manager and CEO related to finance, accounting, IT, treasury, human resources, or other key business processes

        Enterprise Risk Management—experience in managing enterprise risk as CEO

         Governance—experienced in both corporate governance and executive compensation for both public and private companies

•        Strategic Planning—experience with senior executive level strategic planning for publicly-traded companies, private companies and/or non-profit companies

•        Mergers and Acquisitions—experience with public and/or private company M&A both in identifying targets and evaluating potential targets, as well as post-acquisition integration activities

 

157


Table of Contents
Index to Financial Statements

Allyn C. Woodward, Jr.

  

Board Committee:

   Independent:
  

•   Audit

•   Compensation

   Yes—Lead Director

Mr. Woodward, age 77, has extensive experience and qualifications in banking and financial services. He has served as a director on our Board of Directors since February 2004 and his term expires in 2018.

 

Business Experience:   

•        Vice Chairman and Director, Adams Harkness Financial Group (formerly Adams, Harkness & Hill), an independent institutional research, brokerage and investment banking firm (2001-2006)

•        President and Director, Adams Harkness Financial Group (1995-2001)

•        Silicon Valley Bank

•        Vice President, Founder, Wellesley, Massachusetts office

•        Senior Vice President (1990-1992)

•        Chief Operating Officer (California) (1992-1995)

•        Senior Vice President and Group Manager of Technology Group, Bank of New England (1963-1990)

Private Directorships:   

•        Union Specialties, manufacturer of water-based polyurethane dispersions and specialty products (1990-present)

Current Advisory Board Directorships:   

•        Fletcher Spaght Venture Capital (2005-present)

•        Boston Millennia Partners (2000-present)

•        Ampersand Venture Capital (2013-present)

Prior Directorships:   

•        AH&H Venture Capital

•        Square 1 Bank

•        Lecroy Corporation, Chairman

•        Viewlogic Systems

•        Cayenne Software, Inc.

Non-Profit Leadership:   

•        Member of Finance Committee and Board of Overseers, Newton Wellesley Hospital (2000-present)

 

•        Babson College, Member of:

•        Investment Committee

•        Finance Committee

•        Private Equity Committee (co-founder) (2000-present)

Education:   

•        Bachelor’s degree in Finance and Accounting from Babson College

•        Banking degree, Stonier Graduate School of Banking at Rutgers University

Memberships:   

•        National Association of Corporate Directors

•        Board Leaders Group

Certifications:   

•        Executive Masters Professional Director Certification, American College of Corporate Directors

Skills/

Qualifications:

  

•        In particular, Mr. Woodward’s key areas of skill/qualifications include, but are not limited to:

        Client Industries and Banking/Financial Services—extensive leadership, management and director experience in financial services, banking and technology-related companies

         Leadership/Strategy—significant executive and board experience for both private and public companies in business, finance and investments with a special emphasis on best policies regarding compensation and governance and service as Lead Independent Director

        Finance, IT and Other Business Processes—extensive experience related to finance, accounting, IT, treasury, human resources or other key business processes

         Governance—as lead director extensive experience with corporate governance issues, particularly in a publicly-traded company

 

158


Table of Contents
Index to Financial Statements

Robert P. Badavas

  

Board Committee:

   Independent:
  

•   Audit

   Yes

Mr. Badavas, aged 65, retired in August 2016 as Chairman and Chief Executive Officer of PlumChoice, a venture-backed technology, software and services company (since December 2011). He has served as a director on our Board of Directors since March 2006 and his term expires in 2020.

 

Business

Experience:

  

•        President, Petros Ventures, Inc., a management and advisory services firm (2009-2011 and 2016-present)

•        President and Chief Executive Officer of TAC Worldwide, a multi-national technical workforce management and business services company (2005-2009)

•        Executive Vice President and Chief Financial Officer, TAC Worldwide (2003-2005)

•        Senior Partner and Chief Operating Officer, Atlas Venture, an international venture capital firm (2001-2003)

•        Chief Executive Officer at Cerulean Technology, Inc., a venture capital backed wireless application software company (1995-2001)

•        Certified Public Accountant, PwC (1974-1983)

Public

Directorships:

  

•        Constant Contact, Inc., including chairman of the audit committee, a provider of email and other engagement marketing products and services for small and medium sized organizations, acquired by Endurance International Group Holdings, Inc., (2007-2016)

Prior

Directorships:

  

•        PlumChoice

•        Arivana, Inc.; a telecommunications infrastructure company—publicly traded until its acquisition by SAC Capital

•        RSA Security; an IT security company—publicly traded until its acquisition by EMC

•        On Technology; an IT software infrastructure company—publicly traded until its acquisition by Symantec

•        Renaissance Worldwide; an IT services and solutions company—publicly traded until its acquisition by Aquent

Other

Experience:

  

•        Vice-Chairman, Board of Trustees. Bentley University (since 2005)

•        Board of Trustees Executive Committee and Corporate Treasurer, Hellenic College/Holy Cross School of Theology (since 2002)

•        Chairman Emeritus, The Learning Center for the Deaf (1995-2005)

•        Master Professional Director Certification, American College of Corporate Directors

•        National Association of Corporate Directors

•        Annunciation Greek Orthodox Cathedral of New England, Parish Council President (since 2016)

Education:

  

•        Bachelor’s degree in Accounting and Finance from Bentley University

Skills/

Qualifications:

  

In particular, Mr. Badavas’ key areas of skill/qualifications include, but are not limited to:

 

        Client Industries—extensive experience in software, business and technology enabled services and venture capital

         Leadership/Strategy—significant experience as a senior corporate executive in private and public companies, including tenure as chief executive officer, chief financial officer and chief operating officer

        Finance, IT and Other Business Strategy and Enterprise Risk Management—prior experience as a CEO directing business strategy and as a CFO directing IT, financing and accounting, strategic alliances and human resources and evaluation of enterprise risk in such areas

         Governance—extensive experience as an executive and director of private and public companies with governance matters

•        Strategic Planning—experience with senior executive level strategic planning for publicly-traded companies, private companies and/or non-profit companies

•        Mergers and Acquisitions—experience with public and/or private company M&A both in identifying targets and evaluating potential targets, as well as post-acquisition integration activities

 

159


Table of Contents
Index to Financial Statements

Thomas J. Fallon

  

Board Committee:

   Independent:
  

•   Nominating

   Yes

Mr. Fallon, aged 56, currently serves as Chief Executive Officer of Infinera Corporation (since 2010) and a member of Infinera’s board of directors (since 2009). He has served as a director on our Board of Directors since July 2014 and his term expires in 2018.

 

Infinera

Corporation

Business

Experience:

  

•        President and Chief Executive Officer, Infinera Corporation (2010-Current)

•        Chief Operating Officer, Infinera Corporation (2006-2009)

•        Vice President of Engineering and Operations, Infinera Corporation (2004-2006)

Other Business

Experience

  

•        Vice President, Corporate Quality and Development Operations of Cisco Systems, Inc. (2003-2004)

•        General Manager of Cisco Systems’ Optical Transport Business Unit, VP Operations, VP Supply, various executive positions (1991-2003)

Prior

Directorships:

  

•        Piccaro, a leading provider of solutions to measure greenhouse gas concentrations, trace gases and stable isotopes (2010-2016)

Other

Experience:

  

•        Member, Engineering Advisory Board of the University of Texas at Austin

•        Member, President’s Development Board University of Texas

Education:

  

•        Bachelor’s degree in Mechanical Engineering from the University of Texas at Austin

•        Master’s degree in Business Administration from the University of Texas at Austin

Skills/

Qualifications:

  

In particular, Mr. Fallon’s key areas of skill/qualifications include, but are not limited to:

 

        Client Industries—significant experience in venture capital and technology

         Leadership/Strategy—extensive experience as a director and executive in both public and private companies

         Governance—experienced in both corporate governance and executive compensation for both public and private companies

•        Strategic Planning—experience with senior executive level strategic planning for publicly-traded companies, private companies and/or non-profit companies

•        Mergers and Acquisitions—experience with public and/or private company M&A both in identifying targets and evaluating potential targets, as well as post-acquisition integration activities

 

160


Table of Contents
Index to Financial Statements

Doreen Woo Ho

  

Board Committee:

   Independent:
  

•   Nominating, Chair

•   Compensation

   Yes

Ms. Woo Ho, aged 70, is a retired senior executive who has held top management roles at some of the largest commercial banks in America, including Wells Fargo Bank, Citibank and United Commercial Bank. She has served as a director on our Board of Directors since October 2016 and her term expires in 2019.

 

Business

Experience:

  

•        President and Chief Executive Officer of United Commercial Bank (2009)

•        Executive Vice President, Student Loans and Corporate Trust, Wells Fargo & Company (2008)

•        President of the Consumer Credit Group, Wells Fargo Bank (1998-2007)

•        Senior Vice President of National Business Banking, US Consumer Bank, Citibank (1974-1998)

Public

Directorships:

  

•        U.S. Bank (since 2012)

Prior

Directorships:

  

•        United Commercial Bank (2009)

Private

Directorships:

  

•        San Francisco Opera (since 1992)

Other

Experience:

  

•        Commissioner of the Port of San Francisco (since 2011)

•        Wells Fargo Management Committee member (1999-2008)

Education:

  

•        Bachelor’s in History from Smith College

•        Masters in East Asian Studies from the School of International and Public Affairs at Columbia University

Skills/

Qualifications:

  

In particular, Ms. Woo Ho’s key areas of skill/qualifications include, but are not limited to:

 

        Banking/Financial Services—held a variety of key executive and management positions at large global financial institutions

         Leadership/Strategy—extensive experience as a director and executive with broad operational experience in investments and finance

        Finance, IT and other Business Processes—extensive experience in commercial lending, sales marketing as well as other key business processes

        Enterprise Risk Management—extensive experience in risk management and regulatory compliance in banking services

         Governance—gained extensive experience as CEO of a banking institution in corporate governance and executive management

 

161


Table of Contents
Index to Financial Statements

Executives

Our executive officers perform policy-making functions for us within the meaning of applicable SEC rules. They may also serve as officers of our other subsidiaries. There are no family relationships among our directors or executive officers.

The following information, as of March 31, 2018, outlines the name and age of our executive officers (as of the date of this prospectus) and his or her principal occupation with the Company, followed by the biographical information of each of such executive officer:

 

Name

   Age     

Principal Occupation

Manuel A. Henriquez

     54      Chairman and Chief Executive Officer

David Lund

     64      Interim Chief Financial Officer

Scott Bluestein

     40      Chief Investment Officer

Melanie Grace

     49      General Counsel, Chief Compliance Officer and Secretary

Gerard Waldt, Jr.

     33      Interim Chief Accounting Officer

Executive Biographies

Manuel A. Henriquez’ biography can be found under “Interested Director” above.

David Lund joined us in 2017 as Interim Chief Financial Officer. Mr. Lund has over 30 years of experience in finance and accounting serving companies in the technology sector. Mr. Lund oversees the financial and accounting functions of the Company.

 

Business Experience  

•        Partner, Ravix Group Inc. (since 2016)

•        Chief Financial Officer and Consultant, White Oak Global Advisors LLC (2011-2015)

•        Chief Financial Officer, Hercules Capital, Inc. (2005-2011)

•        Corporate Controller, Rainmaker Systems, Inc. (2005-2005)

•        Corporate Controller, Centillium Communications, Inc. (2003-2005)

•        Chief Financial Officer and Consultant, APT Technologies, Inc. (2002-2003)

•        Chief Financial Officer and Vice President, Scion Photonics, Inc. (2001-2002)

•        Vice President and Senior Corporate Controller, Urban Media Communications (2000-2001)

•        Vice President and Corporate Controller, InterTrust Technologies Corporation (1996-2000)

•        Senior Manager, Murdock & Associates Inc. (1996-1996)

•        Audit Senior Manager, Ernst & Young (1987-1996)

•        Audit Manager, Grant Thornton, LLP (1983-1987)

Education/Other:  

•        Bachelor’s in Business Administration with an emphasis in Accounting from San Jose State University

•        Bachelor’s in Business Administration with an emphasis in Marketing from California State University, Chico

 

162


Table of Contents
Index to Financial Statements

Scott Bluestein joined us in 2010 as Chief Credit Officer. He was promoted to Chief Investment Officer in 2014. Mr. Bluestein is responsible for managing the investment teams and investments made by the Company.

 

Business Experience  

•        Founder and Partner, Century Tree Capital Management (2009-2010)

•        Managing Director, Laurus-Valens Capital Management, an investment firm specializing in financing small and microcap growth-oriented businesses through debt and equity securities (2003-2009)

•        Member of Financial Institutions Coverage Group focused on Financial Technology, UBS Investment Bank (2000-2003)

Education/Other:  

•        Bachelor’s in Business Administration from Emory University

Melanie Grace joined us in 2015 as General Counsel, Chief Compliance Officer and Secretary. She has over 18 years of experience representing public and private companies in securities, compliance and transactional matters. Ms. Grace oversees the legal and compliance function for the Company and serves as secretary for the Company and select subsidiaries.

 

Business

Experience

 

•        Chief Legal Officer and Corporate Secretary, WHV Investments, Inc. where she also served as interim Chief Compliance Officer (2011-2015)

•        Member, Management, Operations and Proxy Committees, WHV Investments, Inc. (2013-2015)

•        Chair, Ethics Committee, WHV Investments, Inc. (2013-2015)

•        Chief Counsel, Corporate, NYSE Euronext (2005-2008)

•        Associate, Fenwick & West LLP (2000-2005)

Education/Other:  

•        Bachelor’s and Master’s in History from the University of California, Riverside

•        Juris Doctor from Boston University School of Law

•        Member, State Bar of California

•        Registered In-House Counsel, New York

•        Designated Investment Adviser Certified Compliance Professional®

Gerard R. Waldt, Jr. joined us in 2016 as Assistant Controller and in 2017 became Corporate Controller and Interim Chief Accounting Officer. He is responsible for the financial and regulatory reporting, financial planning and analysis, and financial systems design and implementation.

 

Business Experience  

•        Senior Manager in the Financial Services practice of Ernst & Young, McLean, VA where he developed extensive experience providing audit and advisory services to both publicly-traded and private institutions (2009-2016)

Education/Other:  

•        Bachelor of Business Administration—Accounting from James Madison University

•        Active Certified Public Accountant in Maryland

Board of Directors

The number of directors is currently fixed at eight directors.

Our Board of Directors is divided into three classes. Class I directors hold office for a term expiring at the annual meeting of stockholders to be held in 2020, Class II directors hold office for a term expiring at the annual meeting of stockholders to be held in 2018 and Class III directors hold office for a term expiring at the annual meeting of stockholders to be held in 2019. Each director holds office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Messrs. Woodward, Koenig and Fallon’s terms expire in 2018, Messrs. Henriquez and Hoffman and Ms. Woo Ho’s terms expire in 2019 and Messrs. Badavas and Titinger’s terms expire in 2020. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify.

 

163


Table of Contents
Index to Financial Statements

CORPORATE GOVERNANCE

Our business, property and affairs are managed under the direction of our Board of Directors. Members of our Board of Directors are kept informed of our business through discussions with our chairman and chief executive officer, our chief financial officer, our chief investment officer, our general counsel, and our other officers and employees, and by reviewing materials provided to them and participating in meetings of our Board of Directors and its committees.

Because our Board of Directors is committed to strong and effective corporate governance, it regularly monitors our corporate governance policies and practices to ensure we meet or exceed the requirements of applicable laws, regulations and rules, and the NYSE’s listing standards. The Board of Directors has adopted a number of policies to support our values and good corporate governance, including corporate governance guidelines, Board of Directors’ committee charters, insider trading policy, code of ethics, code of business conduct and ethics, and related person transaction approval policy. The Board of Directors has approved corporate governance guidelines that provide a framework for the operation of the Board of Directors and address key governance practices. Examples of our corporate governance practices include:

 

   

Continued Board Recruitment and Refreshment

 

   

Lead Independent Director

 

   

Majority Independent Directors

 

   

Independent Audit and Compensation, Nominating and Governance Committees

 

   

Annual Board and Committee Self-Evaluations

 

   

Annual Board Review of Senior Management Succession Plans

 

   

Anti-Hedging Policy

 

   

Active Stockholder Outreach

 

 

   

Pay for Performance Philosophy

 

   

Stock Ownership Guidelines for Executives and Directors

 

   

Clawback Provisions for Executive Incentive Compensation

 

   

Double Trigger Change-of-Control Provisions for Stock Awards

 

   

No Tax Gross-Up Payments

Our Board of Directors will continue to review and update the corporate governance guidelines, corporate governance practices, and our corporate governance framework.

Board Leadership Structure

Chairman and Chief Executive Officer

Our Board of Directors currently combines the role of chairman of the Board of Directors with the role of chief executive officer, coupled with a lead independent director position to further strengthen our governance structure. Our Board of Directors believes this provides an efficient and effective leadership model for our company. Combining the chairman and chief executive officer roles fosters clear accountability, effective decision-making, and alignment on corporate strategy. Since 2004, Mr. Henriquez has served as both chairman of the Board of Directors and as our chief executive officer. Mr. Henriquez is an interested director.

No single leadership model is right for all companies at all times. Our Board of Directors recognizes that depending on the circumstances, other leadership models, such as a separate independent chairman of the Board of Directors, might be appropriate. Accordingly, our Board of Directors periodically reviews its leadership structure.

Moreover, our Board of Directors believes that its governance practices provide adequate safeguards against any potential risks that might be associated with having a combined chairman and chief executive officer. Specifically:

 

   

seven of our eight current directors are independent directors;

 

164


Table of Contents
Index to Financial Statements
   

all of the members of our Audit Committee, Compensation Committee, and NCG Committee are independent directors;

 

   

our Board of Directors and its committees regularly conduct scheduled meetings in executive session, out of the presence of Mr. Henriquez and other members of management;

 

   

our Board of Directors and its committees regularly conduct meetings which specifically include Mr. Henriquez;

 

   

our Board of Directors and its committees remain in close contact with, and receive reports on various aspects of Hercules’ management and enterprise risk directly from our senior management and independent auditors.

Lead Independent Director

Our Board of Directors has instituted the lead independent director position to provide an additional measure of balance, ensure our Board of Directors’ independence, and enhance its ability to fulfill its management oversight responsibilities. Mr. Badavas currently serves as our lead independent director. The lead independent director:

 

   

presides over all meetings of the independent directors at which our chairman is not present, including executive sessions of the independent directors;

 

   

has the authority to call meetings of the independent directors;

 

   

frequently consults with our chairman and chief executive officer about strategic policies;

 

   

provides our chairman and chief executive officer with input regarding Board of Directors meetings;

 

   

serves as a liaison between the chairman and chief executive officer and the independent directors; and

 

   

otherwise assumes such responsibilities as may be assigned to him by the independent directors.

Having a combined chairman and chief executive officer, coupled with a substantial majority of independent, experienced directors, including a lead independent director with specified responsibilities on behalf of the independent directors, provides the right leadership structure for our company and is best for us and our stockholders at this time.

Board Oversight of Risk

While day-to-day risk management is primarily the responsibility of our management team, our Board of Directors, as a whole and through its committees, is responsible for oversight of the risk management processes.

Our Audit Committee has oversight responsibility not only for financial reporting with respect to our major financial exposures and the steps management has taken to monitor and control such exposures, but also for the effectiveness of management’s enterprise risk management process that monitors and manages key business risks facing our company. In addition to our Audit Committee, the other committees of our Board of Directors consider the risks within their areas of responsibility. For example, our Compensation Committee considers the risks that may be posed by our executive compensation program.

Management provides regular updates throughout the year to our Board of Directors regarding the management of the risks they oversee at each regular meeting of our Board of Directors. Also, our Board of Directors receives presentations throughout the year from various department and business group heads that include discussion of significant risks as necessary. Additionally, our full Board of Directors reviews our short and long-term strategies, including consideration of significant risks facing our business and their potential impact.

 

165


Table of Contents
Index to Financial Statements

During 2017, in addition to unanimous written consents, the Board of Directors held the following meetings:

 

Type of Meeting

   Number  

Regular Meetings to address regular, quarterly business matters

     4  

Other Meetings to address business matters that arise between quarters, such as fair valuing the portfolio investments, quarterly audit committee presentations and review and approval of earnings reports, among other matters

     12  

Each director makes a diligent effort to attend all Board of Directors and committee meetings, as well as our annual meeting of stockholders. All directors attended at least 75% of the aggregate number of meetings of the Board of Directors and of the respective committees on which they served. Each of our then-serving directors attended our 2017 annual meeting of stockholders in person.

Board Committees

Our Board of Directors has established an Audit Committee, a Compensation Committee, and a NCG Committee. A brief description of each committee is included in this prospectus and the charters of the Audit, Compensation, and NCG Committees are available on the Investor Relations page of our website at http://investor.htgc.com/governance-documents.

As of the date of this prospectus, the members of each of our Board of Directors committees are as follows (the names of the respective committee chairperson are bolded):

 

Audit

 

Compensation

 

Nominating and Governance

Joseph Hoffman

Robert Badavas

Brad Koenig

Allyn Woodward, Jr.

 

Jorge Titinger

Allyn Woodward, Jr.

Doreen Woo Ho

 

Doreen Woo Ho

Thomas Fallon

Joseph Hoffman

Brad Koenig

Each of our directors who sits on a committee satisfies the independence requirements for purposes of the rules promulgated by the NYSE and the requirements to be a non-interested director as defined in Section 2(a)(19) of the 1940 Act. Mr. Hoffman, Chairman of the Audit Committee and Messrs. Badavas and Koenig, members of the Audit Committee, are each an “audit committee financial expert” as defined by applicable SEC rules.

Committee Governance

Each committee is governed by a charter that is approved by the Board of Directors, which sets forth each committee’s purpose and responsibilities. The Board of Directors reviews the committees’ charters, and each committee reviews its own charter, on at least an annual basis, to assess the charters’ content and sufficiency, with final approval of any proposed changes required by the full Board of Directors.

Committee Responsibilities and Meetings

The key oversight responsibilities of the Board of Directors committees, and the number of meetings held by each committee during 2017, are as follows:

 

Audit Committee

   Number of meetings held in 2017:    4

 

   

Overseeing the accounting and financial reporting processes and the integrity of the financial statements.

 

166


Table of Contents
Index to Financial Statements
   

Establishing procedures for complaints relating to accounting, internal accounting controls or auditing matters.

 

   

Examining the independence qualifications of our auditors.

 

   

Assisting our Board of Directors’ oversight of our compliance with legal and regulatory requirements and enterprise risk management.

 

   

Assisting our Board of Directors in fulfilling its oversight responsibilities related to the systems of internal controls and disclosure controls which management has established regarding finance, accounting, and regulatory compliance.

 

   

Reviewing and recommending to the Board of Directors the valuation of the Company’s portfolio.

 

Compensation Committee

   Number of meetings held in 2017:     8

 

   

Oversees our overall compensation strategies, plans, policies and programs.

 

   

The approval of director and executive compensation.

 

   

The assessment of compensation-related risks.

 

Nominating and Corporate Governance Committee

   Number of meetings held in 2017:     3

 

   

Discharging our Board of Director’s responsibilities related to general corporate governance practices, including developing, reviewing and recommending to our Board of Directors a set of principles to be adopted as the Company’s Corporate Governance Guidelines.

 

   

Conducting an annual performance evaluation of our Board of Directors, its committees, and its members.

 

   

Reviewing board composition, size, and refreshment and identifying and recommending to our Board of Directors qualified director candidates.

 

   

Overseeing succession planning for CEO and NEOs of the Company.

 

   

Criteria considered by the NCG Committee in evaluating qualifications of individuals for election as members of the Board of Directors consist of the independence and other applicable NYSE corporate governance requirements; the 1940 Act and all other applicable laws, rules, regulations and listing standards; and the criteria, polices and principles set forth in the NCG Committee charter.

 

   

Considers nominees properly recommended by a stockholder. Nominations for directors may be made by stockholders if notice is timely given and if the notice contains the information required in our Bylaws. Except as noted below, to be timely, proposals and nominations of stockholders must be delivered to our secretary no earlier than December 30, 2018 and not later than 5:00 p.m., Eastern Time, on January 29, 2019. Proposals must comply with the other requirements contained in our Bylaws, including supporting documentation and other information.

 

   

The NCG Committee regularly considers the composition of our Board to ensure there is a proper combination of skills and viewpoints. In 2017, the NCG Committee conducted a search to identify new director nominee candidates who would enhance the mix of leadership skills and qualifications on our Board. On October 25, 2017, the Board increased its size to eight directors and filled the vacancy by appointing Mr. Koenig to serve on the Board until such time as his successor is duly elected and qualified or until his earlier resignation or removal. On October 25, 2017, the Board also appointed Mr. Titinger to the Board until such time as his successor is duly elected and qualified or until his earlier resignation or removal. Mr. Titinger’s appointment became effective at the time of the Annual Meeting, and he filled the position vacated by Susanne Lyons, who stepped down at the Annual Meeting.

 

167


Table of Contents
Index to Financial Statements

Director Independence

The NYSE’s listing standards and Section 2(a)(19) of the 1940 Act require that a majority of our Board of Directors and every member of our Audit, Compensation, and NCG Committees are “independent.” Under the NYSE’s listing standards and our corporate governance guidelines, no director will be considered to be independent unless and until our Board of Directors affirmatively determines that such director has no direct or indirect material relationship with our company or our management. Our Board of Directors reviews the independence of its members annually.

In determining that Ms. Woo Ho and Messrs. Badavas, Woodward, Fallon, Hoffman, Koenig and Titinger are independent, our Board of Directors, through the NCG Committee, considered the financial services, commercial, family and other relationships between each director and his or her immediate family members or affiliated entities, on the one hand, and Hercules and its subsidiaries, on the other hand.

Communication with the Board

We believe that communications between our Board of Directors, our stockholders and other interested parties are an important part of our corporate governance process. Stockholders with questions about Hercules are encouraged to contact Michael Hara, Investor Relations at (650) 433-5578. However, if stockholders believe that their questions have not been addressed, they may communicate with our Board of Directors by sending their communications to Hercules Capital, Inc., c/o Melanie Grace, Secretary, 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301. All stockholder communications received in this manner will be delivered to one or more members of our Board of Directors.

Mr. Badavas currently serves as the lead independent director, and he presides over executive sessions of the independent directors. Parties may communicate directly with Mr. Badavas by sending their communications to Hercules Capital, Inc., c/o Melanie Grace, Secretary at the above address. All communications received in this manner will be delivered to Mr. Badavas.

All communications involving accounting, internal accounting controls and auditing matters, possible violations of, or non-compliance with, applicable legal and regulatory requirements or our code of ethics, or retaliatory acts against anyone who makes such a complaint or assists in the investigation of such a complaint, will be referred to Melanie Grace, Secretary. The communication will be forwarded to the chair of our Audit Committee if our secretary determines that the matter has been submitted in conformity with our whistleblower procedures or otherwise determines that the communication should be so directed.

The acceptance and forwarding of a communication to any director does not imply that the director owes or assumes any fiduciary duty to the person submitting the communication, all such duties being only as prescribed by applicable law.

Code of Business Conduct and Ethics

Our code of business conduct and ethics requires that our directors and executive officers avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and the interests of Hercules. Pursuant to our code of business conduct and ethics, which is available on the Governance Documents page of our website at http://investor.htgc.com/governance-documents, each director and executive officer must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Audit Committee. Certain actions or relationships that might give rise to a conflict of interest are reviewed and approved by our Board of Directors.

 

168


Table of Contents
Index to Financial Statements

Availability of Corporate Governance Documents

To learn more about our corporate governance and to view our corporate governance guidelines, code of business conduct and ethics, and the charters of our Audit Committee, Compensation Committee, and NCG Committee, please visit the Investor Relations page of our website at http://investor.htgc.com/governance-documents, under “Governance Documents.” Copies of these documents are also available in print free of charge by writing to Hercules Capital, Inc., c/o Melanie Grace, secretary, 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301.

Compensation Committee Interlocks and Insider Participation

All members of our Compensation Committee are independent directors and none of the members are present or past employees of the Company. No member of our Compensation Committee: (i) has had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K under the Exchange Act; or (ii) is an executive officer of another entity, at which one of our executive officers serves on our Board of Directors.

 

169


Table of Contents
Index to Financial Statements

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The Compensation Discussion and Analysis discusses our 2017 executive compensation program, as it relates to the following executive officers:

 

Manuel A. Henriquez

  Chairman of the Board of Directors and Chief Executive Officer (“CEO”)

Scott Bluestein

  Chief Investment Officer

Melanie Grace

  General Counsel, Chief Compliance Officer and Secretary

Gerard R. Waldt, Jr.(1)(2)

  Interim Chief Accounting Officer

David Lund(1)

  Interim Chief Financial Officer (“CFO”)

Mark Harris(1)

  Chief Financial Officer

Andrew Olson(2)

  Vice President of Finance and Senior Controller

 

(1)

Effective November 2, 2017, the Company and Mr. Harris mutually agreed that Mr. Harris would separate from the Company and end his tenure as Chief Financial Officer and Chief Accounting Officer. The Board appointed David Lund, the Company’s former Chief Financial Officer, as Interim Chief Financial Officer and Gerard R. Waldt, Jr., the Company’s current Controller, as Interim Chief Accounting Officer.

(2)

Mr. Olson announced his resignation, effective July 21, 2017, from his position as Vice President of Finance and Senior Controller. Gerard R. Waldt, Jr., the Company’s current assist Assistant Controller, assumed the position of Controller. Subsequently, the Board appointed Mr. Waldt as the Company’s Interim Chief Accounting Officer.

We refer to Messrs. Henriquez, Bluestein, Waldt, Lund, Harris and Olson and Ms. Grace as our “named executive officers,” or “NEOs”.

Executive Summary

Under the oversight of our Compensation Committee, the Company’s executive compensation program is designed to attract, incent and retain talented individuals who are critical to our continued success and our corporate growth and who will deliver sustained strong performance over the longer term. Our executive compensation program is designed to motivate the Company’s executive officers to maintain the financial strength of the Company while avoiding any inappropriate focus on short-term profits that would impede the Company’s long-term growth and encourage excessive risk-taking.

In 2017, the Company continued to review and enhance our compensation practices in accordance with our executive compensation philosophy. The review considered both compensation levels and company performance over a one-, three-, and five-year period from 2013 to 2017 (the “Performance Periods”). The Company believes that compensation paid to our NEOs for 2017 was commensurate with the Company’s overall absolute performance as well as our performance relative to peers during the Performance Periods. The 2017 compensation decisions made by the Compensation Committee considered the fact that our performance relative to a peer group of companies was above the median, and in most cases above the 75th percentile, measured using:

 

   

Return on average assets (“ROAA”)

 

   

Return on equity (“ROE”)

 

   

Return on investment capital (“ROIC”)

 

   

Total shareholder return (“TSR”)

The Company’s incentive compensation practices are significantly limited by the requirements imposed on us as an internally managed business development company pursuant to the 1940 Act. (See “Limitations Imposed by the Investment Company Act of 1940” below). These are regulatory limitations related to our corporate structure that are relatively unique and do not apply to most other publicly-traded companies. As discussed further below, our NEOs were compensated to reflect the Company’s performance during the Performance Periods.

 

170


Table of Contents
Index to Financial Statements

In addition to key factors involved in the 2017 decisions made by the Compensation Committee, we continue to maintain the enhancements to our executive officer compensation program that we adopted in 2016, such as our clawback policy for all Section 16 officers and consideration of a mix of corporate and individual performance factors for our NEOs. In 2017, the Company entered into retention awards with Messrs. Henriquez, Harris and Bluestein that provide for certain benefits upon certain terminations of employment.

Compensation Philosophy and Objectives

The primary principle of our compensation program is to engage and align a substantial portion of executive compensation to the financial strength, long-term profitability, and risk management of the Company and to the creation of long-term stockholder value. As an internally managed business development company, the Company’s compensation program is designed to encourage our NEOs to think and act like stockholders. The structure of the NEOs’ compensation program is designed to encourage and reward the following factors, among other things:

 

   

Sourcing and pursuing attractively priced investment opportunities to venture-backed and selected publicly-listed companies;

 

   

Maintaining credit quality, monitoring financial performance, and ultimately managing a successful exit of the Company’s investment portfolio;

 

   

Achieving the Company’s dividend objectives (which focus on stability and potential growth);

 

   

Providing compensation and incentives necessary to attract, motivate and retain key executives critical to our continued success and growth;

 

   

Focusing management behavior and decision-making on goals that are consistent with the overall strategy of the business;

 

   

Ensuring a linkage between NEO compensation and individual contributions to our performance; and

 

   

Creation of compensation principles and processes that are designed to balance risk and reward in a way that does not encourage unnecessary risk taking.

We believe that our continued success during 2017, despite strong competition for top-quality executive talent in the commercial and venture lending industry, was attributable to our ability to attract, motivate and retain the Company’s outstanding executive team using both short- and long-term incentive compensation programs.

The Company’s compensation objectives are achieved through its executive compensation program, which for 2017 consisted of the following:

 

   

Annual Base Salary: Cash paid on a regular basis throughout the year. This provides a level of fixed income that is market competitive to allow the Company to retain and attract executive talent.

 

   

Annual Cash Bonus Awards: Cash awards paid on an annual basis following year-end (not formulaic, but subject to Compensation Committee discretion, due to regulatory requirements that do not allow formulaic incentive plans; see “—Our Regulatory Status and Limitations Imposed by the Investment Company Act of 1940”. This rewards NEOs who contribute to our financial performance and strategic success during the year, and reward individual achievements.

 

   

Long-Term Equity Incentive Awards: Equity incentive awards vest 1/3 on a one-year cliff with remaining 2/3 vesting quarterly over two years based on continued employment with the Company. This rewards NEOs who contribute to our success through the alignment and creation of shareholder value, provide meaningful retention incentives, and reward individual achievements.

The compensation program is designed to reflect best practices in executive compensation:

 

   

No employment agreements for NEOs.

 

171


Table of Contents
Index to Financial Statements
   

No guaranteed retirement benefits.

 

   

No tax gross ups for NEOs.

 

   

Clawback policy for all Section 16 officers.

 

   

No pension.

 

   

Maintain stock ownership guidelines for NEOs to own at least two times his or her salary.

 

   

No executive perquisite allowances beyond the benefit programs offered to all employees.

 

   

No repricing of stock options without stockholder approval, as required under applicable NYSE rules (and subject to other requirements under the 1940 Act).

 

   

Routinely engage an independent compensation consultant to review NEO compensation.

Executive Compensation Governance

The Company’s executive compensation program is supported by strong corporate governance and Board-level oversight. The Compensation Committee provides primary oversight of our compensation programs, including the design and administration of executive compensation plans, assessment and setting of corporate performance goals, as well as individual performance metrics, and the approval of executive compensation. In addition, the Compensation Committee retains an independent compensation consultant, and where appropriate, discusses compensation-related matters with our CEO, as it relates to the other NEOs. The Compensation Committee developed our 2017 compensation program, and the compensation paid to our NEOs during and in respect of 2017 was approved by the Compensation Committee as well as all of our independent directors.

 

   

Role of Compensation Committee: The Compensation Committee is comprised entirely of independent directors who are also non-employee directors as defined in Rule 16b-3 under the Exchange Act, independent directors as defined by the NYSE rules, and are not “interested persons” of the Company, as defined by Section 2(a)(19) of the 1940 Act. For 2017, Susanne Lyons, Ms. Woo Ho and Mr. Woodward comprised the Compensation Committee and Ms. Lyons chaired the Compensation Committee from the beginning of the year through the 2017 annual meeting. Following the 2017 annual meeting, Ms. Woo Ho and Messrs. Titinger and Woodward comprised the Compensation Committee, and Mr. Titinger chaired the Compensation Committee.

The Compensation Committee operates pursuant to a charter that sets forth its mission, specific goals and responsibilities. A key component of the Compensation Committee’s goals and responsibilities is to evaluate, approve and/or make recommendations to our Board regarding the compensation of our NEOs, and to review their performance relative to their compensation to assure that they are compensated in a manner consistent with the compensation philosophy discussed above.

The Compensation Committee has not established a policy or target for the allocation between cash and non-cash or short-term and long-term compensation. Rather, the Compensation Committee undertakes a subjective analysis in light of the principles described herein and, in connection with its analysis, reviews and considers information provided by independent compensation consultants and surveys to which the Company subscribes to determine the appropriate level and mix of base compensation, performance-based pay, and other elements of compensation.

In addition, the Compensation Committee evaluates and makes recommendations to our Board regarding the compensation of the directors for their services. Annually, the Compensation Committee:

 

   

evaluates our CEO’s performance;

 

   

reviews our CEO’s evaluation of the other NEOs’ performance;

 

   

determines and approves the compensation paid to our CEO; and

 

   

with input from our CEO, reviews and approves the compensation of the other NEOs.

 

172


Table of Contents
Index to Financial Statements

The Compensation Committee periodically reviews our compensation programs and equity incentive plans to ensure that such programs and plans are consistent with our corporate objectives and appropriately align our NEOs’ interests with those of our stockholders. The Compensation Committee also administers our stock incentive program. The Compensation Committee may not delegate its responsibilities discussed above.

 

   

Role of Compensation Consultant: The Compensation Committee has engaged Frederic W. Cook & Co., Inc., or F.W. Cook, as an independent outside compensation consultant to assist the Compensation Committee and provide advice on incorporating a variety of compensation matters relating to CEO and NEOs compensation, peer group selection, compensation program design best practices, market and industry compensation trends, improved program designs, market competitive director compensation levels and regulatory developments. F.W. Cook was hired by and reports directly to the Compensation Committee. F.W. Cook does not provide any other services to the Company. The Compensation Committee has assessed the independence of F.W. Cook pursuant to the NYSE rules, and it has been concluded that F.W. Cook’s work for the Compensation Committee does not raise any conflict of interest.

Subsequently, the Compensation Committee engaged Frederic W. Cook & Co. to provide the following services to the Committee:

 

   

Provide information, research, market analysis and recommendations with respect to our 2017 executive and non-employee director compensation programs, including evaluating the components of our executive and non-employee director compensation programs and the alignment of the compensation programs with our performance;

 

   

In connection with its research with respect to executive and non-employee director compensation programs, update the Compensation Committee on market trends, changing practices, and legislation pertaining to compensation programs;

 

   

Advise on the design of the executive and non-employee director compensation programs and the reasonableness of individual compensation targets and awards, including in the context of business and shareholder performance;

 

   

Provide advice and recommendations that incorporated both market data and Company-specific factors; and

 

   

Assist the Compensation Committee in making pay recommendations for the NEOs after the evaluation of, among other things, Company and individual performance, market pay level, and management recommendations.

The Compensation Committee’s executive compensation determinations are subjective and the result of the Compensation Committee’s business judgment. Its determinations are informed by the experiences of its members and the peer group pay and performance data provided by its independent compensation consultant. Accordingly, the Compensation Committee does not target a percentile within its peer group. Instead, it uses the data as a reference point in determining the types and amounts of compensation provided by the Company.

 

   

Role of Chief Executive Officer: From time to time and at the Compensation Committee’s request, our CEO will attend the Compensation Committee’s meetings to discuss the Company’s performance and compensation-related matters. Our CEO does not attend executive sessions of the Compensation Committee, unless invited by the Compensation Committee. While our CEO does not participate in any deliberations relating to his own compensation, our CEO reviews on at least an annual basis the performance of each of the other NEOs and other executive officers. Based on these performance reviews and the Company’s overall absolute and relative performance, our CEO makes recommendations to the Compensation Committee on any changes to base salaries, annual bonuses and equity awards. The Compensation Committee considers the recommendations submitted by our CEO, as well as data and analysis provided by management and F.W. Cook, but retains full discretion to approve and/or recommend for Board approval all executive and director compensation.

 

173


Table of Contents
Index to Financial Statements

Competitive Benchmarking Against Peers

To determine the competitiveness of executive compensation levels, the Compensation Committee analyzes a group of internally managed business development companies, financial services companies and real estate investment trusts (“REITs”) as set forth below (the “Peer Group”). The Peer Group is viewed as reflecting the labor market for our officer and employee talent, has a similar investor base, and, like the Company, the business development companies and REITs are pass-through entities with the majority of earnings required to be distributed to shareholders as a dividend. The Compensation Committee does not specifically benchmark the compensation of our NEOs against that paid by other companies. During 2017, the Compensation Committee, based on the advice of F.W. Cook, reviewed the peer group used in connection with prior compensation decisions. Based on this review, and the advice of F.W. Cook, the Compensation Committee updated our Peer Group to better align it to our business. Our Peer Group was used as a factor in determining the annual cash bonus awards made with respect to 2017 (but paid in 2018) as well as the further considerations further described below under “Annual Cash Bonus Awards”. The Peer Group data used in such determination is for the period January 1, 2017 through September 30, 2017.

Our current Peer Group includes:

Internally Managed Business Development Companies: Triangle Capital(1), KCAP Financial, and Main Street Capital.

Financial Services: Alliance Bernstein, BGC Partners, Cowen Group, Evercore Partners, Fortress Investment Group, Greenhill & Co., Houlihan Lokey, LPL Financial Holdings, On Deck Capital, and Wisdom Tree Investment.

Real Estate Investment Trusts: Capstead Mortgage, CYS Investments, Hannon Armstrong, iStar Inc., Ladder Capital, MFA Financial, Redwood Trust, Sabra Health Care, and Seritage Growth.

As of September 30, 2017, which is the period the Compensation Committee reviewed our Peer Group, the Company outperformed most of its Peer Group over the one-, three- and five-years as follows:

 

     Return on
Average Assets
(excl. cash)
    Return on Equity     Return on
Invested Capital
    Total Shareholder
Returns
 

Performance

Period          

   HTGC     % Rank
of Peer
Group
    HTGC     % Rank
of Peer
Group
    HTGC     % Rank
of Peer
Group
    HTGC     % Rank
of Peer
Group
 

1-year

     6.3     100     11.1     100     6.4     100     4.6     41

3-year

     6.1     99     10.4     99     6.2     99     6.5     59

5-year

     6.4     98     10.6     97     6.5     98     13.6     61

 

1-, 3- and 5-year calculations of performance are based on Q3 2017 and as of November 10, 2017 for TSR.

Companies with less than three and/or less than five full years of historical financial and TSR performance are excluded.

Financial Services peers are excluded from analysis of capital allocation because services companies are not as capital intensive as REITs and business development companies, which are primarily engaged in direct investment of firm capital.

Data source: S&P Capital IQ

The Company believes that compensation paid to our NEOs for 2017 was commensurate with the Company’s overall absolute performance as well as our performance relative to the Peer Group during the relevant Performance Periods. The 2017 compensation decisions made by the Compensation Committee considered the fact that our performance relative to the Peer Group was above the median, and in most cases above the 75th percentile, measured using Return on Average Assets, Return on Equity, Return on Investment Capital and Total Shareholder Return during the trailing one-, three-, and five-years as indicated in the chart above.

 

(1)

Triangle Capital is no longer included in the 2018 peer group since it was acquired by Benefit Street Partners.

 

174


Table of Contents
Index to Financial Statements

In addition, the Compensation Committee also considers the Company’s total shareholder returns as compared to a select number of business development company Peers(1) to consider the competitiveness of executive compensation levels. As of December 30, 2017, the Company delivered the following TSR results(2) as compared to our select business development company peers:

 

     Total Shareholder
Returns
 

Performance

Period          

   HTGC     BDC Peer
Group
 

1-year

     1.8     1.1

3-year

     13.2     9.3

5-year

     72.4     12.6

 

(1)

BDC Peers: AINV, ARCC, BKCC, OCSL, FSIC, GBDC, GSBD, KCAP, MAIN, MCC, NMFC, PNNT, PSEC, SLRC, TCAP, TCPC, TCRD, TICC, TSLX

(2)

Data Source: S&P Capital IQ

CEO Pay Ratio

For 2017, our last completed fiscal year, the median of the annual total compensation of all of our employees (other than Mr. Henriquez, our Chief Executive Officer (our “CEO”)) was $209,713, and the annual total compensation of our CEO, as reported in the Summary Compensation Table, was $8,235,700. Based on this information, our CEO’s 2017 annual total compensation was approximately 39.3 times that of the median of the 2017 annual total compensation of all of our employees.

We selected December 31, 2017 as the date used to identify our “median employee” whose annual total compensation was the median of the annual total compensation of all our employees (other than our CEO) for 2017. As of December 31, 2017, our employee population consisted of 66 individuals (other than Mr. Henriquez), located in our California, Connecticut, Illinois, Massachusetts, New York and Washington, D.C. offices. We compared the annual total compensation for our employee population in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, which included salary, bonus, stock awards and employer contributions to employee accounts in our 401(k) plan. In making this determination, we annualized the compensation of 79 employees who either were hired or terminated in 2017 but did not work for us the entire fiscal year.

Our Regulatory Status and Limitations Imposed by the Investment Company Act of 1940

We are an internally-managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, referred to as the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements, including the 1940 Act, rules promulgated under the 1940 Act, and exemptive orders issued to us by the Securities and Exchange Commission, or the SEC. We refer to these requirements, rules and exemptive orders as the 1940 Act Requirements. Among other things, these 1940 Act Requirements:

 

   

Limit our ability to implement non-equity incentive plans (i.e., cash incentive plans) that would restrict the discretion and decision-making authority of our Compensation Committee. The 1940 Act Requirements provide that we may maintain either an equity incentive plan or a profit sharing plan. A “profit sharing plan” as defined under the 1940 Act is any written or oral plan, contract, authorization or arrangement, or any practice, understanding or undertaking whereby amounts payable under the compensation plan are dependent upon or related to the profits of the company. The SEC has stated that compensation plans possess profit-sharing characteristics if an investment company is obligated to make payments under such a plan based on the level of income, realized gains or loss on investments or unrealized appreciation or depreciation of assets of such investment company.

 

175


Table of Contents
Index to Financial Statements
   

We believe that equity incentives strongly align the interests of our stockholders with our executive officers and other employees, and, accordingly, we implemented an equity incentive plan in 2004. Given our 2004 Equity Incentive Plan, referred to as the Equity Plan, the 1940 Act Requirements prohibit us from also implementing a cash incentive plan that restricts our Compensation Committee’s discretion in the final determination of cash incentive awards.

 

   

Limit the terms we may include in our Equity Plan and limit our ability to implement certain changes to our Equity Plan without the SEC’s approval. Our Equity Plan is administered pursuant to specific exemptive orders granted by the SEC. We believe the current structure of our Equity Plan reflects the terms and plan provisions currently permitted for an internally-managed business development company.

Why is this important to the Company’s executive compensation? The 1940 Act Requirements that restrict the Company to sponsoring either an equity incentive plan or a “profit sharing plan” limit the Company’s use of formulas or non-discretionary objective performance goals or criteria in its incentive plans. This means that the Compensation Committee is not permitted to use a nondiscretionary formulaic application of any performance criteria for corporate and individual goals to determine compensation. Rather, the Compensation Committee must take into consideration all factors and use its discretion to determine the appropriate amount of compensation for our NEOs. The Compensation Committee’s objective is to work within this regulatory framework to maintain and motivate pay-for-performance alignment, to establish appropriate compensation levels relative to our Peer Group and to implement compensation best practices. Annual cash bonus decisions are not made pursuant to a formulaic cash bonus plan in order to comply with our obligations under the 1940 Act.

2017 Advisory Vote on Executive Compensation

At our 2017 annual meeting of stockholders, our advisory vote on say-on-pay received support from our stockholders with 94% of votes cast. The Company believes that the continuing dialogue with our stockholders on company performance, compensation and other governance matters is important. In advance of our 2017 annual meeting of stockholders, management engaged in numerous direct dialogues with our largest institutional shareholders, as well as a number of other institutional shareholders, to gain broad-based and/or specific insights into the Company’s overall performance, operating expenses, including executive compensation and corporate governance practices. In addition, we invited each of our institutional stockholders holding more than 1% of the Company’s stock to speak directly with management specifically on executive compensation and corporate governance practices. The Company anticipates continuing our stockholder engagement efforts following the 2018 annual meeting and in advance of our future annual meetings.

Assessment of Company Performance

In determining annual compensation for our NEOs, the Compensation Committee analyzes and evaluates the individual achievements and performance of our NEOs as well as the overall relative and absolute operating performance and achievements of the Company. We believe that the alignment of (i) our business plan, (ii) stockholder expectations and (iii) our employee compensation is essential to long-term business success and the interests of our stockholders and employees and to our ability to attract and retain executive talent, especially in a competitive environment for top-quality executive talent in the venture debt industry.

Our business plan involves taking on credit risk over an extended period of time, and a premium is placed on our ability to maintain stability and growth of net asset values as well as continuity of earnings growth to pass through to stockholders in the form of recurring dividends over the long term. Our strategy is to generate income and capital gains from our investments in the debt with warrant securities, and to a lesser extent direct equity, of our portfolio companies. This income supports the anticipated payment of dividends to our stockholders. Therefore, a key element of our return to stockholders is current income through the payment of dividends. This recurring payout requires methodical asset acquisition analyses as well as highly active monitoring and

 

176


Table of Contents
Index to Financial Statements

management of our investment portfolio over time. To accomplish these functions, our business requires implementation and oversight by management and key employees with highly specialized skills and experience in the venture debt industry. A substantial part of our employee base is dedicated to the generation of new investment opportunities to allow us to sustain dividends and to the maintenance of asset values in our portfolio. In addition to the performance factors above, the Company considered the following Company-specific performance factors over the relevant Performance Periods: overall credit performance, performance against annual gross funding goals, overall yields, efficiency ratios, total and net investment income and realized and unrealized gains and losses.

Elements of Executive Compensation and 2017 Compensation Determinations

Base Salary

We believe that base salaries are a fundamental element of our compensation program. The Compensation Committee establishes base salaries for each NEO to reflect (i) the scope of the NEO’s industry experience, knowledge and qualifications, (ii) the NEO’s position and responsibilities and contributions to our business growth and (iii) salary levels and pay practices of those companies with whom we compete for executive talent.

The Compensation Committee considers base salary levels at least annually as part of its review of the performance of NEOs and from time to time upon a promotion or other change in job responsibilities. During its review of base salaries for our executives, the Compensation Committee primarily considers: individual performance of the executive, including leadership and execution of strategic initiatives and the accomplishment of business results for our company; market data provided by our compensation consultant; our NEOs’ total compensation, both individually and relative to our other NEOs; and for NEOs other than the CEO, the base salary recommendations of our CEO.

 

NEO

   2017 Base
Salary
 

Manuel A. Henriquez

   $ 827,249  

Scott Bluestein

   $ 500,000  

Melanie Grace

   $ 345,000  

Gerard R. Waldt, Jr.(1)(3)

   $ 152,800  

David Lund(1)(2)

   $ 49,854  

Mark Harris(1)

   $ 347,105  

Andrew Olson(3)

   $ 121,847  

 

(1)

Effective November 2, 2017, the Company and Mr. Harris mutually agreed that Mr. Harris would separate from the Company and end his tenure as Chief Financial Officer and Chief Accounting Officer. The Board appointed David Lund, the Company’s former Chief Financial Officer, as Interim Chief Financial Officer and Gerard R. Waldt, Jr., the Company’s current Controller, as Interim Chief Accounting Officer.

(2)

Mr. Lund began as a contractor on October 31, 2017 serving as the Company’s Interim Chief Financial Officer. The base salary represents base compensation amounts paid to Mr. Lund between October 31, 2017 and December 31, 2017.

(3)

Mr. Olson announced his resignation, effective July 21, 2017, from his position as Vice President of Finance and Senior Controller. Gerard R. Waldt, Jr., the Company’s current assist Assistant Controller, assumed the position of Controller. Subsequently, the Board appointed Mr. Waldt as the Company’s Interim Chief Accounting Officer.

Annual Cash Bonus Awards

The Compensation Committee, together with input from our CEO, developed a specific bonus pool for the 2017 operating year to be available for our annual cash bonus program. The amount determined to be available for our annual cash program was dependent upon many factors that are not formulaic due to our obligations under the 1940 Act.

The Compensation Committee designs our annual cash bonuses to motivate our NEOs to achieve financial and non-financial objectives consistent with our operating plan. The Compensation Committee generally targets

 

177


Table of Contents
Index to Financial Statements

cash bonuses to 50% to 100% of an NEO’s base salary; however, such bonus amounts may exceed these targets in the event of exceptional company and individual performance.

Bonuses are not formulaic to comply with the 1940 Act regulations that govern our business as an internally managed business development company and have restrictions on setting compensation to specific financial measurements. As a result, the Compensation Committee considers overall business performance factors and individual factors, including CEO feedback, when determining the size of individual NEO bonuses. Accordingly, should actual company and NEO performance exceed expectations, the Compensation Committee may adjust individual cash bonuses to take such superior performance into account. Conversely, if company and NEO performance is below expectations, the Compensation Committee will consider such performance in determining the NEO’s actual cash bonus.

In evaluating the performance of our NEOs to arrive at their 2017 cash bonus awards, the Compensation Committee specifically compared our performance and the returns of our stockholders against the performance and shareholder returns of other select business development companies. In particular, the Committee considered our high relative total shareholder return and high return on invested capital relative to peer group benchmarks as this shows the success for shareholders and of the core business mission of allocating equity and debt capital efficiently for a high risk-adjusted return.

In evaluating the performance of our NEOs to arrive at their 2017 cash bonus awards, the Compensation Committee specifically compared our performance and the returns of our stockholders against the performance and shareholder returns of other business development companies. In particular, the Committee considered our high relative total shareholder return, which was above the median over the three-year and five-year performance periods, and our return on invested capital relative to peer group benchmarks, which was the highest in the compensation peer group over the last year, as this shows the success for shareholders and of the core business mission of allocating equity and debt capital efficiently for a high risk-adjusted return.

When sizing our cash bonus pool and allocating bonus awards, the total compensation paid to our NEOs and other employees is evaluated against the expense ratios of other business development companies. With respect to 2017, company-wide compensation expense as a percentage of average assets among the peers in the Peer Group was considered. For the fiscal year ended December 31, 2017, the ratio of our compensation expense divided by total revenue was below the median of our Peer Group.

Based on the foregoing considerations and analysis, and after due deliberation, the Compensation Committee awarded our current NEOs the following annual cash bonuses with respect to 2017.

 

NEO

   2017 Cash
Bonus Award(1)
 

Manuel A. Henriquez

   $ 1,600,000  

Scott Bluestein

   $ 750,000  

Melanie Grace

   $ 145,000  

Gerard R. Waldt, Jr.

   $ 150,000  

 

(1)

Messrs. Lund, Harris and Olson did not receive cash bonuses for 2017.

Long-Term Equity Incentive Compensation

2004 Equity Incentive Plan

Our long-term equity incentive compensation is designed to develop a strong linkage between pay and our strategic goals and performance, as well as to align the interests of our NEOs, and other executives and key employees, with those of our stockholders by awarding long-term equity incentives in the form of stock options, restricted stock and/or restricted stock units. These awards are made pursuant to our Equity Plan, which permits options, restricted stock and restricted stock unit awards.

 

178


Table of Contents
Index to Financial Statements

We believe that annual equity grants, in the form of restricted stock awards or restricted stock units, to our NEOs are a critical part of our compensation program as they allow us to:

 

   

Align our business plan, stockholder interests and employee concerns,

 

   

Manage dilution associated with equity-based compensation,

 

   

Match the return expectations of the business more closely with our equity-based compensation plan, and

 

   

Retain key management talent.

We believe that these annual equity grants motivate performance that is more consistent with the type of return expectations that we have established for our stockholders. Accordingly, the Company awards restricted stock award grants to our NEOs. These grants typically vest over three years.

Grant Practices for Executive Officers

Annual equity compensation grants to executive officers have typically been granted in the first quarter of the year. The Company does not grant stock options to executive officers. As a result, there were no option grants to our NEOs in 2017.

Restricted Stock Units

In January 2018, the Compensation Committee granted restricted stock units to the NEOs. With respect to the restricted stock units, the Compensation Committee assessed each current NEO’s individual performance for 2017, our overall company performance in 2017 and the levels of equity compensation paid by other companies with whom we compete for executive talent. Based on this assessment, the Compensation Committee determined that the following restricted stock units be granted to our current NEOs with respect to 2017, in the amounts and on the dates set forth below to reward them for services performed in 2017. These restricted stock units vest as to one-third of the shares underlying the awards on the first anniversary of the grant date, and they vest as to the remaining shares in equal quarterly installments over the next two years. Settlement of the restricted stock units is deferred following vesting and the restricted stock units will not be settled until the earliest to occur of (1) January 9, 2022, (2) the death or disability of the NEO, (3) the separation from service of the NEO, or (4) a change in control of the Company. Each restricted stock unit will entitle the holder to dividend equivalents in the form of the Company’s common stock, which dividend equivalent payments will be settled on the date the related restricted stock unit is settled. We believe these restricted stock unit awards assist the Company in retaining the NEOs and the deferred provisions effectively create a mandatory post-vesting holding period to ensure a long-term alignment horizon.

 

NEO

   Grant
Date
     Restricted Stock
Units(2)
     Fair Value of
Restricted Stock
Units(1)
 

Manuel A. Henriquez

     01/09/2018        230,125      $ 3,000,830  

Scott Bluestein

     01/09/2018        92,024      $ 1,199,993  

Melanie Grace

     01/09/2018        12,845      $ 167,499  

Gerard R. Waldt, Jr.

     01/09/2018        7,669      $ 100,004  

 

(1)

Based on the closing price per share of our common stock of $13.04 on January 9, 2018.

(2)

Messrs. Lund, Harris and Olson did not receive grants of restricted stock units.

Restricted Stock Awards

In January 2018, the Compensation Committee assessed each current NEO’s individual performance for 2017, our overall company performance in 2017 and the levels of equity compensation paid by other companies

 

179


Table of Contents
Index to Financial Statements

with whom we compete for executive talent. Based on this assessment, the Compensation Committee determined that the following restricted stock awards be made to our current NEOs with respect to 2017, in the amounts and on the dates set forth below to reward them for services performed in 2017. These restricted stock awards vest as to one-third of the shares underlying the awards on the first anniversary of the grant date, and they vest as to the remaining shares in equal quarterly installments over the next two years.

 

NEO

   Grant
Date
     Restricted Stock
Awards(2)
     Fair Value of
Restricted Stock
Awards(1)
 

Manuel A. Henriquez

     01/09/2018        230,125      $ 3,000,830  

Scott Bluestein

     01/09/2018        92,025      $ 1,200,006  

Melanie Grace

     01/09/2018        12,845      $ 167,499  

 

(1)

Based on the closing price per share of our common stock of $13.04 on January 9, 2018.

(2)

Messrs. Waldt, Lund, Harris and Olson did not receive grants of restricted stock awards.

Other Elements of Compensation

 

   

Retention Agreements: Messrs. Henriquez, Harris and Bluestein entered into retention agreements with the Company in October 2017 which provide for severance benefits in the event of certain terminations of employment. In November 2017, Mr. Harris and the Company mutually agreed to enter into a separation agreement, which supersedes the terms of Mr. Harris’ retention agreement. Messrs. Lund and Waldt and Ms. Grace do not have a written severance agreement or other arrangement providing for payments or benefits upon a termination of employment. No NEO is entitled to any tax gross up payment if severance is paid in connection with a change-in-control.

 

   

Benefits and Perquisites: Our NEOs receive the same benefits and perquisites as other full-time employees. Our benefits program is designed to provide competitive benefits and is not based on performance. Our NEOs and other full-time employees receive health and welfare benefits, which consist of life, long-term and short-term disability, health, dental and vision insurance benefits and the opportunity to participate in our defined contribution 401(k) plan. During 2017, our 401(k) plan provided for a match of contributions by the company for up to $18,000 per full-time employee. Other than the benefits set forth immediately above, our NEOs are not entitled to any other benefits or perquisites.

 

   

Potential Payments Upon Termination or Change of Control: No NEO or employee of the Company has a written employment agreement, or other agreement, providing for enhanced cash payments in connection with a change of control of the Company except with respect to the retention agreements described herein. Further, no NEO or any other employee is entitled to any tax gross-up payments.

Retention Agreements

In October 2017, Messrs. Henriquez, Harris and Bluestein entered into retention agreements with the Company pursuant to which, if (1) the Executive’s employment is terminated by the Company without cause or by the Executive for good reason, or (2) the Company becomes an externally managed business development company and the new external advisor does not make a written offer of employment to the Executive or makes a written offer of employment to the Executive that is not on similar terms to the Executive’s current employment with the Company (including, without limitation, authority, responsibilities, base salary, annual bonus opportunity, long term incentive opportunity and retention benefits) and the Executive does not accept such offer then, subject to the Executive’s execution of a release of claims in favor of the Company, each of Mr. Henriquez and Mr. Bluestein shall be entitled to receive the following benefits:

 

   

Mr. Henriquez shall be entitled to receive (a) a lump sum payment in an amount equal to two times the sum of (i) annual base salary and (ii) an amount equal to the three-year average annual bonus actually earned by and paid to Mr. Henriquez for the three full performance periods immediately prior to the

 

180


Table of Contents
Index to Financial Statements
 

termination date; (b) any unpaid annual bonus earned with respect to a prior performance period and not yet paid as the date of termination; (c) a pro rata annual bonus with respect to the performance period in which termination of employment occurs, (d) (x) continued vesting of outstanding equity awards for two years in the case of a termination not in connection with a change in control of the Company or (y) full vesting of outstanding equity awards in the case of a termination in connection with a change in control of the Company and (e) reimbursement of the full amount of COBRA premiums for Mr. Henriquez and his eligible dependents for 18 months following termination of employment.

 

   

Mr. Bluestein shall be entitled to receive (a) a lump sum payment in an amount equal to 1.75 times the sum of (i) annual base salary and (ii) an amount equal to the three-year average annual bonus actually earned by and paid to Mr. Bluestein for the three full performance periods immediately prior to the termination date; (b) any unpaid annual bonus earned with respect to a prior performance period and not yet paid as the date of termination; (c) a pro rata annual bonus with respect to the performance period in which termination of employment occurs, (d) (x) continued vesting of outstanding equity awards for 1.75 years in the case of a termination not in connection with a change in control of the Company or (y) full vesting of outstanding equity awards in the case of a termination in connection with a change in control of the Company and (e) reimbursement of the full amount of COBRA premiums for Mr. Bluestein and his eligible dependents for 18 months following termination of employment.

In November 2017, Mr. Harris and the Company mutually agreed to enter into a separation agreement, which provides that the Company will pay Mr. Harris a monetary sum equivalent to six months gross base salary plus up to an additional six months subject to Mr. Harris certifying he is not employed and is actively seeking employment during such time. In addition, the Company will reimburse Mr. Harris for health insurance premiums for Mr. Harris and his eligible dependents under COBRA for a period of up to twelve months subject to the same qualifications applicable to payments based on his gross base salary. The separation agreement also contains certain additional provisions that are customary for agreements of this type, including confidentiality, non-solicitation, and non-disparagement covenants, as well as a general release in favor of the Company against certain claims. The separation agreement supersedes the terms of Mr. Harris’ retention agreement, under which he would have received (a) a lump sum payment in an amount equal to 1.5 times the sum of (i) annual base salary and (ii) an amount equal to the three-year average annual bonus actually earned by and paid to Mr. Harris for the three full performance periods immediately prior to the termination date; (b) any unpaid annual bonus earned with respect to a prior performance period and not yet paid as the date of termination; (c) a pro rata annual bonus with respect to the performance period in which termination of employment occurs, (d) (x) continued vesting of outstanding equity awards for 1.5 years in the case of a termination not in connection with a change in control of the Company or (y) full vesting of outstanding equity awards in the case of a termination in connection with a change in control of the Company and (e) reimbursement of the full amount of COBRA premiums for Mr. Harris and his eligible dependents for 18 months following termination of employment.

Retention Performance Stock Units and Cash Retention Bonus Awards

On May 2, 2018, the Company granted long-term Retention Performance Stock Unit awards (the “Retention PSUs”) under its 2004 Equity Incentive Plan to Messrs. Henriquez and Bluestein, and separate cash bonus awards with similar terms (the “Cash Awards”) to Mr. Waldt and three other senior personnel. The awards are designed to provide incentives that increase along with the total shareholder return (“TSR”) and further align the interests of key management with those of the Company’s shareholders. The Company believes that there is a highly competitive market place for senior personnel that have the experience and track record of successfully sourcing, financing and managing the asset class in which the Company invests. Accordingly, the Compensation Committee and the other independent directors adopted this program with the assistance of F.W. Cook. These awards are intended to promote long term management consistency and retention and to mitigate the likelihood of departure to competitors of those individuals most responsible for delivering financial performance to our

 

181


Table of Contents
Index to Financial Statements

shareholders. The objectives are sought to be achieved by offering a four year cliff vesting retention program to reward critical executives and senior personnel, whose services are valuable to the Company and industry competitors as a result of their proven and specialized expertise sourcing and funding venture debt. The target number of Retention PSUs granted to Mr. Henriquez and Mr. Bluestein are 812,348 and 487,409, respectively. The target amount of the Cash Award granted to Mr. Waldt is $500,000, and $3,500,000, in the aggregate, for the three other senior personnel.

The Retention RSUs 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. No Retention PSUs or Cash Awards will vest if the Company’s TSR relative to certain specified publicly traded business development companies is not at or above the 25th percentile level of such business development companies. 50% of the target Cash Award and target number of Retention PSUs will vest if the Company’s TSR performance relative to such business development companies is at the 25-percentile level. 100% of the target Cash Award and target number of Retention PSUs will vest if the Company’s TSR performance relative to such business development companies 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 business development companies 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 business development companies, 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. TSR is calculated assuming dividend reinvestment and measurement begins on the date of grant and utilizes a 20-trading day volume weighted average price ending on the last trading day of the four year TSR performance period.

In the event of death or disability occurring prior to the fourth anniversary of the date of grant, Retention PSUs and the Cash Awards will vest, along with, in the case only of the Retention PSUs, any accrued dividend equivalents, on the date of such death or disability, with the Relative TSR Percentile Rank used to calculate such vesting to be the greater of (a) 50% and (b) the actual Relative TSR Percentile Rank as of the date of such death or disability. In the event of a voluntary termination prior to the fourth anniversary, all Cash Awards and Retention PSUs, and accrued dividend equivalents, will be forfeited. In the event of an involuntary termination without Cause prior to the fourth anniversary of the date of grant, the Retention PSUs and Cash Awards will be pro-rated based on service through the date of termination and such pro-rated Retention PSUs and Cash Awards will vest based on the actual relative TSR performance over the four-year TSR performance period. In the event of a termination for Cause occurring at any time prior to delivery of the shares underlying the Retention PSUs or payment of the Cash Awards, all Retention PSUs and accrued dividend equivalents, and Cash Awards will be forfeited.

In the event of a change in control of the Company, Retention PSUs and Cash Awards will vest and be paid on a non-pro-rated basis based on the actual relative TSR performance through the date of the change in control utilizing the transaction price for the Company and the peer group TSR through the date of the change in control.

Corporate Goals

For 2017, the Compensation Committee developed corporate goals that were required to be achieved for executive officers to receive up to 50% of their incentive compensation. These goals included operational performance as well as performance relative to the Peer Group. While the criteria may not be weighted, the Compensation Committee took into consideration each of these factors to determine whether the executive officers are eligible for up to 50% of the proposed incentive compensation. The Compensation Committee believes that the corporate goals applicable to all executive officers create an alignment not only with shareholders but also to the Company’s business strategy and performance goals.

 

182


Table of Contents
Index to Financial Statements

Defined Individual Goals

For 2017, the Compensation Committee developed individual goals for the CEO. In addition, the CEO and each NEO developed individual goals for the NEOs and such goals were approved by the Compensation Committee. Each set of individual goals are unique to the executive officer’s responsibilities and position within the Company. While each of the factors may not be weighted, the Compensation Committee took into consideration each of these factors to determine whether the executive officers are eligible for up to 50% of the executive officer’s incentive compensation.

Pay-for-Performance Alignment

The Company believes that there exists an alignment between the compensation of our NEOs and our performance over the relevant Performance Periods. As noted above, a broad range of individual performance factors and company performance factors are analyzed each year, including total shareholder return relative to our Peer Group, and, in 2017, analysis of relative ROAA, ROE, and ROIC versus the compensation peers over one-, three-, and five-years to measure short-, medium-, and long-term performance. The objective in analyzing these key performance factors is to align NEO compensation to our performance relative to our Peer Group and our absolute corporate performance.

The Company’s annual bonus and equity awards constitute an effective mix of short- and long-term compensation components and reflect key measures of our performance and the returns enjoyed by our stockholders. Consistent with our pay-for-performance philosophy, the Compensation Committee will make future compensation decisions taking into account our absolute and relative performance, and, if our future performance were to fall significantly below our peers, the Compensation Committee would consider adjusting NEO compensation prospectively.

Total Compensation Expense Relative to other Internally Managed Business Development Companies

In determining annual bonus awards, the total compensation paid to our NEOs and other employees against the expense ratios of other internally managed business development companies, as well as a comparison to total SG&A for select externally managed business development companies, was considered.

Internal Pay Equity Analysis

Our compensation program is designed with the goal of providing compensation to our NEOs that is fair, reasonable, and competitive. To achieve this goal, the Company believes it is important to compare compensation paid to each NEO not only with compensation in our Peer Group, as discussed above, but also with compensation paid to each of our other NEOs. Such an internal comparison is important to ensure that compensation is equitable among our NEOs.

As part of the Compensation Committee’s review, we made a comparison of our CEO’s total compensation paid for the period ending November 29, 2017 against that paid to our other NEOs during the same year. Upon review, the Compensation Committee determined that our CEO’s compensation relative to that of our other NEOs was appropriate because of his level and scope of responsibilities, expertise and performance history, and other factors deemed relevant by the Compensation Committee. The Compensation Committee also reviewed the mix of the individual elements of compensation paid to our NEOs for this period, the individual performance of each NEO and any changes in responsibilities of the NEO.

Stock Ownership Guidelines

The Company maintains stock ownership guidelines, which are outlined in our corporate governance guidelines, because we believe that material stock ownership by our executives plays a role in effectively

 

183


Table of Contents
Index to Financial Statements

aligning the interests of these employees with those of our stockholders and strongly motivates our executives to build long-term shareholder value. Pursuant to our stock ownership guidelines, each member of senior management is required to beneficially own at least two times the individual’s annual salary in Company common stock, based on market value, within three years of joining the Company. Our Board may make exceptions to this requirement based on particular circumstances; however, no exceptions have been made for our current NEOs. Messrs. Henriquez and Bluestein have met their minimum guidelines. The Compensation Committee’s review of the NEO’s stock ownership in the fourth quarter of 2017 showed that:

 

   

As of December 31, 2017, Mr. Henriquez beneficially owned 1,856,509 shares of Company stock and restricted stock. Based on his 2017 salary of $827,249, he beneficially owns shares worth 29x his annual base salary.

 

   

As of December 31, 2017, Mr. Bluestein beneficially owned 207,775 shares of Company stock and restricted stock. Based on his 2017 salary of $500,000, he beneficially owns shares worth 5x his annual base salary.

Tax and Accounting Matters

Stock-Based Compensation. We account for stock-based compensation, including options and shares of restricted stock granted pursuant to our Equity Plan and 2006 Non-Employee Director Plan in accordance with the requirements of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718. Under the FASB ASC Topic 718, we estimate the fair value of our option awards at the date of grant using the Black-Scholes-Merton option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates on the expected term, volatility and forfeiture rates of the awards. Forfeitures are not estimated due to our limited history but are reversed in the period in which forfeiture occurs. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value stock-based awards granted in future periods. We estimate the fair value of our restricted stock awards based on the grant date market closing price.

Deductibility of Executive Compensation. When analyzing both total compensation and individual elements of compensation paid to our NEOs, the Company considers the income tax consequences to the Company of its compensation policies and procedures. In particular, the Company considers Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), which, for tax years beginning on or prior to December 31, 2017, limits the deductibility of non-performance-based compensation paid to certain of the NEOs to $1,000,000 per affected NEO.

Effective for tax years beginning on or after January 1, 2018, Section 162(m) of the Code generally limits the deductibility of all compensation paid to certain executive officers to $1,000,000 per affected executive officer. A transition rule applies to “qualifying performance-based compensation” granted pursuant to a written binding contract prior to November 2, 2017, which has not been materially modified since that date.

The Compensation Committee intends to balance its objective of providing compensation to our NEOs that is fair, reasonable, and competitive with the Company’s ability to claim compensation expense deductions. Our Board believes that the best interests of the Company and our stockholders are served by executive compensation programs that encourage and promote our principal compensation philosophy, enhancement of shareholder value, and permit the Compensation Committee to exercise discretion in the design and implementation of compensation packages. Accordingly, we may from time to time pay compensation to our NEOs that may not be fully tax deductible, (including by reason of Section 162(m) of the Code), including certain bonuses and restricted stock. Stock options granted under our stock plan for tax years beginning on or prior to December 31, 2017 are intended to qualify as performance-based compensation under Section 162(m) of the Code. The Company will continue to review its executive compensation plans periodically to determine what changes, if any, should be made as a result of any deduction limitations.

 

184


Table of Contents
Index to Financial Statements

Clawback Policy for Section 16 Officers

The Board has adopted a clawback policy for all Section 16 officers. The policy applies to all Section 16 officers and reaches beyond financial statements. Pursuant to our clawback policy, for payments that are predicated on financial results augmented by fraud, embezzlement, gross negligence or deliberate disregard of applicable rules resulting in significant monetary loss, damage or injury to the Company (“Excess Compensation”), the Compensation Committee has the authority to seek repayment of any Excess Compensation, including (1) cancellation of unvested, unexercised or unreleased equity incentive awards; and (2) repayment of any compensation earned on previously exercised or released equity incentive awards whether or not such activity resulted in a financial restatement.

The Compensation Committee has sole discretion under this policy, consistent with any applicable statutory requirements, to seek reimbursement of any Excess Compensation paid or received by the Section 16 officer for up to a 12-month period prior to the date of the Compensation Committee action to require reimbursement of the Excess Compensation. Any clawback of Excess Compensation must be based upon fraud adjudicated by a court of competent jurisdiction or a financial restatement. Further, following a restatement of our financial statements, we will recover any compensation received by the CEO and CFO that is required to be recovered by Section 304 of the Sarbanes-Oxley.

For purposes of this policy, Excess Compensation will be measured as the positive difference, if any, between the compensation earned by a Section 16 officer and the compensation that would have been earned by the Section 16 officer had the fraud, embezzlement, gross negligence or deliberate disregard of applicable rules resulting from significant monetary loss, damage or injury to the Company not occurred.

Risk Assessment of the Compensation Programs

Our Board believes that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. The Company has designed our compensation programs, including our incentive compensation plans, with specific features to address potential risks while rewarding employees for achieving long-term financial and strategic objectives through prudent business judgment and appropriate risk taking. We use common variable compensation designs, with a significant focus on individual contributions to our performance and the achievement of absolute and relative corporate objectives, as generally described in this Compensation Discussion and Analysis.

The Compensation Committee and the Board reviewed our compensation programs to assess whether any aspect of the programs would encourage any of our employees to take any unnecessary or inappropriate risks that could threaten the value of the Company. The Company has designed our compensation programs to reward our employees for achieving annual profitability and long-term increases in shareholder value.

Our Board recognizes that the pursuit of corporate objectives possibly leads to behaviors that could weaken the link between pay and performance, and, therefore, the correlation between the compensation delivered to employees and the long-term return realized by stockholders. Accordingly, our executive compensation program is designed to mitigate these possibilities and to ensure that our compensation practices are consistent with our risk profile. These features include the following:

 

   

Bonus payouts and equity incentive awards that are not based solely on corporate performance objectives, but are also based on individual performance levels;

 

   

The financial opportunity in our long-term equity incentive program that is best realized through long-term appreciation of our stock price, which mitigates excessive short-term risk-taking;

 

   

Annual cash bonuses that are paid after the end of the fiscal year to which the bonus payout relates;

 

   

The engagement and use of a compensation consultant;

 

185


Table of Contents
Index to Financial Statements
   

The institution of stock ownership guidelines applicable to our executive officers; and

 

   

Final decision making by our Compensation Committee and our Board of Directors on all awards.

Additionally, the Company performed an assessment of compensation-related risks for all of our employees. Based on this assessment, we concluded that our compensation programs do not create risks that are reasonably likely to have a material adverse effect on the Company. In making this evaluation, the Company reviewed the key design elements of our compensation programs in relation to industry “best practices,” as well as the means by which any potential risks may be mitigated. In addition, management completed an inventory of incentive programs below the executive level and reviewed the design of these incentives and concluded that such incentive programs do not encourage excessive risk-taking.

 

186


Table of Contents
Index to Financial Statements

Executive Compensation Tables

Summary Compensation Table

 

Name and Principal Position

  Year     Salary ($)(1)     Bonus ($)(2)     Stock
Awards ($)(3)
    Option
Awards ($)(3)
    All Other
Compensation ($)(4)
    Total ($)  

Manuel A. Henriquez

Chairman & Chief Executive Officer

    2017     $ 827,249     $ 1,600,000     $ 5,000,002       —       $ 808,449     $ 8,235,700  
    2016     $ 803,154     $ 1,200,000     $ 4,005,335       —       $ 771,425     $ 6,779,914  
    2015     $ 779,762     $ 1,000,000     $ 4,472,142       —       $ 1,635,353     $ 7,887,257  

Scott Bluestein

Chief Investment Officer

    2017     $ 500,000     $ 750,000     $ 1,750,004       —       $ 175,872     $ 3,175,876  
    2016     $ 432,600     $ 650,000     $ 1,249,040       —       $ 200,555     $ 2,532,195  
    2015     $ 420,000     $ 525,000     $ 670,212       —       $ 193,370     $ 1,808,582  

Melanie Grace

General Counsel, Chief Compliance Officer & Secretary

    2017     $ 345,000     $ 145,000     $ 300,002       —       $ 57,061     $ 847,063  
    2016     $ 283,250     $ 145,000     $ 112,894       —       $ 40,726     $ 581,870  
    2015     $ 79,167       50,000     $ 112,500       —       $ 36,466     $ 278,133  

Gerard R. Waldt, Jr.

Interim Chief Accounting Officer

    2017     $ 152,800     $ 150,000     $ —         —       $ 8,708     $ 311,508  
    2016     $ 23,333       —       $ 68,300       —         —       $ 91,633  

David Lund(5)

Interim Chief Financial Officer

    2017     $ 49,854     $ —       $ —         —       $ —       $ 49,854  

Mark Harris(6)

Chief Financial Officer

    2017     $ 347,105     $ —       $ 500,007       —       $ 95,255     $ 942,367  
    2016     $ 412,000     $ 400,000     $ 396,330       —       $ 95,624     $ 1,303,954  
    2015     $ 166,667     $ 200,000     $ 400,001       —       $ 26,404     $ 793,072  

Andrew Olson(7)

Vice President of Finance and Senior Controller

    2017     $ 121,847     $ —       $ 249,997       —       $ 21,211     $ 393,054  
    2016     $ 211,150     $ 150,000     $ 72,060       —       $ 28,684     $ 461,894  
    2015     $ 186,250     $ 195,000     $ 53,332       —       $ 22,717     $ 457,299  

 

(1)

Salary column amounts represent base salary compensation received by each named executive officer (“NEO”) for the listed fiscal year.

(2)

Bonus column amounts represent the annual cash bonus earned during the fiscal year and awarded and paid out during the first quarter of the following fiscal year.

(3)

The amounts reflect the aggregate grant date fair value of restricted stock unit awards made to our NEOs and former NEOs during the applicable year computed in accordance with FASB ASC Topic 718. The grant date fair value of each restricted stock award is measured based on the closing price of our common stock on the date of grant.

(4)

All Other Compensation column includes the following:

   

We made matching contributions under our 401(k) plan of (a) $18,000 in 2017 to Messrs. Henriquez, Bluestein, Harris and Olson and Ms. Grace and $8,708 to Mr. Waldt; (b) $18,000 in 2016 to Messrs. Henriquez, Bluestein, Harris and Olson and $17,703 to Ms. Grace; and (c) $18,000 in 2015 to Messrs. Henriquez, Bluestein and Olson.

   

Distributions to Messrs. Henriquez, Bluestein, Harris, Olson, and Ms. Grace in the amount of $339,385, $87,148, $32,021, $3,211 and $11,999, respectively, were paid on unvested restricted stock awards during 2017.

   

Distributions to Messrs. Henriquez, Bluestein, Harris, and Olson and Ms. Grace in the amount of $753,425, $182,555, $77,624, $10,684 and $23,023, respectively, were paid on unvested restricted stock awards during 2016.

   

Distributions to Messrs. Henriquez, Bluestein, Harris and Olson and Ms. Grace in the amount of $845,550, $134,985, $22,587, $4,717 and $3,100, respectively, were paid on unvested restricted stock awards during 2015.

   

Dividend equivalent shares to Messrs. Henriquez and Bluestein valued at $451,064 and $157,872, respectively, and to Ms. Grace valued at $27,063 were issued on restricted stock units during 2017.

   

Mr. Harris received severance payments in the amount of $77,255 during 2017.

(5)

Mr. Lund began as a contractor on October 31, 2017 serving as the Company’s Interim Chief Financial Officer. The salary represents base compensation amounts paid to Mr. Lund between October 31, 2017 and December 31, 2017.

(6)

Effective November 2, 2017, the Company and Mr. Harris mutually agreed that Mr. Harris would separate from the Company and end his tenure as Chief Financial Officer and Chief Accounting Officer. The Board appointed David Lund, the Company’s former Chief Financial Officer, as Interim Chief Financial Officer and Gerard R. Waldt, Jr., the Company’s current Controller, as Interim Chief Accounting Officer.

(7)

Mr. Olson announced his resignation, effective July 21, 2017, from his position as Vice President of Finance and Senior Controller. Gerard R. Waldt, Jr., the Company’s current assist Assistant Controller, assumed the position of Controller. Subsequently, the Board appointed Mr. Waldt as the Company’s Interim Chief Accounting Officer.

 

187


Table of Contents
Index to Financial Statements

Grants of Plan Based Awards in 2017

 

NEO

   Grant Date      All Other
Stock
Awards:
Number of
Shares of
Stock or
Units(1)
     All Other
Option
Awards:
Number of
Securities
Underlying
Options(1)
     Grant Date
Fair Value of
Stock and
Option
Awards(2)
 

Manuel A. Henriquez

     01/24/2017        351,865        —        $ 5,000,002  

Scott Bluestein

     01/24/2017        123,153      —        $ 1,750,004

Melanie Grace

     01/24/2017        21,112        —        $ 300,002  

Gerard R. Waldt, Jr.

     —          —          —          —    

David Lund

     —          —          —          —    

Mark Harris

     01/24/2017        35,187        —        $ 500,007  

Andrew Olson

     01/24/2017        17,593        —        $ 249,997  

 

(1)

Restricted stock units vest as to one-third of the shares underlying the awards on the first anniversary of the grant date, and they vest as to the remaining shares in equal quarterly installments over the next two years. Settlement of the restricted stock units is deferred following vesting and the restricted stock units will not be settled until the earliest to occur of (1) January 24, 2021, (2) the death or disability of the NEO, (3) the separation from service of the NEO, or (4) a change in control of the Company.

(2)

The amounts reflect the aggregate grant date fair value of computed in accordance with FASB ASC Topic 718.

Outstanding Equity Awards at Fiscal Year End, December 31, 2017

 

     Option Awards      Stock Awards  

Name and Principal Position

   Number of
Securities
Underlying
Unexercised
Options
Exercisable
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
     Option
Exercise
Price ($)
     Option
Expiration
Date
     Number
of Shares
or Units of
Stock That
Have Not
Vested
     Market
Value of
Shares or
Units of
Stock That
Have
Not Vested(1)
 

Manuel A. Henriquez

     —         —          —          —          26,584 (2)      $ 348,782  
     —         —          —          —          138,966 (3)      $ 1,823,234  
     —         —          —          —          385,076 (5)      $ 5,052,197  

Scott Bluestein

     —         —          —          —          3,984 (2)      $ 52,270  
     —         —          —          —          43,336 (3)      $ 568,568  
     —         —          —          —          134,775 (5)      $ 1,768,248  

Melanie Grace

     —         —          —          —          2,501 (4)      $ 32,813  
     —         —          —          —          3,917 (3)      $ 51,391  
     —         —          —          —          23,102 (5)      $ 303,098

Gerard R. Waldt, Jr.

     1,805 (6)       3,195    $ 13.66      11/30/2023      —          —    

David Lund

     —         —          —          —          —          —    

Mark Harris

     —         —          —          —          —          —    

Andrew Olson

     —         —          —          —          —          —    

 

(1)

Market value is computed by multiplying the closing market price of the Company’s stock at December 31, 2017 by the number of shares.

(2)

Restricted stock granted on 03/10/2015 that vests as to one-third of the total award on the one-year anniversary of the date of the grant and quarterly over the succeeding 24 months.

(3)

Restricted stock granted on 01/10/2016 that vests as to one-third of the total award on the one-year anniversary of the date of the grant and quarterly over the succeeding 24 months.

(4)

Restricted stock granted on 09/17/2015 that vests as to one-third of the total award on the one-year anniversary of the date of the grant and quarterly over the succeeding 24 months.

(5)

Restricted stock units granted on 01/24/2017 that vests as to one-third of the shares underlying the awards on the first anniversary of the grant date, and the remaining shares in equal quarterly installments over the next two years. Settlement of the restricted stock units is

 

188


Table of Contents
Index to Financial Statements
  deferred following vesting and the restricted stock units will not be settled until the earliest to occur of (1) January 24, 2021, (2) the death or disability of the NEO, (3) the separation from service of the NEO, or (4) a change in control of the Company. This amount includes unvested dividend equivalents earned during 2017. These dividend equivalents vest when and if the restricted stock units to which they relate vest.
(6)

Options granted on 11/30/2016 that vest as to one-third of the total underlying shares on the one-year anniversary of the date of the grant and on a monthly basis over the succeeding 24 months.

Options Exercised and Stock Vested in 2017

 

     Option Awards      Stock Awards  

Name and Principal Position

   Number of
Shares Acquired
on Exercise
     Value
Realized on
Exercise
     Number of
Shares Acquired
on Vesting
     Value
Realized on
Vesting
 

Manuel A. Henriquez

     —          —          313,151      $ 4,320,126  

Scott Bluestein

     —          —          79,057    $ 1,098,118

Melanie Grace

     —          —          8,816    $ 121,627

Gerard R. Waldt, Jr.

     —          —          —          —    

David Lund

     —          —          —          —    

Mark Harris

     —          —          25,607      $ 392,055  

Andrew Olson

     —          —          3,133      $ 44,739  

COMPENSATION OF DIRECTORS

Our Compensation Committee has the authority from our Board of Directors for the appointment, compensation and oversight of our outside compensation consultant. Our Compensation Committee generally engages a compensation consultant every other year to assist it with its responsibilities related to our director compensation program.

The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as the case may be, to each of our directors during the fiscal year ended December 31, 2017.

 

Name

   Fees Earned or
Paid in Cash ($)(1)
     Stock
Awards ($)
     Option
Awards ($)
     All Other
Compensation ($)(2)
     Total ($)  

Robert P. Badavas

   $ 175,000        —          —        $ 1,033      $ 176,033  

Thomas J. Fallon

   $ 150,000        —          —        $ 3,099      $ 153,099  

Joseph F. Hoffman

   $ 165,000        —          —        $ 5,683      $ 170,683  

Allyn C. Woodward, Jr.

   $ 175,000        —          —        $ 3,099      $ 178,099  

Doreen Woo Ho

   $ 150,000        —          —        $ 3,616      $ 153,616  

Brad Koenig

     —          —          —          —          —    

Jorge Titinger

     —          —          —          —          —    

Susanne Lyons

   $ 175,000        —          —        $ 516      $ 175,516  

Manuel A. Henriquez(3)

     —          —          —          —          —    

 

(1)

Messrs. Badavas, Fallon, Hoffman, Woodward and Ms. Woo Ho and Lyons earned $125,000, $100,000, $115,000, $125,000, $100,000 and $125,000, respectively, and each elected to receive an additional retainer fee of 3,903 shares of our common stock in lieu of cash. The total value of the shares issued to each of Messrs. Badavas, Fallon, Hoffman and Woodward and Ms. Woo Ho and Lyons services in fiscal 2017 was $50,000. Messrs. Koenig and Titinger did not receive any cash compensation during 2017.

(2)

Represents distributions paid during 2017 on unvested common stock under restricted stock awards.

(3)

As an employee director, Mr. Henriquez does not receive any compensation for his service as a director. The compensation Mr. Henriquez receives as our chief executive officer is disclosed in the Summary Compensation Table and elsewhere under “EXECUTIVE COMPENSATION.”

As of December 31, 2017, Messrs. Badavas, Fallon, Hoffman and Woodward and Ms. Woo Ho had outstanding options in the amount of 20,000, 25,000, 25,000, 25,000, and 10,000, respectively. As of December 31, 2017, Messrs. Fallon, Hoffman and Woodward and Ms. Woo Ho held unvested shares of restricted stock in the amount of 1,666, 3,333, 1,666 and 1,666, respectively.

 

189


Table of Contents
Index to Financial Statements

During 2017, the compensation for serving on our Board of Directors as an independent director included the following:

 

Annual Director Retainer Fee

   $100,000

Annual Chairperson Fee

   $25,000, Audit Committee
   $25,000, Compensation Committee
   $15,000, NCG Committee

Annual Lead Director Fee

   $25,000

In 2017, we granted each independent director, except for Messrs. Titinger and Koenig who were not directors at the time of the grant, an additional retainer of $50,000, which was distributed as shares of common stock in lieu of cash. Employee directors do not receive compensation for serving on our Board of Directors. In addition, we reimburse our directors for their reasonable out-of-pocket expenses incurred in attending Board of Directors meetings.

 

190


Table of Contents
Index to Financial Statements

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of March 31, 2018, with respect to compensation plans under which the Company’s equity securities are authorized for issuance:

 

Plan Category

   (a)
Number of Securities
to be issued upon
exercise of
outstanding options,
restricted stock and
warrants
     (b)
Weighted-average
exercise price of
outstanding options,
restricted stock and
warrants
     (c)
Number of
securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
 

Equity compensation plans approved by stockholders:

        

2004 Equity Incentive Plan

     437,690      $ 13.84        2,561,229  

2006 Non-Employee Director Plan(1)

     105,000      $ 13.05        —    

Equity compensation plans not approved by stockholders:

     —          —          —    

Total

     542,690      $ 13.69        2,561,229  

 

(1)

Our 2006 Non-Employee Director Plan terminated on June 21, 2017 and no additional awards may be made under our 2006 Non-Employee Director Plan.

 

191


Table of Contents
Index to Financial Statements

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

The following table sets forth, as of May 29, 2018, the beneficial ownership of each current director, each nominee for director, our NEOs, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. Common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of May 29, 2018 are deemed to be outstanding and beneficially owned by the person holding such options or warrants. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of ownership is based on 86,796,043 shares of common stock outstanding as of May 29, 2018.

Unless otherwise indicated, to our knowledge, each stockholder listed below has sole voting and investment power with respect to the shares beneficially owned by the stockholder, except to the extent authority is shared by their spouses under applicable law. Unless otherwise indicated, the address of all executive officers and directors is c/o Hercules Capital, Inc., 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301.

Our directors are divided into two groups—interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19) of the 1940 Act, and independent directors are all other directors.

 

Name and Address of Beneficial Owner

  

Type of Ownership

   Number of Shares
Owned Beneficially(1)
     Percentage
of Class
 

Interested Director

        

Manuel A. Henriquez(2)

   Record/Beneficial      2,233,935        2.6

Independent Directors

        

Robert B. Badavas(3)

   Beneficial      152,962        *  

Jorge Titinger

        —          —    

Allyn C. Woodward, Jr.(4)

   Record/Beneficial      287,309        *  

Brad Koenig

        —          —    

Thomas J. Fallon(5)

   Record/Beneficial      56,958        *  

Joseph F. Hoffman(6)

   Record/Beneficial      40,478        *  

Doreen Woo Ho(7)

   Record/Beneficial      12,236        *  

Other Named Executive Officers

        

David Lund

        —          —    

Scott Bluestein(8)

   Record/Beneficial      354,666        *  

Melanie Grace(9)

   Record/Beneficial      37,402        *  

Gerard R. Waldt, Jr(10)

   Record/Beneficial      2,638        *  

Executive officers and directors as a group (12 persons)(11)

        3.7

 

(1)

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(2)

Includes 313,505 shares of restricted stock and 184,293 shares of vested deferred restricted stock units and dividend equivalent units. 1,669,565 shares of common stock held by the Henriquez Family Trust of which 862,784 shares are pledged as a security; 54,348 shares of common stock held in trusts for the benefit of Mr. Henriquez’s children; and 12,224 shares of common stock held in the Manuel Henriquez-Roth IRA. Mr. Henriquez disclaims any beneficial ownership interest of such shares except to the extent of his pecuniary interest therein.

(3)

Includes 20,000 shares of common stock that can be acquired upon the exercise of outstanding options. All shares are held of record by the Robert P. Badavas Trust of 2007, and Mr. Badavas disclaims any beneficial ownership interest of such shares except to the extent of his pecuniary interest therein.

(4)

Includes 25,000 shares of common stock that can be acquired upon the exercise of outstanding options, 1,666 shares of restricted common stock, and 35,000 shares of common stock held by Mr. Woodward’s spouse in her name. Mr. Woodward disclaims any beneficial ownership interest of such shares held by his spouse except to the extent of his pecuniary interest therein.

 

192


Table of Contents
Index to Financial Statements
(5)

Includes 25,000 shares of common stock that can be acquired upon the exercise of outstanding options and 1,666 shares of restricted common stock. All shares are held of record by the Fallon Family Revocable Trust, and Mr. Fallon disclaims any beneficial ownership interest of such shares except to the extent of his pecuniary interest therein.

(6)

Includes 20,000 shares of common stock that can be acquired upon the exercise of outstanding options and 3,333 shares of restricted common stock. All shares are held of record by the Hoffman Trust, and Mr. Hoffman disclaims any beneficial ownership interest of such shares except to the extent of his pecuniary interest therein.

(7)

Includes 5,000 shares of common stock that can be acquired upon the exercise of outstanding options and includes 1,666 shares of restricted common stock.

(8)

Includes 118,027 shares of restricted common stock and 64,495 shares of vested deferred restricted stock.

(9)

Includes 16,863 shares of restricted common stock and 11,051 shares of vested deferred restricted stock.

(10)

Includes 2,638 shares of common stock that can be acquired upon the exercise of outstanding options.

(11)

Includes 97,638 shares of common stock that can be acquired upon the exercise of outstanding options, 259,839 shares of vested deferred restricted stock and dividend equivalent shares and 456,726 shares of restricted common stock.

*

Less than 1%.

The following table sets forth as of May 29, 2018, the dollar range of our securities owned by our directors and executive officers.

 

Name

   Dollar Range of
Equity Securities
Beneficially Owned
 

Interested Director

  

Manuel A. Henriquez

     Over $100,000  

Independent Directors

  

Robert B. Badavas

     Over $100,000  

Jorge Titinger

     —    

Allyn C. Woodward, Jr.

     Over $100,000  

Brad Koenig

     —    

Thomas J. Fallon

     Over $100,000  

Joseph F. Hoffman

     Over $100,000  

Doreen Woo Ho

     Over $100,000  

Other Named Executive Officers

  

David Lund

     —    

Scott Bluestein

     Over $100,000  

Melanie Grace

     Over $100,000  

Gerard R. Waldt, Jr

     $0 – $50,000  

 

193


Table of Contents
Index to Financial Statements

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have established a written policy to govern the review, approval and monitoring of transactions involving the Company and certain persons related to Hercules. As a business development company, the 1940 Act restricts us from participating in transactions with any persons affiliated with Hercules, including our officers, directors, and employees and any person controlling or under common control with us.

In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with Hercules, our officers screen each of our transactions for any possible affiliations, close or remote, between the proposed portfolio investment, Hercules, companies controlled by us and our employees and directors.

We will not enter into any agreements unless and until we are satisfied that no affiliations prohibited by the 1940 Act exist or, if such affiliations exist, we have taken appropriate actions to seek Board of Directors’ review and approval or exemptive relief from the SEC for such transaction.

 

194


Table of Contents
Index to Financial Statements

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 IRS, possibly with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal income tax concerns affecting the Company and its 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 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 U.S. 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 U.S. 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.

Taxation as a Regulated Investment Company

For any taxable year in which we:

 

   

qualify as a RIC; and

 

   

distribute dividends for U.S. 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

 

195


Table of Contents
Index to Financial Statements

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 U.S. 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” (the “90% Income Test”);

 

   

diversify our holdings so that at the end of each quarter of the taxable year:

 

   

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” (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 satisfy 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 for each calendar year (subject to certain deferrals and elections), (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding years (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

 

196


Table of Contents
Index to Financial Statements

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.

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 such distributions as ordinary income (or as long-term capital gain to the extent such distribution is properly designated 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 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 (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.

 

197


Table of Contents
Index to Financial Statements

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.

Under recent tax legislation, we and the companies in which we invest will be generally subject to certain leverage limitations regarding the deductibility of interest expense. The recent tax legislation may, pending further regulatory guidance, require us to accrue market discount currently and to otherwise recognize income for tax purposes no later than we recognize it for financial reporting purposes. The recent tax legislation would require us to recognize accumulated undistributed earnings of foreign corporations if any in which were invested in 2017 if our ownership levels exceeded certain thresholds. The effects of these and other provisions of the tax legislation on us remains uncertain at this time pending regulatory guidance.

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.

 

198


Table of Contents
Index to Financial Statements

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 (“passive foreign investment companies” or “PFICs”), we could be subject to U.S. 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. 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. Furthermore, under recently proposed Treasury Regulations, certain income derived by us from PFICs with respect to which we have made certain U.S. tax elections would generally constitute qualifying income for purposes of the 90% Income Test only to the extent such PFICs make distributions of that income to us. As such, we intend to limit and/or manage our holdings in passive foreign investment companies 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 (“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 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. 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.

Taxation of U.S. Stockholders

A “U.S. stockholder” generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:

 

   

a citizen or individual resident of the United States including an alien individual who is a lawful permanent resident of the United States or meets the “substantial presence” test under Section 7701(b) of the Code;

 

199


Table of Contents
Index to Financial Statements
   

a corporation or other entity taxable as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof;

 

   

a trust if (1) a court in the United States has primary supervision over its administration and one or more U.S. persons has the authority to control all substantial decisions of such trust or (2) if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes; or

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source.

For U.S. federal income tax purposes, distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our ordinary income plus net realized short-term capital gains in excess of net realized long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions are attributable to dividends from certain U.S. corporations and certain qualified foreign corporations, such distributions may be reported by us as “qualified dividend income” eligible to be taxed in the hands of U.S. non-corporate stockholders (including individuals) at the rates applicable to long-term capital gains, provided certain holding period and other requirements are met at both the stockholder and corporate levels. In this regard, it is anticipated that distributions paid by us generally will not be attributable to dividends and, therefore, generally will not be qualified dividend income. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains (currently at a maximum rate of 20%, in the case of individuals, trusts or estates), regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Provided that certain holding period and other requirements are met, ordinary income dividends (if properly reported by us) may qualify (i) for the dividends received deduction available to certain corporations, but only to the extent that our income consists of certain qualifying dividend income from U.S. corporations and (ii) in the case of U.S. noncorporate stockholders, as qualified dividend income eligible to be taxed at long-term capital gain rates to the extent that we earn qualified dividend income (generally, dividend income from taxable U.S. resident corporations and certain qualified foreign corporations). There can be no assurance as to what portion of our distributions will be eligible for the corporate dividends received deduction or for the reduced rates applicable to qualified dividend income. Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.

We currently intend to retain some or all of our realized net long-term capital gains in excess of realized net short-term capital losses. In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a tax credit equal to his, her or its allocable share of the tax paid thereon by us. Since we expect to pay tax on any retained net capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by non-corporate stockholders on long-term capital gains, the amount of tax that non-corporate stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder’s liability for U.S. federal income tax. A stockholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. For U.S. federal income tax purposes, the tax basis of shares owned by a U.S. stockholder will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the U.S. stockholder’s gross income and the tax deemed paid by the U.S. stockholder as described in this paragraph. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of

 

200


Table of Contents
Index to Financial Statements

the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”

Under applicable Treasury regulations and certain administrative guidance issued by the IRS, RICs are permitted to treat certain distributions payable in part in shares of their stock, as taxable dividends that will satisfy their Distribution Requirements provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated 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 dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, 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 dividends, including in respect of all or a portion of such dividend 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 dividends, then such sales may put downward pressure on the trading price of our stock. We previously determined to pay a portion of our first quarter 2009 dividend in shares of newly issued common stock, and we may in the future determine to distribute taxable dividends that are payable in part in our common stock.

For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any taxable year and (2) the amount of the deduction for ordinary income and capital gain dividends paid for that taxable year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by our U.S. stockholders on December 31 of the calendar year in which the dividend was declared.

If an investor acquires shares of our or common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.

A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of his, her or its shares of our common stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the U.S. stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss. Reporting of adjusted cost basis information is required for covered securities, which generally include shares of a RIC acquired after January 1, 2012, to the IRS and to taxpayers. Stockholders should contact their intermediaries with respect to reporting of cost basis and available elections for their accounts.

If a Stockholder recognizes losses with respect to Shares of $2 million or more for an individual Stockholder or $10 million or more for a corporate Stockholder, the Treasury Regulations require the Stockholder to file a disclosure statement with the IRS on IRS Form 8886. Direct Stockholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, stockholders

 

201


Table of Contents
Index to Financial Statements

of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these Treasury Regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Stockholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

In general, individual U.S. stockholders currently are subject to a reduced maximum U.S. federal income tax rate of 20% on their net capital gain (i.e., the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. In addition, individuals with income in excess of certain threshold amounts and certain estates and trusts are subject to an additional 3.8% tax on their “net investment income,” which generally includes net income from interest, dividends, annuities, royalties, and rents, and net capital gains (other than certain amounts earned from trades or businesses). Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate U.S. stockholders with net capital losses for a taxable year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each taxable year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent taxable years as provided in the Code. Corporate U.S. stockholders generally may not deduct any net capital losses for a taxable year, but may carry back such losses for three taxable years or carry forward such losses for five taxable years.

We or the applicable withholding agent will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice reporting the amounts includible in such U.S. stockholder’s taxable income for such calendar year as ordinary income and as long-term capital gain. In addition, the U.S. federal tax status of each calendar year’s distributions generally will be reported to the IRS (including the amount of dividends, if any, eligible for the 20% “qualified dividend income” rate). Distributions may also be subject to additional state, local, and foreign taxes depending on a U.S. stockholder’s particular situation. Dividends distributed by us generally will not be eligible for the corporate dividends-received deduction or the preferential rate applicable to “qualified dividend income.” The Code requires reporting of adjusted cost basis information for covered securities, which generally include shares of our stock, acquired after January 1, 2012, to the IRS and to taxpayers. U.S. stockholders should contact their financial intermediaries with respect to reporting of cost basis and available elections for their accounts.

We or the applicable withholding agent may be required to withhold U.S. federal income tax (“backup withholding”) from all distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or (2) with respect to whom the IRS notifies us or the applicable withholding agent that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s U.S. federal income tax liability, provided that proper information is timely provided to the IRS.

Dividend Reinvestment Plan We have adopted a dividend reinvestment plan through which all distributions are paid to our common stockholders in the form of additional shares of our common stock, unless a stockholder elects to receive cash in accordance with the terms of the plan. See “Dividend Reinvestment Plan.” Any distributions made to a U.S. stockholder that are reinvested under the plan will nevertheless remain generally taxable to the U.S. stockholder. The U.S. stockholder will have an adjusted tax basis in the additional shares of our common stock purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the day on which the shares are credited to the U.S. stockholder’s account.

 

202


Table of Contents
Index to Financial Statements

Taxation of Non-U.S. Stockholders

A “Non-U.S. stockholder” is a beneficial owner of shares of our common stock that is not a U.S. stockholder or a partnership (including an entity treated as a partnership) for U.S. federal income tax purposes.

Whether an investment in our shares is appropriate for a Non-U.S. stockholder will depend upon that person’s particular circumstances. An investment in the shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisors before investing in our common stock.

Distributions (other than certain distributions derived from net long-term capital gains) paid by us to a Non-U.S. stockholder are generally subject to U.S. federal withholding tax at a rate of 30% (or lower applicable treaty rate) even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a Non-U.S. stockholder directly, would not be subject to withholding. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder (and, if an income tax treaty applies, attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States), we will not be required to withhold tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to U.S. federal income tax at the rates applicable to U.S. stockholders. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisors.)

However, no withholding is required with respect to certain distributions if (i) the distributions are properly reported to our stockholders as “interest-related dividends” or “short-term capital gain dividends” in written statements to our stockholders, (ii) the distributions are derived from sources specified in the Code for such dividends and (iii) certain other requirements are satisfied. Currently, we do not anticipate that any significant amount of our distributions would be reported as eligible for this exemption from withholding. In the case of shares of our stock held through an intermediary, the intermediary may withhold even if we report all or a portion of any of our distributions as “interest-related dividends” or “short-term capital gain dividends.” Non-U.S. stockholders should contact their intermediaries with respect to the application of these rules to their accounts. No assurance can be provided as to whether any amount of our distributions will be eligible for this exemption from withholding or if eligible, will be reported as such by us.

Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States), or in the case of an individual stockholder, the stockholder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or capital gain dividend and certain other conditions are met.

If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.

 

203


Table of Contents
Index to Financial Statements

A Non-U.S. stockholder who is a non-resident alien individual, and who is not otherwise subject to withholding of U.S. federal income tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN or IRS Form W-8BEN-E, (or an acceptable substitute or successor form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

The “Foreign Account Tax Compliance Act,” or “FATCA,” provisions of the Code, generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions that fail to enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners). The types of income subject to the tax include U.S. source interest and dividends and the gross proceeds from the sale of any property that could produce U.S.-source interest or dividends paid after December 31, 2018. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a Non-U.S. Holder and the status of the intermediaries through which they hold their shares, Non-U.S. Holders could be subject to this 30% withholding tax with respect to distributions on their shares and proceeds from the sale of their shares. Under certain circumstances, a Non-U.S. Holders might be eligible for refunds or credits of such taxes.

Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.

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.

 

204


Table of Contents
Index to Financial Statements

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.

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)

is not an investment company (other than a small business investment company 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

 

  (c)

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.

 

205


Table of Contents
Index to Financial Statements
  (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.

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 U.S. 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

 

206


Table of Contents
Index to Financial Statements

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.

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 200% (or 150%, subject to certain approval and disclosure requirements) immediately after each such issuance. In addition, we may not be permitted to declare any cash 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 200% (or 150%, subject to certain approval and disclosure requirements) 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 “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 200% (or 150%, subject to certain approval and disclosure requirements) 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.

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. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. 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, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

 

207


Table of Contents
Index to Financial Statements

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 200% (or 150%, subject to certain approval and disclosure requirements) asset coverage requirement applicable to us.

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 (the “2004 Plan”) and 2006 Non-Employee Director Plan (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. In the future, we may adopt a Non-Employee Director Plan that, among other things, provides for the issuance of

 

208


Table of Contents
Index to Financial Statements

restricted stock to directors. The maximum amount of shares that may be issued under the Plans will be 10% of the outstanding shares of our common stock on the effective date of the Plans plus 10% of the outstanding number of shares of our common stock issued or delivered by us (other than pursuant to compensation plans) during the term of the Plans. The amount of voting securities that would result from the exercise of all of our outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of our outstanding voting securities, except that if such amount would exceed 15% of our outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights, if any, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities.

On June 22, 2010 we received approval from the SEC on our request for exemptive relief that permits our employees to exercise their stock options and restricted stock and pay any related income taxes using a cashless exercise program.

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 two wholly-owned SBIC subsidiaries, HT II and HT III. With our net investments of $44.0 million and $74.5 million in HT II and HT III, respectively, we have the combined capacity to issue a total of $190.2 million of SBA guaranteed debentures, subject to SBA approval. At March 31, 2018, we have issued $190.2 million in SBA guaranteed debentures in our SBIC subsidiaries.

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. for that purpose. There can be no assurance of when or if we will receive SBA approval for another SBIC license.

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 subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

 

209


Table of Contents
Index to Financial Statements

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of March 31, 2018 as a result of having sufficient capital as defined under the SBA regulations.

HT II and HT III hold approximately $113.1 million and $285.8 million in assets, respectively, and accounted for approximately 5.7% and 14.4% of our total assets prior to consolidation at March 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 II and HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital and/or distributed earnings, in accordance with SBA regulations.

Our SBIC subsidiaries are 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.

 

210


Table of Contents
Index to Financial Statements

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 prospectus, we do not have any preferred stock outstanding.

At March 31, 2018, approximately 91.6% 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 Accounting Standards Codification Topic 946 Financial Services—Investment Companies (“ASC 946”) and measured in accordance with Accounting Standards Codification Topic 820 Fair Value Measurements and Disclosures (“ASC 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 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 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 an independent valuation firm to provide us with valuation assistance with respect to certain 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;

(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.

 

211


Table of Contents
Index to Financial Statements

ASC 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 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 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 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 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 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 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 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 investment 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

 

212


Table of Contents
Index to Financial Statements

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.

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 yield 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 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 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 instrument, 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 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. 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 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 March 31, 2018, there were no material past due escrow receivables.

 

213


Table of Contents
Index to Financial Statements

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.

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.

 

214


Table of Contents
Index to Financial Statements

SALES OF COMMON STOCK BELOW NET ASSET VALUE

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 agree to 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.

In order to sell shares pursuant to this authorization:

 

   

a majority of our independent directors who have no financial interest in the sale must have approved the sale; and

 

   

a majority of such directors, who are not interested persons of the Company, in consultation with the underwriter or underwriters of the offering if it is to be underwritten, must have determined in good faith, and as of a time immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares or immediately prior to the issuance of such shares, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of those shares, less any underwriting commission or discount; and

Any offering of common stock below NAV per share will be designed to raise capital for investment in accordance with our investment objectives and business strategies.

In making a determination that an offering below NAV per share is in our and our stockholders’ best interests, our Board of Directors would consider a variety of factors including:

 

   

The effect that an offering below NAV per share would have on our stockholders, including the potential dilution they would experience as a result of the offering;

 

   

The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined NAV per share;

 

   

The relationship of recent market prices of our common stock to NAV per share and the potential impact of the offering on the market price per share of our common stock;

 

   

Whether the proposed offering price would closely approximate the market value of our shares;

 

   

The potential market impact of being able to raise capital during the current financial market difficulties;

 

   

The nature of any new investors anticipated to acquire shares in the offering;

 

   

The anticipated rate of return on and quality, type and availability of investments to be funded with the proceeds from the offering, if any; and

 

   

The leverage available to us, both before and after any offering, and the terms thereof.

Sales by us of our common stock at a discount from NAV pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering.

The following three headings and accompanying tables will explain and provide hypothetical examples on the impact of an offering at a price less than NAV per share on three different sets of investors:

 

   

existing stockholders who do not purchase any shares in the offering;

 

215


Table of Contents
Index to Financial Statements
   

existing stockholders who purchase a relatively small amount of shares in the offering or a relatively large amount of shares in the offering; and

 

   

new investors who become stockholders by purchasing shares in the offering.

Impact on Existing Stockholders not Participating in the Offering

Our existing stockholders who do not participate in an offering below NAV per share or who do not buy additional shares in the secondary market at the same or lower price we obtain in the offering (after expenses and commissions) face the greatest potential risks. All stockholders will experience an immediate decrease (often called dilution) in the NAV of the shares they hold. Stockholders who do not participate in the offering will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than stockholders who do participate in the offering. All stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV increases.

 

216


Table of Contents
Index to Financial Statements

The following table illustrates the level of NAV dilution that would be experienced by a nonparticipating stockholder in different hypothetical offerings of different sizes and levels of discount from NAV per share. Actual sales prices and discounts may differ from the presentation below.

The examples assume that Company XYZ has 3,000,000 common shares outstanding, $40,000,000 in total assets and $10,000,000 in total liabilities. The current NAV and NAV are thus $30,000,000 and $10.00, respectively. The table illustrates the dilutive effect on nonparticipating Stockholder A of (1) an offering of 300,000 shares (10% of the outstanding shares) with proceeds to the Company XYZ at $9.00 per share after offering expenses and commissions, and (2) an offering of 600,000 shares (20% of the outstanding shares) with proceeds to the Company at $0.001 per share after offering expenses and commissions (a 100% discount from NAV).

 

     Prior to
Sale Below
NAV
    Example 1
10% Offering
at 10% Discount
    Example 2
20% Offering
at 100% Discount
 
    Following
Sale
    %
Change
    Following
Sale
    %
Change
 

Offering Price

        

Price per Share to Public(1)

     —       $ 9.47       —       $ 0.001       —    

Net Proceeds per Share to Issuer

     —       $ 9.00       —       $ 0.001       —    

Decrease to NAV

        

Total Shares Outstanding

     3,000,000       3,300,000       10.00     3,600,000       20.00

NAV per Share

   $ 10.00     $ 9.91       (0.90 )%    $ 8.33       (16.67 )% 

Share Dilution to Stockholder

        

Shares Held by Stockholder A

     30,000       30,000       —         30,000       —    

Percentage of Shares Held by Stockholder A

     1.00     0.91     (9.09 )%      0.83     (16.67 )% 

Total Asset Values

        

Total NAV Held by Stockholder A

   $ 300,000     $ 297,273       (0.90 )%    $ 250,005       (16.67 )% 

Total Investment by Stockholder A (Assumed to Be $10.00 per Share)

   $ 300,000     $ 300,000       —       $ 300,000       —    

Total Dilution to Stockholder A (Change in Total NAV Held By Stockholder)

     —       $ (2,727     —       $ (49,995     —    

Per Share Amounts

        

NAV per Share Held by Stockholder A

     —       $ 9.91       —       $ 8.33       —    

Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share on Shares
Held Prior to Sale)

   $ 10.00     $ 10.00       —       $ 10.00       —    

Dilution per Share Held by Stockholder A

     —       $ (0.09     —       $ (1.67     —    

Percentage Dilution per Share Held by Stockholder A

     —         —         (0.90 )%      —         (16.67 )% 

 

(1)

Assumes 5% in selling compensation and expenses paid by Company XYZ.

Impact on Existing Stockholders who do Participate in the Offering

Our existing stockholders who participate in an offering below NAV per share or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of NAV dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in our shares immediately prior to the offering. The level of NAV dilution on an aggregate basis will decrease as the number of shares such stockholders purchase increases. Existing stockholders who buy more than their proportionate percentage will experience NAV dilution but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in NAV per share over their investment per share and will also experience a disproportionately greater increase in their participation in

 

217


Table of Contents
Index to Financial Statements

our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares purchased by such stockholder increases. Even a stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience NAV dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. This decrease could be more pronounced as the size of the offering and the level of discount to NAV increases.

The following chart illustrates the level of dilution and accretion in the hypothetical 20% discount offering from the prior chart (Example 3) for a stockholder that acquires shares equal to (1) 50% of its proportionate share of the offering (i.e., 3,000 shares, which is 0.5% of an offering of 600,000 shares rather than its 1.0% proportionate share) and (2) 150% of such percentage (i.e., 9,000 shares, which is 1.5% of an offering of 600,000 shares rather than its 1.0% proportionate share). The prospectus supplement pursuant to which any discounted offering is made will include a chart for this example based on the actual number of shares in such offering and the actual discount from the most recently determined NAV per share.

 

     Prior to
Sale Below
NAV
    50%
Participation
    150%
Participation
 
  Following
Sale
    %
Change
    Following
Sale
    %
Change
 

Offering Price

          

Price per Share to Public(1)

     —       $ 8.42       —       $ 8.42       —    

Net Proceeds per Share to Issuer

     —       $ 8.00       —       $ 8.00       —    

Increase in Shares and Decrease to NAV

          

Total Shares Outstanding

     3,000,000       3,600,000       20.00     3,600,000       20.00

NAV per Share

   $ 10.00     $ 9.67       (3.33 )%    $ 9.67       (3.33 )% 

Dilution/Accretion to Participating Stockholder A

          

Share Dilution/Accretion

          

Shares Held by Stockholder A

     30,000       33,000       10.00     39,000       30.00

Percentage Outstanding Held by Stockholder A

     1.00     0.92     (8.33 )%      1.08     8.33

NAV Dilution/Accretion

          

Total NAV Held by Stockholder A

   $ 300,000     $ 319,110       6.33   $ 377,130       25.67

Total Investment by Stockholder A (Assumed to be $10.00 per Share on Shares Held Prior to Sale)

     —       $ 325,260       —       $ 375,780       —    

Total Dilution/Accretion to Stockholder A (Total NAV Less Total Investment)

     —       $ (6,150     —       $ 1,350       —    

NAV Dilution/Accretion per Share

    

NAV per Share Held by Stockholder A

     —       $ 9.67       —       $ 9.67       —    

Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share on Shares Held Prior to Sale)

   $ 10.00     $ 9.86       (1.44 )%    $ 9.64       (3.65 )% 

NAV Dilution/Accretion per Share Experienced by Stockholder A (NAV per Share Less Investment per Share)

     —       $ (0.19     —       $ 0.03       —    

Percentage NAV Dilution/Accretion Experienced by Stockholder A (NAV Dilution/Accretion per Share Divided by Investment per Share)

     —         —         (1.93 )%      —         0.31

 

(1)

Assumes 5% in selling compensation and expenses paid by Company XYZ.

 

218


Table of Contents
Index to Financial Statements

Impact on New Investors

Investors who are not currently stockholders, but who participate in an offering below NAV and whose investment per share is greater than the resulting NAV per share (due to selling compensation and expenses paid by us) will experience an immediate decrease, albeit small, in the NAV of their shares and their NAV per share compared to the price they pay for their shares. Investors who are not currently stockholders and who participate in an offering below NAV per share and whose investment per share is also less than the resulting NAV per share will experience an immediate increase in the NAV of their shares and their NAV per share compared to the price they pay for their shares. All these investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV increases.

The following chart illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same hypothetical 10% and 100% discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (1.00%) of the shares in the offering as Stockholder A in the prior examples held immediately prior to the offering. The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined NAV per share.

 

     Prior to
Sale Below
NAV
    Example 1
10% Offering
at 10% Discount
    Example 2
20% Offering
at 100% Discount
 
  Following
Sale
    %
Change
    Following
Sale
    %
Change
 

Offering Price

        

Price per Share to Public(1)

     —       $ 9.47       —       $ 0.001       —    

Net Proceeds per Share to Issuer

     —       $ 9.00       —       $ 0.001       —    

Increase in Shares and Decrease to NAV

        

Total Shares Outstanding

     3,000,000       3,300,000       10.00     3,600,000       20.00

NAV per Share

   $ 10.00     $ 9.91       (0.90 )%    $ 8.33       (16.67 )% 

Dilution/Accretion to New Investor A

        

Share Dilution

        

Shares Held by Investor A

     —         3,000       —         6,000       —    

Percentage Outstanding Held by Investor A

     0.00     0.09     —         0.17     —    

NAV Dilution

          

Total NAV Held by Investor A

     —       $ 29,730       —       $ 50,001       —    

Total Investment by Investor A (At Price to Public)

     —       $ 28,410       —       $ 6       —    

Total Dilution/Accretion to Investor A (Total NAV Less Total Investment)

     —       $ 1,320       —       $ 49,995       —    

NAV Dilution per Share

          

NAV per Share Held by Investor A

     $ 9.91       —       $ 8.33       —    

Investment per Share Held by Investor A

     —       $ 9.47       —       $ 0.001       —    

NAV Dilution/Accretion per Share Experienced by Investor A (NAV per Share Less Investment per Share)

     —       $ 0.44       —       $ 8.33       —    

Percentage NAV Dilution/Accretion Experienced by Investor A (NAV Dilution/Accretion per Share Divided by Investment per Share)

     —         —         4.65     —         99.99

 

(1)

Assumes 5% in selling compensation and expenses paid by Company XYZ.

 

219


Table of Contents
Index to Financial Statements

DIVIDEND REINVESTMENT PLAN

We have adopted a dividend reinvestment plan (the “DRP”), through which all distributions are paid to our stockholders in the form of additional shares of our common stock, unless a stockholder elects to receive cash as provided below. In this way, a stockholder can maintain an undiluted investment in our common stock and still allow us to pay out the required distributable income.

No action is required on the part of a registered stockholder to receive a distribution in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer & Trust Company, the plan administrator and our transfer agent and registrar, so that such notice is received by the plan administrator no later than three days prior to the payment date for distributions to stockholders. The plan administrator will set up an account for shares acquired through the DRP for each stockholder who has not elected to receive distributions in cash (each a “Participant”) and hold such shares in non-certificated form. Upon request by a Participant, received not less than three days prior to the payment date, the plan administrator will, instead of crediting shares to the Participant’s account, issue a certificate registered in the Participant’s name for the number of whole shares of our common stock and a check for any fractional share.

Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.

We expect to use primarily newly-issued shares to implement the DRP, whether our shares are trading at a premium or at a discount to NAV, although we have the option under the DRP to purchase shares in the market to fulfill DRP requirements. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of our common stock at the close of regular trading on the NYSE on the valuation date for such distribution. Market price per share on that date will be the closing price for such shares on the NYSE or, if no sale is reported for such day, at the average of their electronically-reported bid and asked prices. The number of shares of our common stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.

There is no charge to our stockholders for receiving their distributions in the form of additional shares of our common stock. The plan administrator’s fees for handling distributions in stock are paid by us. There are no brokerage charges with respect to shares we have issued directly as a result of distributions payable in stock. If a Participant elects by internet or by written or telephonic notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the Participant’s account and remit the proceeds to the Participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus brokerage commissions from the proceeds.

Any shares issued in connection with a stock split or stock dividend will be added to a Participant’s account with the Plan Administrator. The Plan Administrator may curtail or suspend transaction processing until the completion of such stock split or payment of such stock dividend.

Stockholders who receive distributions in the form of stock generally are subject to the same federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. A stockholder’s basis for determining gain or loss upon the sale of stock received in a distribution from us will be equal to the total dollar amount of the distribution payable to the stockholder.

The DRP may be terminated by us upon notice in writing mailed to each Participant at least 30 days prior to any record date for the payment of any distribution by us. All correspondence concerning the DRP, including requests for additional information, should be directed to the plan administrator by mail at American Stock Transfer & Trust Company, Attn: Dividend Reinvestment Department, P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or by phone at 1-866-669-9888.

 

220


Table of Contents
Index to Financial Statements

DESCRIPTION OF CAPITAL STOCK

The following description is based on relevant portions of the Maryland General Corporation Law and on our charter and bylaws. This summary may not contain all of the information that is important to you, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a more detailed description of the provisions summarized below.

Under the terms of our charter, our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share, of which 86,796,043 shares are outstanding as of May 29, 2018. Under our charter, our Board of Directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock, and to cause the issuance of such shares, without obtaining stockholder approval. In addition, as permitted by the Maryland General Corporation Law, but subject to the 1940 Act, our charter provides that the Board of Directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

Common Stock

All shares of our common stock have equal rights as to earnings, assets, distributions and voting privileges, except as described below and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable.

Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of Directors and declared by us out of assets legally available therefor. Shares of our common stock have no conversion, exchange, preemptive or redemption rights. In the event of a liquidation, dissolution or winding up of Hercules each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock will elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.

 

Title of Class

   Amount
Authorized
     Amount Held
by Company
for its Account
     Amount
Outstanding
 

Common Stock, $0.001 par value per share

     200,000,000        —          86,796,043  

Preferred Stock

Our charter authorizes our Board of Directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. You should note, however, that any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before

 

221


Table of Contents
Index to Financial Statements

any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, 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. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the 1940 Act.

Our charter authorizes us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in any such capacity, except with respect to any matter as to which such person shall have been finally adjudicated in any proceeding not to have acted in good faith in the reasonable belief that their action was in our best interest or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. Our charter also provides that, to the maximum extent permitted by Maryland law, with the approval of our Board of Directors and provided that certain conditions described in our charter are met, we may pay certain expenses incurred by any such indemnified person in advance of the final disposition of a proceeding upon receipt of an undertaking by or on behalf of such indemnified person to repay amounts we have so paid if it is ultimately determined that indemnification of such expenses is not authorized under our charter. Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in any such capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity, except with respect to any matter as to which such person shall have been finally adjudicated in any proceeding not to have acted in good faith in the reasonable belief that their action was in our best interest or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. Our bylaws also provide that, to the maximum extent permitted by Maryland law, with the approval of our Board of Directors and provided that certain conditions described in our bylaws are met, we may pay certain expenses incurred by any such indemnified person in advance of the final disposition of a proceeding upon receipt of an undertaking by or on behalf of such indemnified person to repay amounts we have so paid if it is ultimately determined that indemnification of such expenses is not authorized under our bylaws.

Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments,

 

222


Table of Contents
Index to Financial Statements

penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

We currently have in effect a directors’ and officers’ insurance policy covering our directors and officers and us for any acts and omissions committed, attempted or allegedly committed by any director or officer during the policy period. The policy is subject to customary exclusions.

Provisions of the Maryland General Corporation Law and Our Charter and Bylaws

The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

Classified Board of Directors

Our Board of Directors is divided into three classes of directors serving staggered three-year terms. The terms of the first, second and third classes will expire in 2020, 2018 and 2019, respectively. Upon expiration of their current terms, directors of each class are eligible to serve for three-year terms or until their successors are duly elected and qualify. Each year one class of directors will be elected by the stockholders. A classified board may render a change in control or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of our management and policies.

Election of Directors

Our charter provides that, except as otherwise provided in the bylaws, the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of directors will be required to elect each director. Our bylaws currently provide that directors are elected by a plurality of the votes cast in the election of directors. Pursuant to our charter and bylaws, our Board of Directors may amend the bylaws to alter the vote required to elect directors.

Number of Directors; Vacancies; Removal

Our charter provides that the number of directors will be set only by the Board of Directors in accordance with our bylaws. Our bylaws provide that a majority of our entire Board of Directors may at any time increase or decrease the number of directors. However, unless the bylaws are amended, the number of directors may never

 

223


Table of Contents
Index to Financial Statements

be less than one nor more than 12. We have elected to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law, as amended (the “Maryland General Corporation Law”), regarding the filling of vacancies on the Board of Directors. Accordingly, at such time, except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.

Our charter provides that a director may be removed only for cause, as defined in the charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.

Action by Stockholders

Under the Maryland General Corporation Law, stockholder action may be taken only at an annual or special meeting of stockholders or by unanimous consent in lieu of a meeting (unless the charter provides for stockholder action by less than unanimous written consent, which our charter does not). These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board of Directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of Directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.

The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meeting of Stockholders

Our bylaws provide that special meetings of stockholders may be called by our Board of Directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders shall be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all of the votes entitled to be cast at such meeting.

 

224


Table of Contents
Index to Financial Statements

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter also provides that certain charter amendments and any proposal for our conversion, whether by merger or otherwise, from a closed-end company to an open-end company or any proposal for our liquidation or dissolution requires the approval of the stockholders entitled to cast at least 75% of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by at least 75% of our continuing directors (in addition to approval by our Board of Directors), such amendment or proposal may be approved by the stockholders entitled to cast a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in our charter as our current directors, as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the Board of Directors.

Our charter and bylaws provide that the Board of Directors will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.

No Appraisal Rights

Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights.

Control Share Acquisitions

The Maryland Control Share Acquisition Act (the “Control Share Act”) provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

 

   

one-tenth or more but less than one-third;

 

   

one-third or more but less than a majority; or

 

   

a majority or more of all voting power.

The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition may compel the Board of Directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

 

225


Table of Contents
Index to Financial Statements

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The Control Share Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our shares of stock.

Business Combinations

Under the Maryland Business Combination Act (the “Business Combination Act”), “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

   

any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or

 

   

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under this statute if the Board of Directors approved in advance the transaction by which such stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the 5-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the Board of Directors of the corporation and approved by the affirmative vote of at least:

 

   

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

   

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the Board of Directors before the time that the interested stockholder becomes an interested

 

226


Table of Contents
Index to Financial Statements

stockholder. Our Board of Directors has adopted a resolution exempting any business combination between us and any other person from the provisions of the Business Combination Act, provided that the business combination is first approved by the Board of Directors, including a majority of the directors who are not interested persons as defined in the 1940 Act.

Conflict with 1940 Act

Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.

Regulatory Restrictions

Our wholly-owned subsidiaries, HT II and HT III, have obtained SBIC licenses. The SBA prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of a SBIC. A “change of control” is any event which would result in a transfer of the power, direct or indirect, to direct the management and policies of a SBIC, whether through ownership, contractual arrangements or otherwise.

 

227


Table of Contents
Index to Financial Statements

DESCRIPTION OF OUR PREFERRED STOCK

In addition to shares of common stock, our charter authorizes the issuance of preferred stock. We may issue preferred stock from time to time in one or more classes or series, without stockholder approval. If we offer preferred stock under this prospectus we will issue an appropriate prospectus supplement. Prior to issuance of shares of each class or series, our Board of Directors is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. You should note, however, that any such an issuance must adhere to the requirements of the 1940 Act, Maryland law and any other limitations imposed by law.

The following is a general description of the terms of the preferred stock we may issue from time to time. Particular terms of any preferred stock we offer will be described in the prospectus supplement accompanying each preferred share offering.

The 1940 Act requires, among other things, that (i) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, (ii) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends or other distribution on the preferred stock are in arrears by two years or more, and (iii) such shares be cumulative as to distributions and have a complete preference over our common stock to payment of their liquidation in event of dissolution. Some matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a business development company. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.

For any series of preferred stock that we may issue, our Board of Directors will determine and the articles supplementary and the prospectus supplement relating to such series will describe:

 

   

the designation and number of shares of such series;

 

   

the rate and time at which, and the preferences and conditions under which, any dividends or other distributions will be paid on shares of such series, as well as whether such dividends or other distributions are participating or non-participating;

 

   

any provisions relating to convertibility or exchangeability of the shares of such series, including adjustments to the conversion price of such series;

 

   

the rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or winding up of our affairs;

 

   

the voting powers, if any, of the holders of shares of such series;

 

   

any provisions relating to the redemption of the shares of such series;

 

   

any limitations on our ability to pay dividends or make distributions on, or acquire or redeem, other securities while shares of such series are outstanding;

 

   

any conditions or restrictions on our ability to issue additional shares of such series or other securities;

 

   

if applicable, a discussion of certain U.S. federal income tax considerations; and

 

228


Table of Contents
Index to Financial Statements
   

any other relative powers, preferences and participating, optional or special rights of shares of such series, and the qualifications, limitations or restrictions thereof.

All shares of preferred stock that we may issue will be identical and of equal rank except as to the particular terms thereof that may be fixed by our Board of Directors, and all shares of each series of preferred stock will be identical and of equal rank except as to the dates from which dividends or other distributions, if any, thereon will be cumulative. To the extent we issue preferred stock, the payment of distributions to holders of our preferred stock will take priority over payment of distributions to our common stockholders.

 

229


Table of Contents
Index to Financial Statements

DESCRIPTION OF OUR SUBSCRIPTION RIGHTS

The following is a general description of the terms of the subscription rights we may issue from time to time. Particular terms of any subscription rights we offer will be described in the prospectus supplement relating to such subscription rights.

We may issue subscription rights to our stockholders to purchase common stock. Subscription rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the subscription rights. In connection with a subscription rights offering to our stockholders, we would distribute certificates evidencing the subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering.

Our stockholders will indirectly bear all of the expenses of the subscription rights offering, regardless of whether our stockholders exercise any subscription rights.

A prospectus supplement will describe the particular terms of any subscription rights we may issue, including the following:

 

   

the period of time the offering would remain open (which shall be open a minimum number of days such that all record holders would be eligible to participate in the offering and shall not be open longer than 120 days);

 

   

the title and aggregate number of such subscription rights;

 

   

the exercise price for such subscription rights (or method of calculation thereof);

 

   

the currency or currencies, including composite currencies, in which the price of such subscription rights may be payable;

 

   

if applicable, the designation and terms of the securities with which the subscription rights are issued and the number of subscription rights issued with each such security or each principal amount of such security;

 

   

the ratio of the offering (which, in the case of transferable rights, will require a minimum of three shares to be held of record before a person is entitled to purchase an additional share);

 

   

the number of such subscription rights issued to each stockholder;

 

   

the extent to which such subscription rights are transferable and the market on which they may be traded if they are transferable;

 

   

the date on which the right to exercise such subscription rights shall commence, and the date on which such right shall expire (subject to any extension);

 

   

if applicable, the minimum or maximum number of subscription rights that may be exercised at one time;

 

   

the extent to which such subscription rights include an over-subscription privilege with respect to unsubscribed securities and the terms of such over-subscription privilege;

 

   

any termination right we may have in connection with such subscription rights offering;

 

   

the terms of any rights to redeem, or call such subscription rights;

 

   

information with respect to book-entry procedures, if any;

 

   

the terms of the securities issuable upon exercise of the subscription rights;

 

   

the material terms of any standby underwriting, backstop or other purchase arrangement that we may enter into in connection with the subscription rights offering;

 

230


Table of Contents
Index to Financial Statements
   

if applicable, a discussion of certain U.S. federal income tax considerations applicable to the issuance or exercise of such subscription rights; and

 

   

any other terms of such subscription rights, including exercise, settlement and other procedures and limitations relating to the transfer and exercise of such subscription rights.

Each subscription right will entitle the holder of the subscription right to purchase for cash or other consideration such amount of shares of common stock at such subscription price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby. Subscription rights may be exercised as set forth in the prospectus supplement beginning on the date specified therein and continuing until the close of business on the expiration date for such subscription rights set forth in the prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights will become void.

Upon receipt of payment and the subscription rights certificate properly completed and duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement we will forward, as soon as practicable, the shares of common stock purchasable upon such exercise. If less than all of the rights represented by such subscription rights certificate are exercised, a new subscription certificate will be issued for the remaining rights. Prior to exercising their subscription rights, holders of subscription rights will not have any of the rights of holders of the securities purchasable upon such exercise. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than stockholders, to or through agents, underwriters or dealers or through a combination of such methods, as set forth in the applicable prospectus supplement.

Under the 1940 Act, we may generally only offer subscription rights (other than rights to subscribe expiring not later than 120 days after their issuance and issued exclusively and ratably to a class or classes of our security holders) on the condition that (1) the subscription rights expire by their terms within ten years; (2) the exercise price is not less than the current market value at the date of issuance; (3) our stockholders authorize the proposal to issue such subscription rights, and a “required” majority of our Board of Directors approves of such issuance on the basis that the issuance is in the best interests of the Company and our stockholders; and (4) if the subscription rights are accompanied by other securities, the subscription rights are not separately transferable unless no class of such subscription rights and the securities accompanying them has been publicly distributed. A “required” majority of our Board of Directors is a vote of both a majority of our directors who have no financial interest in the transaction and a majority of the directors who are not interested persons of the company. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, options and subscription rights at the time of issuance may not exceed 25% of our outstanding voting securities.

For information regarding the dilutive impact of rights offerings, please see “Risk Factors—Risks Related to Our Securities” 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.”

 

231


Table of Contents
Index to Financial Statements

DESCRIPTION OF WARRANTS

The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants and will be subject to compliance with the 1940 Act.

We may issue warrants to purchase shares of our common stock, preferred stock or debt securities. Such warrants may be issued independently or together with shares of common stock, preferred stock or debt securities and may be attached or separate from such securities. We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.

A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:

 

   

the title and aggregate number of such warrants;

 

   

the price or prices at which such warrants will be issued;

 

   

the currency or currencies, including composite currencies, in which the price of such warrants may be payable;

 

   

if applicable, the designation and terms of the securities with which the warrants are issued and the number of warrants issued with each such security or each principal amount of such security;

 

   

in the case of warrants to purchase debt securities, the principal amount of debt securities purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which this principal amount of debt securities may be purchased upon such exercise;

 

   

in the case of warrants to purchase common stock or preferred stock, the number of shares of common stock or preferred stock, as the case may be, purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which these shares may be purchased upon such exercise;

 

   

the date on which the right to exercise such warrants shall commence and the date on which such right will expire (subject to any extension);

 

   

whether such warrants will be issued in registered form or bearer form;

 

   

if applicable, the minimum or maximum amount of such warrants that may be exercised at any one time;

 

   

if applicable, the date on and after which such warrants and the related securities will be separately transferable;

 

   

the terms of any rights to redeem, or call such warrants;

 

   

information with respect to book-entry procedures, if any;

 

   

the terms of the securities issuable upon exercise of the warrants;

 

   

if applicable, a discussion of certain U.S. federal income tax considerations; and

 

   

any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants.

We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.

 

232


Table of Contents
Index to Financial Statements

Each warrant will entitle the holder to purchase for cash such common stock or preferred stock at the exercise price or such principal amount of debt securities as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the warrants offered thereby. Warrants may be exercised as set forth in the prospectus supplement beginning on the date specified therein and continuing until the close of business on the expiration date set forth in the prospectus supplement. After the close of business on the expiration date, unexercised warrants will become void.

Upon receipt of payment and a warrant certificate properly completed and duly executed at the corporate trust office of the warrant agent or any other office indicated in the prospectus supplement, we will, as soon as practicable, forward the securities purchasable upon such exercise. If less than all of the warrants represented by such warrant certificate are exercised, a new warrant certificate will be issued for the remaining warrants. If we so indicate in the applicable prospectus supplement, holders of the warrants may surrender securities as all or part of the exercise price for warrants.

Prior to exercising their warrants, holders of warrants will not have any of the rights of holders of the securities purchasable upon such exercise, including, in the case of warrants to purchase debt securities, the right to receive principal, premium, if any, or interest payments, on the debt securities purchasable upon exercise or to enforce covenants in the applicable indenture or, in the case of warrants to purchase common stock or preferred stock, the right to receive dividends or other distributions, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting rights.

Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board of Directors approves such issuance on the basis that the issuance is in the best interests of the Company and its stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities.

 

233


Table of Contents
Index to Financial Statements

DESCRIPTION OF OUR DEBT SECURITIES

We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in this prospectus and in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, including any supplemental indenture, you should read both this prospectus and the prospectus supplement relating to that particular series.

As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an “indenture.” An indenture is a contract between us and U.S. Bank National Association, a financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “Events of Default—Remedies if an Event of Default Occurs.” Second, the trustee performs certain administrative duties for us.

Because this section is a summary, it does not describe every aspect of the debt securities and the indenture. The following description summarizes the material provisions of the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. For example, in this section, we use capitalized words to signify terms that are specifically defined in the indenture. We have filed the form of the indenture with the SEC. See “Available Information” for information on how to obtain a copy of the indenture.

A prospectus supplement, which will accompany this prospectus, will describe the particular terms of any series of debt securities being offered, including the following:

 

   

the designation or title of the series of debt securities;

 

   

the total principal amount of the series of debt securities;

 

   

the percentage of the principal amount at which the series of debt securities will be offered;

 

   

the date or dates on which principal will be payable;

 

   

the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of interest, if any;

 

   

the date or dates from which any interest will accrue, or the method of determining such date or dates, and the date or dates on which any interest will be payable;

 

   

the terms for redemption, extension or early repayment, if any;

 

   

the currencies in which the series of debt securities are issued and payable;

 

   

whether the amount of payments of principal, premium or interest, if any, on a series of debt securities will be determined with reference to an index, formula or other method (which could be based on one or more currencies, commodities, equity indices or other indices) and how these amounts will be determined;

 

   

the place or places, if any, other than or in addition to the City of New York, of payment, transfer, conversion and/or exchange of the debt securities;

 

   

the denominations in which the offered debt securities will be issued;

 

   

the provision for any sinking fund;

 

   

any restrictive covenants;

 

   

any Events of Default;

 

234


Table of Contents
Index to Financial Statements
   

whether the series of debt securities are issuable in certificated form;

 

   

any provisions for defeasance or covenant defeasance;

 

   

if applicable, U.S. federal income tax considerations relating to OID;

 

   

whether and under what circumstances we will pay additional amounts in respect of any tax, assessment or governmental charge and, if so, whether we will have the option to redeem the debt securities rather than pay the additional amounts (and the terms of this option);

 

   

any provisions for convertibility or exchangeability of the debt securities into or for any other securities;

 

   

whether the debt securities are subject to subordination and the terms of such subordination;

 

   

the listing, if any, on a securities exchange; and

 

   

any other terms.

The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds.

We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or 150%, subject to certain approval and disclosure requirements) immediately after each such issuance. In addition, while any indebtedness and other senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Related to Our Business Structure.”

General

The indenture provides that any debt securities proposed to be sold under this prospectus and the attached prospectus supplement (“offered debt securities”) and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered securities (“underlying debt securities”), may be issued under the indenture in one or more series.

For purposes of this prospectus, any reference to the payment of principal of or premium or interest, if any, on debt securities will include additional amounts if required by the terms of the debt securities.

The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the “indenture securities.” The indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See “Resignation of Trustee” section below. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term “indenture securities” means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the indenture, the powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.

We refer you to the prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision providing event risk or similar protection.

 

235


Table of Contents
Index to Financial Statements

We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.

Conversion and Exchange

If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the prospectus supplement.

Issuance of Securities in Registered Form

We may issue the debt securities in registered form, in which case we may issue them either in book-entry form only or in “certificated” form. Debt securities issued in book-entry form will be represented by global securities. We expect that we will usually issue debt securities in book-entry only form represented by global securities.

Book-Entry Holders

We will issue registered debt securities in book-entry form only, unless we specify otherwise in the applicable prospectus supplement. This means debt securities will be represented by one or more global securities registered in the name of a depositary that will hold them on behalf of financial institutions that participate in the depositary’s book-entry system. These participating institutions, in turn, hold beneficial interests in the debt securities held by the depositary or its nominee. These institutions may hold these interests on behalf of themselves or customers.

Under the indenture, only the person in whose name a debt security is registered is recognized as the holder of that debt security. Consequently, for debt securities issued in book-entry form, we will recognize only the depositary as the holder of the debt securities and we will make all payments on the debt securities to the depositary. The depositary will then pass along the payments it receives to its participants, which in turn will pass the payments along to their customers who are the beneficial owners. The depositary and its participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the debt securities.

As a result, investors will not own debt securities directly. Instead, they will own beneficial interests in a global security, through a bank, broker or other financial institution that participates in the depositary’s book-entry system or holds an interest through a participant. As long as the debt securities are represented by one or more global securities, investors will be indirect holders, and not holders, of the debt securities.

Street Name Holders

In the future, we may issue debt securities in certificated form or terminate a global security. In these cases, investors may choose to hold their debt securities in their own names or in “street name.” Debt securities held in street name are registered in the name of a bank, broker or other financial institution chosen by the investor, and the investor would hold a beneficial interest in those debt securities through the account he or she maintains at that institution.

 

236


Table of Contents
Index to Financial Statements

For debt securities held in street name, we will recognize only the intermediary banks, brokers and other financial institutions in whose names the debt securities are registered as the holders of those debt securities and we will make all payments on those debt securities to them. These institutions will pass along the payments they receive to their customers who are the beneficial owners, but only because they agree to do so in their customer agreements or because they are legally required to do so. Investors who hold debt securities in street name will be indirect holders, and not holders, of the debt securities.

Legal Holders

Our obligations, as well as the obligations of the applicable trustee and those of any third parties employed by us or the applicable trustee, run only to the legal holders of the debt securities. We do not have obligations to investors who hold beneficial interests in global securities, in street name or by any other indirect means. This will be the case whether an investor chooses to be an indirect holder of a debt security or has no choice because we are issuing the debt securities only in book-entry form.

For example, once we make a payment or give a notice to the holder, we have no further responsibility for the payment or notice even if that holder is required, under agreements with depositary participants or customers or by law, to pass it along to the indirect holders but does not do so. Similarly, if we want to obtain the approval of the holders for any purpose (for example, to amend an indenture or to relieve us of the consequences of a default or of our obligation to comply with a particular provision of an indenture), we would seek the approval only from the holders, and not the indirect holders, of the debt securities. Whether and how the holders contact the indirect holders is up to the holders.

When we refer to you, we mean those who invest in the debt securities being offered by this prospectus, whether they are the holders or only indirect holders of those debt securities. When we refer to your debt securities, we mean the debt securities in which you hold a direct or indirect interest.

Special Considerations for Indirect Holders

If you hold debt securities through a bank, broker or other financial institution, either in book-entry form or in street name, we urge you to check with that institution to find out:

 

   

how it handles securities payments and notices,

 

   

whether it imposes fees or charges,

 

   

how it would handle a request for the holders’ consent, if ever required,

 

   

whether and how you can instruct it to send you debt securities registered in your own name so you can be a holder, if that is permitted in the future for a particular series of debt securities,

 

   

how it would exercise rights under the debt securities if there were a default or other event triggering the need for holders to act to protect their interests, and

 

   

if the debt securities are in book-entry form, how the depositary’s rules and procedures will affect these matters.

Global Securities

As noted above, we usually will issue debt securities as registered securities in book-entry form only. A global security represents one or any other number of individual debt securities. Generally, all debt securities represented by the same global securities will have the same terms.

Each debt security issued in book-entry form will be represented by a global security that we deposit with and register in the name of a financial institution or its nominee that we select. The financial institution that we

 

237


Table of Contents
Index to Financial Statements

select for this purpose is called the depositary. Unless we specify otherwise in the applicable prospectus supplement, The Depository Trust Company, New York, New York, known as DTC, will be the depositary for all debt securities issued in book-entry form.

A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. We describe those situations below under “Special Situations when a Global Security Will Be Terminated.” As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all debt securities represented by a global security, and investors will be permitted to own only beneficial interests in a global security. Beneficial interests must be held by means of an account with a broker, bank or other financial institution that in turn has an account with the depositary or with another institution that has an account with the depositary. Thus, an investor whose security is represented by a global security will not be a holder of the debt security, but only an indirect holder of a beneficial interest in the global security.

Special Considerations for Global Securities

As an indirect holder, an investor’s rights relating to a global security will be governed by the account rules of the investor’s financial institution and of the depositary, as well as general laws relating to securities transfers. The depositary that holds the global security will be considered the holder of the debt securities represented by the global security.

If debt securities are issued only in the form of a global security, an investor should be aware of the following:

 

   

An investor cannot cause the debt securities to be registered in his or her name, and cannot obtain certificates for his or her interest in the debt securities, except in the special situations we describe below.

 

   

An investor will be an indirect holder and must look to his or her own bank or broker for payments on the debt securities and protection of his or her legal rights relating to the debt securities, as we describe under “Issuance of Securities in Registered Form” above.

 

   

An investor may not be able to sell interests in the debt securities to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form.

 

   

An investor may not be able to pledge his or her interest in a global security in circumstances where certificates representing the debt securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective.

 

   

The depositary’s policies, which may change from time to time, will govern payments, transfers, exchanges and other matters relating to an investor’s interest in a global security. We and the trustee have no responsibility for any aspect of the depositary’s actions or for its records of ownership interests in a global security. We and the trustee also do not supervise the depositary in any way.

 

   

If we redeem less than all the debt securities of a particular series being redeemed, DTC’s practice is to determine by lot the amount to be redeemed from each of its participants holding that series.

 

   

An investor is required to give notice of exercise of any option to elect repayment of its debt securities, through its participant, to the applicable trustee and to deliver the related debt securities by causing its participant to transfer its interest in those debt securities, on DTC’s records, to the applicable trustee.

 

   

DTC requires that those who purchase and sell interests in a global security deposited in its book-entry system use immediately available funds. Your broker or bank may also require you to use immediately available funds when purchasing or selling interests in a global security.

 

   

Financial institutions that participate in the depositary’s book-entry system, and through which an investor holds its interest in a global security, may also have their own policies affecting payments,

 

238


Table of Contents
Index to Financial Statements
 

notices and other matters relating to the debt securities. There may be more than one financial intermediary in the chain of ownership for an investor. We do not monitor and are not responsible for the actions of any of those intermediaries.

Special Situations when a Global Security will be Terminated

In a few special situations described below, a global security will be terminated and interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated debt securities directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders. We have described the rights of legal holders and street name investors under “Issuance of Securities in Registered Form” above.

The prospectus supplement may list situations for terminating a global security that would apply only to the particular series of debt securities covered by the prospectus supplement. If a global security is terminated, only the depositary, and not we or the applicable trustee, is responsible for deciding the names of the institutions in whose names the debt securities represented by the global security will be registered and, therefore, who will be the holders of those debt securities.

Payment and Paying Agents

We will pay interest to the person listed in the applicable trustee’s records as the owner of the debt security at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, often approximately two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

Payments on Global Securities

We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants.

Payments on Certificated Securities

We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date by check mailed on the interest payment date to the holder at his or her address shown on the trustee’s records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, New York and/or at other offices that may be specified in the prospectus supplement or in a notice to holders against surrender of the debt security.

Alternatively, if the holder asks us to do so, we will pay any amount that becomes due on the debt security by wire transfer of immediately available funds to an account at a bank in New York City, on the due date. To request payment by wire, the holder must give the applicable trustee or other paying agent appropriate transfer instructions at least 15 business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person who is the holder on the relevant regular record date. Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above.

 

239


Table of Contents
Index to Financial Statements

Payment when Offices are Closed

If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt securities.

Events of Default

You will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.

The term “Event of Default” in respect of the debt securities of your series means any of the following (unless the prospectus supplement relating to such debt securities states otherwise):

 

   

we do not pay the principal of, or any premium on, a debt security of the series on its due date, and do not cure this default within five days;

 

   

we do not pay interest on a debt security of the series when due, and such default is not cured within 30 days;

 

   

we do not deposit any sinking fund payment in respect of debt securities of the series on its due date, and do not cure this default within five days;

 

   

we remain in breach of a covenant in respect of debt securities of the series for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of debt securities of the series;

 

   

we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days;

 

   

on the last business day of each of 24 consecutive calendar months, we have an asset coverage of less than 100%; and

 

   

any other Event of Default in respect of debt securities of the series described in the applicable prospectus supplement occurs.

An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium or interest, if it considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

If an Event of Default has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of the debt securities of the affected series may declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the debt securities of the affected series.

The trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an “indemnity”). If reasonable

 

240


Table of Contents
Index to Financial Statements

indemnity is provided, the holders of a majority in principal amount of the outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:

 

   

the holder must give your trustee written notice that an Event of Default has occurred and remains uncured;

 

   

the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must make a written request that the trustee take action because of the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of taking that action;

 

   

the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity; and

 

   

the holders of a majority in principal amount of the debt securities must not have given the trustee a direction inconsistent with the above notice during that 60 day period.

However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.

Holders of a majority in principal amount of the debt securities of the affected series may waive any past defaults other than:

 

   

the payment of principal, any premium or interest; or

 

   

in respect of a covenant that cannot be modified or amended without the consent of each holder.

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the debt securities, or else specifying any default.

Merger or Consolidation

Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We may also be permitted to sell all or substantially all of our assets to another entity. However, unless the prospectus supplement relating to certain debt securities states otherwise, we may not take any of these actions unless all the following conditions are met:

 

   

where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for our obligations under the debt securities;

 

   

immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing;

 

   

under the indenture, no merger or sale of assets may be made if as a result any of our property or assets or any property or assets of one of our subsidiaries, if any, would become subject to any mortgage, lien or other encumbrance unless either (a) the mortgage, lien or other encumbrance could be created

 

241


Table of Contents
Index to Financial Statements
   

pursuant to the limitation on liens covenant in the indenture without equally and ratably securing the indenture securities or (b) the indenture securities are secured equally and ratably with or prior to the debt secured by the mortgage, lien or other encumbrance;

 

   

we must deliver certain certificates and documents to the trustee; and

 

   

we must satisfy any other requirements specified in the prospectus supplement relating to a particular series of debt securities.

Modification or Waiver

There are three types of changes we can make to the indenture and the debt securities issued thereunder.

Changes Requiring Approval

First, there are changes that we cannot make to debt securities without specific approval of all of the holders. The following is a list of those types of changes:

 

   

change the stated maturity of the principal of or interest on a debt security;

 

   

reduce any amounts due on a debt security;

 

   

reduce the amount of principal payable upon acceleration of the maturity of a security following a default;

 

   

adversely affect any right of repayment at the holder’s option;

 

   

change the place (except as otherwise described in the prospectus or prospectus supplement) or currency of payment on a debt security;

 

   

impair your right to sue for payment;

 

   

adversely affect any right to convert or exchange a debt security in accordance with its terms;

 

   

modify the subordination provisions in the indenture in a manner that is adverse to holders of the debt securities;

 

   

reduce the percentage of holders of debt securities whose consent is needed to modify or amend the indenture;

 

   

reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults;

 

   

modify any other aspect of the provisions of the indenture dealing with supplemental indentures, modification and waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and

 

   

change any obligation we have to pay additional amounts.

Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.

Changes Requiring Majority Approval

Any other change to the indenture and the debt securities would require the following approval:

 

   

if the change affects only one series of debt securities, it must be approved by the holders of a majority in principal amount of that series; and

 

242


Table of Contents
Index to Financial Statements
   

if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Approval.”

Further Details Concerning Voting

When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:

 

   

for OID securities, we will use the principal amount that would be due and payable on the voting date if the maturity of these debt securities were accelerated to that date because of a default;

 

   

for debt securities whose principal amount is not known (for example, because it is based on an index), we will use a special rule for that debt security described in the prospectus supplement; and

 

   

for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent.

Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. Debt securities will also not be eligible to vote if they have been fully defeased as described later under “Defeasance—Full Defeasance.”

We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.

Defeasance

The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the provisions of covenant defeasance and full defeasance will not be applicable to that series.

Covenant Defeasance

Under current U.S. federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If applicable, you also would be released from the subordination provisions as described under the “Indenture Provisions—Subordination” section below. In order to achieve covenant defeasance, we must do the following:

 

   

if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of such debt securities a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates;

 

243


Table of Contents
Index to Financial Statements
   

we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit and just repaid the debt securities ourselves at maturity; and

 

   

we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.

If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

Full Defeasance

If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the debt securities of a particular series (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

   

if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of such debt securities a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates.

 

   

we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit and just repaid the debt securities ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal release from the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the debt securities at the time of the deposit;

 

   

we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;

 

   

Defeasance must not result in a breach of the indenture or any other material agreements; and

 

   

Satisfy the conditions for covenant defeasance contained in any supplemental indentures.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If applicable, you would also be released from the subordination provisions described later under “Indenture Provisions—Subordination.”

Form, Exchange and Transfer of Certificated Registered Securities

Holders may exchange their certificated securities, if any, for debt securities of smaller denominations or combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed.

Holders may exchange or transfer their certificated securities, if any, at the office of their trustee. We have appointed the trustee to act as our agent for registering debt securities in the names of holders transferring debt securities. We may appoint another entity to perform these functions or perform them ourselves.

 

244


Table of Contents
Index to Financial Statements

Holders will not be required to pay a service charge to transfer or exchange their certificated securities, if any, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

If we have designated additional transfer agents for your debt security, they will be named in your prospectus supplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.

Resignation of Trustee

Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed to act with respect to these series. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

Indenture Provisions—Subordination

Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all senior indebtedness (as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on senior indebtedness has been made or duly provided for in money or money’s worth.

In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities before all senior indebtedness is paid in full, the payment or distribution must be paid over to the holders of the senior indebtedness or on their behalf for application to the payment of all the senior indebtedness remaining unpaid until all the senior indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the senior indebtedness. Subject to the payment in full of all senior indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the senior indebtedness to the extent of payments made to the holders of the senior indebtedness out of the distributive share of such subordinated debt securities.

By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.

 

245


Table of Contents
Index to Financial Statements

Senior indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:

 

   

our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed (other than indenture securities issued under the indenture and denominated as subordinated debt securities), unless in the instrument creating or evidencing the same or under which the same is outstanding it is provided that this indebtedness is not senior or prior in right of payment to the subordinated debt securities; and

 

   

renewals, extensions, modifications and refinancings of any of this indebtedness.

If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt securities, the accompanying prospectus supplement to this prospectus will set forth the approximate amount of our senior indebtedness outstanding as of a recent date.

Secured Indebtedness

Certain of our indebtedness, including certain series of indenture securities, may be secured. The prospectus supplement for each series of indenture securities will describe the terms of any security interest for such series and will indicate the approximate amount of our secured indebtedness as of a recent date. In the event of a distribution of our assets upon our insolvency, the holders of unsecured indenture securities may recover less, ratably, than holders of any of our secured indebtedness.

The Trustee under the Indenture

U.S. Bank National Association will serve as the trustee under the indenture.

Certain Considerations Relating to Foreign Currencies

Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more fully described in the applicable prospectus supplement.

 

246


Table of Contents
Index to Financial Statements

PLAN OF DISTRIBUTION

We may offer, from time to time, in one or more offerings or series, up to $750,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, in one or more underwritten public offerings, at-the-market offerings to or through a market maker or into an existing trading market for the securities, on an exchange, or otherwise, negotiated transactions, block trades, best efforts, auctions or a combination of these methods. The holders of our common stock will indirectly bear any fees and expenses in connection with any such offerings. We may sell the securities through underwriters or dealers, directly to one or more purchasers, including existing stockholders in a rights offering, through agents or through a combination of any such methods of sale. Any underwriter or agent involved in the offer and sale of the securities will be named in the applicable prospectus supplement. A prospectus supplement or supplements will also describe the terms of the offering of the securities, including: the purchase price of the securities and the proceeds we will receive from the sale; any over-allotment options under which underwriters may purchase additional securities from us; any agency fees or underwriting discounts and other items constituting agents’ or underwriters’ compensation; any expenses we incur in connection with the sale of such securities; the public offering price; any discounts or concessions allowed or re-allowed or paid to dealers; and any securities exchange or market on which the securities may be listed. Only underwriters named in the applicable prospectus supplement will be underwriters of the securities offered by the applicable prospectus supplement.

The distribution of the securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, at negotiated prices, or at prices determined by an auction process, provided, however, that the offering price per share of our common stock, less any underwriting commissions or discounts, must equal or exceed the NAV per share of our common stock at the time of the offering except (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the majority of our voting securities or (3) under such circumstances as the SEC may permit. The price at which securities may be distributed may represent a discount from prevailing market prices. Although we are not currently authorized to issue shares of our common stock at a price below our NAV per share, we may seek stockholder approval of this proposal again at a special meeting of stockholders or our next annual meeting of stockholders. 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.

In connection with the sale of our securities, underwriters or agents may receive compensation from us or from purchasers of our securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell our securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our securities may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of our securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement.

Any underwriter may engage in over-allotment, stabilizing transactions, short-covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves sales in excess of the offering size, which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Syndicate-covering or other short-covering transactions involve purchases of the securities, either through exercise of the over-allotment option or in the open market after the distribution is completed, to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are purchased in a stabilizing or covering transaction to cover short positions. Those activities may cause the price of

 

247


Table of Contents
Index to Financial Statements

the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.

Any underwriters that are qualified market makers on the NYSE may engage in passive market making transactions in our common stock on the NYSE in accordance with Regulation M under the Exchange Act, during the business day prior to the pricing of the offering, before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker’s bid, however, the passive market maker’s bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

We may sell securities directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of securities and we will describe any commissions we will pay the agent in the applicable prospectus supplement. Unless the applicable prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.

Unless otherwise specified in the applicable prospectus supplement, each class or series of securities will be a new issue with no trading market, other than our common stock, which is traded on the NYSE. We may elect to list any other class or series of securities on any exchanges, but we are not obligated to do so. We cannot guarantee the liquidity of the trading markets for any securities.

Under agreements that we may enter, underwriters, dealers and agents who participate in the distribution of our securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act, or contribution with respect to payments that the agents or underwriters may make with respect to these liabilities. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.

If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the applicable prospectus supplement, and the applicable prospectus supplement will set forth the commission payable for solicitation of such contracts.

We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement.

In compliance with the guidelines of the Financial Industry Regulatory Authority, the maximum compensation to the underwriters or dealers in connection with the sale of our securities pursuant to this

 

248


Table of Contents
Index to Financial Statements

prospectus and the applicable prospectus supplement may not exceed 8% of the aggregate offering price of the securities as set forth on the cover page of the applicable prospectus supplement.

In order to comply with the securities laws of certain states, if applicable, our securities offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.

BROKERAGE ALLOCATION 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.

CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

Securities we hold in connection with our investments are held under a custody agreement with Union Bank of California. The address of the custodian is 475 Sansome Street, 15th Floor, San Francisco, California 94111. We have also entered into a custody agreement with U.S. Bank National Association, which is located at One Federal Street, Third Floor, Boston, Massachusetts 02110. The transfer agent and registrar for our common stock, American Stock Transfer & Trust Company, will act as our transfer agent, dividend paying and reinvestment agent and registrar. The principal business address of the transfer agent is 6201 15th Avenue, Brooklyn, New York 11219.

LEGAL MATTERS

Certain legal matters regarding the securities offered by this prospectus will be passed upon for us by Dechert LLP, New York, NY. Certain legal matters will be passed upon for underwriters, if any, by the counsel named in the prospectus supplement.

EXPERTS

The consolidated financial statements as of December 31, 2017 and December 31, 2016 and for each of the three years in the period ended December 31, 2017 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) as of December 31, 2017 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

249


Table of Contents
Index to Financial Statements

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our securities offered by this prospectus. The registration statement contains additional information about us and our securities being offered by this prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus forms a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at 202-551-8090. The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s Internet website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.

 

 

250


Table of Contents
Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS

 

UNAUDITED FINANCIAL STATEMENTS

  

Consolidated Statements of Assets and Liabilities as of March  31, 2018 and 2017 (unaudited)

     F-2  

Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)

     F-4  

Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2018 and 2017 (unaudited)

     F-5  

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)

     F-6  

Consolidated Schedule of Investments as of March 31, 2018 (unaudited)

     F-8  

Consolidated Schedule of Investments as of December  31, 2017 (unaudited)

     F-25  

Notes to Consolidated Financial Statements (unaudited)

     F-42  

Consolidated Schedule of Investments In and Advances to Affiliates as of March 31, 2018

     F-81  

AUDITED FINANCIAL STATEMENTS

  

Reports of Independent Registered Public Accounting Firm

     F-83  

Consolidated Statements of Assets and Liabilities as of December  31, 2017 and 2016

     F-85  

Consolidated Statements of Operations for the three years ended December 31, 2017

     F-87  

Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2017

     F-88  

Consolidated Statements of Cash Flows for the three years ended December 31, 2017

     F-89  

Consolidated Schedule of Investments as of December 31, 2017

     F-90  

Consolidated Schedule of Investments as of December 31, 2016

     F-109  

Notes to Consolidated Financial Statements

     F-126  

Consolidated Schedule of Investments In and Advances to Affiliates as of December 31, 2017

     F-172  

 

F-1


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

     March 31, 2018     December 31, 2017  

Assets

    

Investments:

    

Non-control/Non-affiliate investments (cost of $1,427,863 and $1,506,454, respectively)

   $ 1,398,640     $ 1,491,458  

Control investments (cost of $60,992 and $25,419, respectively)

     54,413       19,461  

Affiliate investments (cost of $87,423 and $87,956, respectively)

     30,525       31,295  
  

 

 

   

 

 

 

Total investments in securities, at value (cost of $1,576,278 and $1,619,829, respectively)

     1,483,578       1,542,214  

Cash and cash equivalents

     118,228       91,309  

Restricted cash

     3,632       3,686  

Interest receivable

     11,087       12,262  

Other assets

     3,187       5,244  
  

 

 

   

 

 

 

Total assets

   $ 1,619,712     $ 1,654,715  
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued liabilities

   $ 18,789     $ 26,896  

SBA Debentures, net (principal of $190,200 and $190,200, respectively)(1)

     188,299       188,141  

2022 Notes, net (principal of $150,000 and $150,000, respectively)(1)

     147,698       147,572  

2024 Notes, net (principal of $183,510 and $183,510, respectively)(1)

     179,161       179,001  

2021 Asset-Backed Notes, net (principal of $33,575 and $49,153, respectively)(1)

     33,156       48,650  

2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively)(1)

     223,878       223,488  
  

 

 

   

 

 

 

Total liabilities

   $ 790,981     $ 813,748  

Net assets consist of:

    

Common stock, par value

     85       85  

Capital in excess of par value

     916,738       908,501  

Unrealized depreciation on investments(2)

     (94,957     (79,760

Accumulated undistributed realized gains (losses) on investments

     (25,294     (20,374

Undistributed net investment income

     32,159       32,515  
  

 

 

   

 

 

 

Total net assets

   $ 828,731     $ 840,967  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,619,712     $ 1,654,715  
  

 

 

   

 

 

 

Shares of common stock outstanding ($0.001 par value, 200,000,000 authorized)

     85,239       84,424  

Net asset value per share

   $ 9.72     $ 9.96  

 

(1)

The Company’s SBA Debentures, 2022 Notes, 2024 Notes, 2021 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”.

(2)

Amounts include $2.3 million and $2.1 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, and estimated taxes payable as of March 31, 2018 and December 31, 2017, respectively.

 

See notes to consolidated financial statements.

 

F-2


Table of Contents
Index to Financial Statements

The following table presents the assets and liabilities of our consolidated securitization trust for the 2021 Asset-Backed Notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, 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)

   March 31, 2018      December 31, 2017  

Assets

     

Restricted Cash

   $ 3,632      $ 3,686  

Total investments in securities, at value (cost of $117,441 and $146,208, respectively)

     112,826        144,513  
  

 

 

    

 

 

 

Total assets

   $ 116,458      $ 148,199  
  

 

 

    

 

 

 

Liabilities

     

2021 Asset-Backed Notes, net (principal of $33,575 and $49,153, respectively)(1)

   $ 33,156      $ 48,650  
  

 

 

    

 

 

 

Total liabilities

   $ 33,156      $ 48,650  
  

 

 

    

 

 

 

 

(1)

The Company’s 2021 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4—Borrowings”.

 

 

 

See notes to consolidated financial statements.

 

F-3


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2018     2017  

Investment income:

    

Interest income

    

Non-control/Non-affiliate investments

   $ 41,834     $ 42,345  

Control investments

     586       514  

Affiliate investments

     561       2  
  

 

 

   

 

 

 

Total interest income

     42,981       42,861  
  

 

 

   

 

 

 

Fee income

    

Commitment, facility and loan fee income:

    

Non-control/Non-affiliate investments

     2,440       2,934  

Control investments

     —         5  

Affiliate investments

     108       —    
  

 

 

   

 

 

 

Total commitment, facility and loan fee income

     2,548       2,939  
  

 

 

   

 

 

 

One-time fee income:

    

Non-control/Non-affiliate investments

     3,171       565  
  

 

 

   

 

 

 

Total one-time fee income

     3,171       565  
  

 

 

   

 

 

 

Total fee income

     5,719       3,504  

Total investment income

     48,700       46,365  

Operating expenses:

    

Interest

     9,386       9,607  

Loan fees

     1,175       2,838  

General and administrative

     4,009       4,064  

Employee compensation:

    

Compensation and benefits

     5,758       5,345  

Stock-based compensation

     2,309       1,833  
  

 

 

   

 

 

 

Total employee compensation

     8,067       7,178  
  

 

 

   

 

 

 

Total operating expenses

     22,637       23,687  
  

 

 

   

 

 

 

Net investment income

     26,063       22,678  

Net realized gain (loss) on investments

    

Non-control/Non-affiliate investments

     (3,512     3,288  

Control investments

     (1,408     (51
  

 

 

   

 

 

 

Total net realized gain (loss) on investments

     (4,920     3,237  
  

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

    

Non-control/Non-affiliate investments

     (14,340     (32,155

Control investments

     (620     213  

Affiliate investments

     (237     439  
  

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     (15,197     (31,503
  

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     (20,117     (28,266
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 5,946     $ (5,588
  

 

 

   

 

 

 

Net investment income before investment gains and losses per common share:

    

Basic

   $ 0.31     $ 0.28  
  

 

 

   

 

 

 

Change in net assets resulting from operations per common share:

    

Basic

   $ 0.07     $ (0.07
  

 

 

   

 

 

 

Diluted

   $ 0.07     $ (0.07
  

 

 

   

 

 

 

Weighted average shares outstanding

    

Basic

     84,596       81,420  
  

 

 

   

 

 

 

Diluted

     84,666       81,420  
  

 

 

   

 

 

 

Distributions declared per common share:

    

Basic

   $ 0.31     $ 0.31  

See notes to consolidated financial statements.

 

F-4


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

     Common Stock      Capital
in excess
of par
value
    Unrealized
Appreciation
(Depreciation)

on
Investments
    Accumulated
Undistributed
Realized
Gains

(Losses) on
Investments
    Undistributed
Net

Investment
Income
    Net
Assets
 
     Shares     Par Value  

Balance at December 31, 2016

     79,555     $ 80      $ 839,657     $ (89,025   $ 14,314     $ 22,918     $ 787,944  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     —         —          —         (31,503     3,237       22,678       (5,588

Public offering, net of offering expenses

     3,309       3        46,945       —         —         —         46,948  

Issuance of common stock due to stock option exercises

     24       —          181       —         —         —         181  

Retired shares from net issuance

     (16     —          (140     —         —         —         (140

Issuance of common stock under restricted stock plan

     4       —          —         —         —         —         —    

Retired shares for restricted stock vesting

     (101     —          (1,433     —         —         —         (1,433

Distributions reinvested in common stock

     26       —          388       —         —         —         388  

Issuance of Convertible Notes

     —         —          3,413       —         —         —         3,413  

Distributions

     —         —          —         —         —         (25,667     (25,667

Stock-based compensation(1)

     —         —          1,850       —         —         —         1,850  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

     82,801     $ 83      $ 890,861     $ (120,528   $ 17,551     $ 19,929     $ 807,896  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     84,424     $ 85      $ 908,501     $ (79,760   $ (20,374   $ 32,515     $ 840,967  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     —         —          —         (15,197     (4,920     26,063       5,946  

Public offering, net of offering expenses

     478       —          5,952       —         —         —         5,952  

Issuance of common stock due to stock option exercises

     38       —          432       —         —         —         432  

Retired shares from net issuance

     (36     —          (446     —         —         —         (446

Issuance of common stock under restricted stock plan

     336       —          —         —         —         —         —    

Retired shares for restricted stock vesting

     (36     —          (446     —         —         —         (446

Distributions reinvested in common stock

     35       —          426       —         —         —         426  

Distributions

     —         —          —         —         —         (26,419     (26,419

Stock-based compensation(1)

     —         —          2,319       —         —         —         2,319  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     85,239     $ 85      $ 916,738     $ (94,957   $ (25,294   $ 32,159     $ 828,731  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Stock-based compensation includes $10 and $17 of restricted stock and option expense related to director compensation for the three months ended March 31, 2018 and 2017, respectively.

See notes to consolidated financial statements.

 

F-5


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     For the Three Months
Ended March 31,
 
     2018     2017  

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 5,946     $ (5,588

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchase of investments

     (236,285     (153,665

Principal and fee payments received on investments

     280,181       141,798  

Proceeds from the sale of investments

     1,582       11,995  

Net unrealized depreciation (appreciation) on investments

     15,197       31,503  

Net realized loss (gain) on investments

     4,920       (3,237

Accretion of paid-in-kind principal

     (2,507     (2,199

Accretion of loan discounts

     (763     (1,924

Accretion of loan discount on Convertible Notes

     168       112  

Accretion of loan exit fees

     (4,407     (6,574

Change in deferred loan origination revenue

     631       284  

Unearned fees related to unfunded commitments

     321       976  

Amortization of debt fees and issuance costs

     840       2,508  

Depreciation

     46       52  

Stock-based compensation and amortization of restricted stock grants(1)

     2,319       1,850  

Change in operating assets and liabilities:

    

Interest and fees receivable

     1,175       130  

Prepaid expenses and other assets

     1,870       (1,061

Accounts payable

     (194     1  

Accrued liabilities

     (8,025     (5,255
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     63,015       11,706  

Cash flows from investing activities:

    

Purchases of capital equipment

     (72     (39
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (72     (39

Cash flows from financing activities:

    

Issuance of common stock, net

     5,952       46,948  

Retirement of employee shares

     (460     (1,392

Distributions paid

     (25,993     (25,279

Issuance of 2022 Convertible Notes

     —         230,000  

Issuance of 2024 Notes

     —         5,637  

Repayments of 2019 Notes

     —         (110,365

Repayments of 2021 Asset-Backed Notes

     (15,577     (7,794

Borrowings of credit facilities

     —         8,497  

Repayments of credit facilities

     —         (13,513

Cash paid for debt issuance costs

     —         (4,456

Fees paid for credit facilities and debentures

     —         (252
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (36,078     128,031  

Net increase (decrease) in cash, cash equivalents and restricted cash

     26,865       139,698  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

     94,995       21,366  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 121,860     $ 161,064  
  

 

 

   

 

 

 

Supplemental non-cash investing and financing activities:

    

Distributions reinvested

     426       388  

 

(1)

Stock-based compensation includes $10 and $17 of restricted stock and option expense related to director compensation for the three months ended March 31, 2018 and 2017, respectively.

 

See notes to consolidated financial statements.

 

F-6


Table of Contents
Index to Financial Statements

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:

 

     For the Three Months
Ended March 31,
 

(Dollars in thousands)

   2018      2017  

Cash and cash equivalents

   $ 118,228      $ 148,140  

Restricted cash

     3,632        12,924  
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash presented in the Consolidated Statements of Cash Flows

   $ 121,860      $ 161,064  
  

 

 

    

 

 

 

See “Note 2—Summary of Significant Accounting Policies” and “Note 11—Recent Accounting Pronouncements” for a description of restricted cash and cash equivalents.

 

 

 

See notes to consolidated financial statements.

 

F-7


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

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     $ 5,135     $ 5,151  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,135       5,151  
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.62%)*

 

    5,135       5,151  
           

 

 

   

 

 

 

Communications & Networking

             

Under 1 Year Maturity

             

OpenPeak, Inc.(8)

  Communications & Networking     Senior Secured     April 2018  

Interest rate PRIME + 8.75%

or Floor rate of 12.00%

  $ 11,464       8,228       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    8,228       —    
           

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    8,228       —    
           

 

 

   

 

 

 

Consumer & Business Products

             

Under 1 Year Maturity

             

Gadget Guard (p.k.a. Antenna79)(15)

  Consumer & Business Products     Senior Secured     December 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%

  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
           

 

 

   

 

 

 

1-5 Years Maturity

             

Gadget Guard (p.k.a. Antenna79)(15)

  Consumer & Business Products     Senior Secured     December 2019  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%, 2.95% Exit Fee

  $ 18,043       18,245       18,133  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    18,245       18,133  
           

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.31%)*

 

    19,245       19,133  
           

 

 

   

 

 

 

Diversified Financial Services

             

1-5 Years Maturity

             

Gibraltar Business Capital, LLC(7)

  Diversified Financial Services     Unsecured     March 2023   Interest rate FIXED 14.50%   $ 10,000       9,802       9,802  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,802       9,802  
           

 

 

   

 

 

 

Subtotal: Diversified Financial Services (1.18%)*

 

    9,802       9,802  
           

 

 

   

 

 

 

Drug Delivery

 

   

Under 1 Year Maturity

             

Agile Therapeutics, Inc.(11)

  Drug Delivery     Senior Secured     December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 9,272       9,746       9,747  

Pulmatrix Inc.(9)(11)

  Drug Delivery     Senior Secured     July 2018  

Interest rate PRIME + 6.25%

or Floor rate of 9.50%, 3.50% Exit Fee

  $ 2,540       2,764       2,764  

ZP Opco, Inc
(p.k.a. Zosano Pharma)(11)

  Drug Delivery     Senior Secured     December 2018  

Interest rate PRIME + 2.70%

or Floor rate of 7.95%, 2.87% Exit Fee

  $ 4,789       5,108       5,108  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    17,618       17,619  
           

 

 

   

 

 

 

1-5 Years Maturity

           

AcelRx Pharmaceuticals, Inc.(10)(11)(15)

  Drug Delivery     Senior Secured     March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 16,791       17,275       17,199  

Antares Pharma Inc.(10)(15)

  Drug Delivery     Senior Secured     July 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.25%, 4.25% Exit Fee

  $ 25,000       25,079       24,970  

 

See notes to consolidated financial statements.

 

F-8


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Edge Therapeutics, Inc.(12)

  Drug Delivery   Senior Secured   August 2020  

Interest rate PRIME + 4.65%

or Floor rate of 9.15%, 4.95% Exit Fee

  $ 20,000     $ 20,401     $ 20,167  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    62,755       62,336  
           

 

 

   

 

 

 

Subtotal: Drug Delivery (9.65%)*

 

    80,373       79,955  
           

 

 

   

 

 

 

Drug Discovery & Development

 

   

Under 1 Year Maturity

 

   

CytRx Corporation(11)(15)

  Drug Discovery & Development   Senior Secured   August 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, 7.09% Exit Fee

  $ 8,946       10,393       10,393  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development   Senior Secured   April 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 2,277       2,561       —    

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development   Senior Secured   January 2019  

Interest rate PRIME + 2.25%

or Floor rate of 7.25%, 4.95% Exit Fee

  $ 13,316       14,005       14,005  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    26,959       24,398  
           

 

 

   

 

 

 

1-5 Years Maturity

 

 

Auris Medical
Holding, AG(5)(10)

  Drug Discovery & Development   Senior Secured   January 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 8,836       9,199       9,204  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       9,936       9,818  
  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       9,990       9,948  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       19,926       19,766  

Axovant Sciences Ltd.(5)(10)

  Drug Discovery & Development   Senior Secured   March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       53,783       53,670  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development   Senior Secured   September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 7.49% Exit Fee

  $ 5,834       6,178       6,166  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development   Senior Secured   December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 5,000       4,973       4,973  

Mesoblast(5)(10)

  Drug Discovery & Development   Senior Secured   March 2022  

Interest rate PRIME + 4.95%

or Floor rate of 9.45%, 6.95% Exit Fee

  $ 35,000       34,682       34,682  

Metuchen Pharmaceuticals LLC(12)(14)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 25,648       25,923       25,793  

Motif BioSciences Inc.(15)

  Drug Discovery & Development   Senior Secured   September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,711       14,711  

Myovant Sciences, Ltd.(5)(10)(13)

  Drug Discovery & Development   Senior Secured   May 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 40,000       39,445       39,444  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(15)

  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,347       39,931  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,094       9,984  

 

See notes to consolidated financial statements.

 

F-9


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000     $ 9,996     $ 9,904  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,437       59,819  

Stealth Bio Therapeutics Corp.(5)(10)(12)

  Drug Discovery & Development   Senior Secured   January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 5.00% Exit Fee

  $ 20,000       19,910       19,672  

Tricida, Inc.(15)

  Drug Discovery & Development   Senior Secured   March 2022  

Interest rate PRIME + 3.35%

or Floor rate of 8.35%, 11.14% Exit Fee

  $ 25,000       24,607       24,607  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development   Senior Secured   May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000       20,668       20,579  

Verastem, Inc.(12)

  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,980       4,942  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       5,016       4,978  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,978       4,939  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 15,000       14,974       14,859  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    349,416       347,945  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (44.93%)*

 

    376,375       372,343  
           

 

 

   

 

 

 

Electronics & Computer Hardware

           

1-5 Years Maturity

           

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Senior Secured   September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,061       9,864  

Glo AB(5)(10)(14)

  Electronics & Computer Hardware   Senior Secured   February 2021  

Interest rate PRIME + 6.20%

or Floor rate of 10.45%,

PIK Interest 1.75%, 2.95% Exit Fee

  $ 12,030       11,933       11,933  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    21,994       21,797  
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (2.63%)*

 

    21,994       21,797  
           

 

 

   

 

 

 

Healthcare Services, Other

           

1-5 Years Maturity

           

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 17,685       17,536       17,536  
  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,031       4,990       4,990  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,716       22,526       22,526  

Oak Street Health(12)(17)

  Healthcare Services, Other   Senior Secured   September 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.75%, 5.95% Exit Fee

  $ 20,000       20,083       19,836  

PH Group Holdings(13)

  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,896       19,703  

 

See notes to consolidated financial statements.

 

F-10


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Healthcare Services, Other     Senior Secured     September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 10,000     $ 9,934     $ 9,794  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,830       29,497  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    72,439       71,859  
           

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.67%)*

 

    72,439       71,859  
           

 

 

   

 

 

 

Information Services

           

1-5 Years Maturity

           

MDX Medical, Inc.(14)(15)(19)

  Information Services     Senior Secured     December 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%,

PIK Interest 1.70%

  $ 15,100       14,702       14,410  

Netbase Solutions, Inc.(13)(14)

  Information Services     Senior Secured     August 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 9,096       8,855       8,815  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    23,557       23,225  
           

 

 

   

 

 

 

Subtotal: Information Services (2.80%)*

 

    23,557       23,225  
           

 

 

   

 

 

 

Internet Consumer & Business Services

           

Under 1 Year Maturity

           

The Faction Group

  Internet Consumer & Business Services     Senior Secured     January 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,000       2,000       2,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    2,000       2,000  
           

 

 

   

 

 

 

1-5 Years Maturity

           

AppDirect, Inc.(19)

  Internet Consumer & Business Services     Senior Secured     January 2022  

Interest rate PRIME + 5.70%

or Floor rate of 9.95%, 3.45% Exit Fee

  $ 10,000       9,918       9,918  

Aria Systems, Inc.(11)(14)

  Internet Consumer & Business Services     Senior Secured     June 2019  

Interest rate PRIME + 3.20%

or Floor rate of 6.95%,

PIK Interest 1.95%, 1.75% Exit Fee

  $ 2,113       2,124       1,240  
  Internet Consumer & Business Services     Senior Secured     June 2019  

Interest rate PRIME + 5.20%

or Floor rate of 8.95%,

PIK Interest 1.95%, 1.75% Exit Fee

  $ 18,924       19,019       11,108  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 21,037       21,143       12,348  

Art.com, Inc.(14)(15)

  Internet Consumer & Business Services     Senior Secured     April 2021  

Interest rate PRIME + 5.40%

or Floor rate of 10.15%,

PIK Interest 1.70%, 1.50% Exit Fee

  $ 10,000       9,812       9,812  

Greenphire Inc.(17)

  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate 3-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 3,658       3,658       3,658  
  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate PRIME + 3.75%

or Floor rate of 7.00%

  $ 1,500       1,500       1,500  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 5,158       5,158       5,158  

Intent Media, Inc.(14)(15)

  Internet Consumer & Business Services     Senior Secured     May 2019  

Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%, 2.00% Exit Fee

  $ 5,063       5,053       5,056  
  Internet Consumer & Business Services     Senior Secured     May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.35%, 2.00% Exit Fee

  $ 2,032       2,014       2,014  

 

See notes to consolidated financial statements.

 

F-11


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Internet Consumer & Business Services     Senior Secured     May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.50%, 2.00% Exit Fee

  $ 2,034     $ 2,016     $ 2,016  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,129       9,083       9,086  

Interactions Corporation(19)

  Internet Consumer & Business Services     Senior Secured     March 2021  

Interest rate 3-month LIBOR + 8.60%

or Floor rate of 9.85%, 1.75% Exit Fee

  $ 25,000       25,032       25,032  

LogicSource(15)

  Internet Consumer & Business Services     Senior Secured     October 2019  

Interest rate PRIME + 6.25%

or Floor rate of 9.75%, 5.00% Exit Fee

  $ 5,645       5,935       5,933  

Snagajob.com, Inc.(13)(14)

  Internet Consumer & Business Services     Senior Secured     July 2020  

Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%, 2.55% Exit Fee

  $ 41,223       41,010       41,166  

Tectura Corporation(7)(8)(9)(14)

  Internet Consumer & Business Services     Senior Secured     June 2021  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 20,450       20,450       17,095  
  Internet Consumer & Business Services     Senior Secured     June 2021   PIK Interest 8.00%   $ 10,680       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,130       20,690       17,095  

The Faction Group

  Internet Consumer & Business Services     Senior Secured     January 2021  

Interest rate 3-month LIBOR + 9.25%

or Floor rate of 10.25%

  $ 8,000       8,000       8,000  

Wheels Up Partners LLC

  Internet Consumer & Business Services     Senior Secured     July 2022  

Interest rate 3-month LIBOR + 8.55%

or Floor rate of 9.55%

  $ 22,406       22,191       22,191  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    177,972       165,739  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (20.24%)*

 

    179,972       167,739  
         

 

 

   

 

 

 

Media/Content/Info

           

1-5 Years Maturity

           

Bustle(14)(15)

  Media/Content/Info     Senior Secured     June 2021  

Interest rate PRIME + 4.10%

or Floor rate of 8.35%,

PIK Interest 1.95%, 1.95% Exit Fee

  $ 15,089       15,032       15,032  

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

  $ 19,354       20,072       19,941  
  Media/Content/Info     Convertible Debt     September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       21,072       20,941  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    36,104       35,973  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (4.34%)*

 

    36,104       35,973  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

Under 1 Year Maturity

           

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment     Senior Secured     October 2018  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 6.85% Exit Fee

  $ 1,793       2,148       839  

 

See notes to consolidated financial statements.

 

F-12


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Quanterix Corporation(11)

  Medical Devices & Equipment     Senior Secured     March 2019  

Interest rate PRIME + 2.75%

or Floor rate of 8.00%, 4.00% Exit Fee

  $ 8,591     $ 8,569     $ 8,569  
         

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    10,717       9,408  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Intuity Medical, Inc.(15)

  Medical Devices & Equipment     Senior Secured     June 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 4.95% Exit Fee

  $ 17,500       17,132       17,132  

Micell Technologies, Inc.(12)

  Medical Devices & Equipment     Senior Secured     August 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.50%, 5.00% Exit Fee

  $ 4,715       5,030       4,981  

Quanta Fluid Solutions(5)(10)(11)

  Medical Devices & Equipment     Senior Secured     April 2020  

Interest rate PRIME + 8.05%

or Floor rate of 11.55%, 5.00% Exit Fee

  $ 8,848       9,220       9,150  

Sebacia, Inc.(15)

  Medical Devices & Equipment     Senior Secured     July 2020  

Interest rate PRIME + 4.35%

or Floor rate of 8.85%, 6.05% Exit Fee

  $ 8,000       7,988       7,979  

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

  $ 5,000       5,004       4,989  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    44,374       44,231  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (6.47%)*

 

    55,091       53,639  
         

 

 

   

 

 

 

Software

           

Under 1 Year Maturity

           

Clickfox, Inc.(13)

  Software     Senior Secured     May 2018  

Interest rate PRIME + 8.00%

or Floor rate of 11.50%, 12.01% Exit Fee

  $ 2,592       4,012       4,012  

Digital Train Limited(15)

  Software     Unsecured     July 2018   Interest rate 12-month LIBOR + 2.50%   $ 5,671       5,671       4,073  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    9,683       8,085  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Banker’s Toolbox, Inc(18)

  Software     Senior Secured     March 2023  

Interest rate 3-month LIBOR + 7.94%

or Floor rate of 8.94%

  $ 16,500       16,139       16,139  

Clarabridge, Inc.(12)(14)

  Software     Senior Secured     April 2021  

Interest rate PRIME + 4.80%

or Floor rate of 8.55%, PIK Interest 3.25%

  $ 41,226       41,205       41,164  

Emma, Inc.

  Software     Senior Secured     September 2022  

Interest rate daily LIBOR + 7.75%

or Floor rate of 8.75%

  $ 50,000       48,629       47,785  

Evernote Corporation(14)(15)(17)(19)

  Software     Senior Secured     October 2020  

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,976       6,065  
  Software     Senior Secured     July 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, PIK Interest 1.25%

  $ 4,035       4,013       3,988  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 10,035       9,989       10,053  

Fuze, Inc.(13)(14)(15)(19)

  Software     Senior Secured     July 2021  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.55%, 3.55% Exit Fee

  $ 50,528       50,776       50,413  

Impact Radius Holdings, Inc.(14)(17)

  Software     Senior Secured     December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%, 1.75% Exit Fee

  $ 10,073       10,091       9,945  

 

See notes to consolidated financial statements.

 

F-13


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Insurance Technologies Corp.(17)

  Software   Senior
Secured
  March 2023  

Interest rate 3-month LIBOR + 7.75%

or Floor rate of 8.75%

  $ 12,500     $ 12,250     $ 12,250  

Lightbend, Inc.(14)(15)

  Software   Senior
Secured
  August 2021  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, PIK Interest 2.00%

  $ 11,009       10,806       10,806  

Lithium Technologies, Inc.(17)

  Software   Senior
Secured
  October 2022  

Interest rate 1-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 12,000       11,751       11,751  

Microsystems Holding Company, LLC(19)

  Software   Senior
Secured
  July 2022  

Interest rate 3-month LIBOR + 8.25%

or Floor rate of 9.25%

  $ 12,000       11,829       11,829  

OneLogin, Inc.(14)(15)

  Software   Senior
Secured
  August 2019  

Interest rate PRIME + 6.45%

or Floor rate of 9.95%, PIK Interest 3.25%

  $ 16,012       15,953       16,113  

PerfectServe, Inc.

  Software   Senior
Secured
  April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 16,000       16,057       16,057  
  Software   Senior
Secured
  April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 4,000       4,013       4,013  
         

 

 

   

 

 

   

 

 

 

Total PerfectServe, Inc.

  $ 20,000       20,070       20,070  

Pollen, Inc.(15)

  Software   Senior
Secured
  April 2019  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, 4.00% Exit Fee

  $ 7,000       7,023       7,000  

Poplicus, Inc.(8)(14)

  Software   Senior
Secured
  May 2022  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 1,250       1,250       —    

Quid, Inc.(14)(15)

  Software   Senior
Secured
  October 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%, 3.00%
Exit Fee

  $ 8,350       8,480       8,494  

RapidMiner, Inc.(14)

  Software   Senior
Secured
  December 2020  

Interest rate PRIME + 5.50%

or Floor rate of 9.75%, PIK Interest 1.65%

  $ 7,030       7,004       7,004  

Regent Education(14)

  Software   Senior
Secured
  January 2021  

Interest rate FIXED 10.00%,

PIK Interest 2.00%, 6.35% Exit Fee

  $ 3,302       3,316       3,316  

Signpost, Inc.(14)

  Software   Senior
Secured
  February 2020  

Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%, 3.75% Exit Fee

  $ 15,578       15,742       15,612  

Vela Trading Technologies(18)

  Software   Senior
Secured
  July 2022  

Interest rate daily LIBOR + 9.50%

or Floor rate of 10.50%

  $ 20,000       19,518       19,143  

Wrike, Inc.(14)(17)(19)

  Software   Senior
Secured
  February 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 10,215       10,062       10,043  

ZocDoc(19)

  Software   Senior
Secured
  April 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 20,000       20,026       20,026  

 

See notes to consolidated financial statements.

 

F-14


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Software   Senior
Secured
  November 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 10,000     $ 10,012     $ 10,012  
         

 

 

   

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,038       30,038  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    361,921       358,968  
         

 

 

   

 

 

 

Subtotal: Software (44.29%)*

 

    371,604       367,053  
         

 

 

   

 

 

 

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

  $ 7,608       7,927       7,912  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    7,927       7,912  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (0.95%)*

 

    7,927       7,912  
           

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Under 1 Year Maturity

           

Kinestral Technologies, Inc.

  Sustainable and Renewable Technology   Senior
Secured
  October 2018  

Interest rate 3-month LIBOR + 7.75%

or Floor rate of 8.75%, 3.23% Exit Fee

  $ 2,707       2,739       2,739  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Senior
Secured
  January 2019  

Interest rate PRIME + 6.20%

or Floor rate of 9.45%, 4.00% Exit Fee

  $ 3,318       3,583       3,583  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    6,322       6,322  
           

 

 

   

 

 

 

1-5 Years Maturity

           

ChargePoint Inc.(19)

  Sustainable and Renewable Technology   Senior
Secured
  August 2020  

Interest rate 3-month LIBOR + 8.75%

or Floor rate of 9.75%, 2.00% Exit Fee

  $ 17,576       17,630       17,630  

FuelCell Energy, Inc.(12)

  Sustainable and Renewable Technology   Senior
Secured
  April 2020  

Interest rate PRIME + 5.40%

or Floor rate of 9.90%, 6.68% Exit Fee

  $ 13,091       12,827       12,824  
  Sustainable and Renewable Technology   Senior
Secured
  April 2020  

Interest rate PRIME + 5.40%

or Floor rate of 9.90%, 8.50% Exit Fee

  $ 11,909       13,452       13,452  
         

 

 

   

 

 

   

 

 

 

Total FuelCell Energy, Inc.

  $ 25,000       26,279       26,276  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

  Sustainable and Renewable Technology   Senior
Secured
  August 2019  

Interest rate PRIME + 8.70%

or Floor rate of 12.95%, 4.50% Exit Fee

  $ 12,000       11,770       11,683  

Metalysis Limited(5)(10)

  Sustainable and Renewable Technology   Senior
Secured
  March 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 6.95% Exit Fee

  $ 7,500       7,418       7,418  

Proterra, Inc.(11)(14)(17)

  Sustainable and Renewable Technology   Senior
Secured
  November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 5.95% Exit Fee

  $ 25,146       26,185       26,197  
  Sustainable and Renewable Technology   Senior
Secured
  November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 7.00% Exit Fee

  $ 5,029       5,224       5,219  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,175       31,409       31,416  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    94,506       94,423  
           

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (12.16%)*

 

    100,828       100,745  
           

 

 

   

 

 

 

Total: Debt Investments (161.25%)*

 

    1,368,674       1,336,326  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-15


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(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)

  Biotechnology Tools   Equity   Common Stock     55,780     $ 500     $ —    
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
         

 

 

   

 

 

 

Communications & Networking

           

Achilles Technology Management Co II, Inc.(7)(15)

  Communications & Networking   Equity   Common Stock     100       3,100       117  

GlowPoint, Inc.(4)

  Communications & Networking   Equity   Common Stock     114,192       102       25  

Peerless Network Holdings, Inc.

  Communications & Networking   Equity   Preferred Series A     1,000,000       1,000       6,060  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.75%)*

 

    4,202       6,202  
         

 

 

   

 

 

 

Diagnostic

           

Singulex, Inc.

  Diagnostic   Equity   Common Stock     937,998       750       911  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.11%)*

 

    750       911  
         

 

 

   

 

 

 

Diversified Financial Services

           

Gibraltar Business Capital, LLC(7)

  Diversified Financial Services   Equity   Preferred Series A     10,602,752       25,538       25,538  
  Diversified Financial Services   Equity   Common Stock     830,000       1,861       1,861  
       

 

 

   

 

 

   

 

 

 

Total Gibraltar Business Capital, LLC

    11,432,752       27,399       27,399  
         

 

 

   

 

 

 

Subtotal: Diversified Financial Services (3.31%)*

 

    27,399       27,399  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)

  Drug Delivery   Equity   Common Stock     54,240       108       114  

BioQ Pharma Incorporated(15)

  Drug Delivery   Equity   Preferred Series D     165,000       500       891  

Edge Therapeutics, Inc.(4)

  Drug Delivery   Equity   Common Stock     49,965       309       59  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Equity   Common Stock     125,000       1,500       1,038  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.25%)*

 

    2,417       2,102  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(4)(10)(15)

  Drug Discovery & Development   Equity   Common Stock     1,901,791       1,715       5,558  

Axovant Sciences Ltd.(4)(5)(10)

  Drug Discovery & Development   Equity   Common Stock     129,827       1,269       172  

Cerecor, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     119,087       1,000       511  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Equity   Common Stock     13,550       1,000       11  

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Equity   Common Stock     142,858       1,000       1,365  

Dynavax Technologies(4)(10)

  Drug Discovery & Development   Equity   Common Stock     20,000       550       398  

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     200,000       1,000       —    

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     223,463       2,000       235  

Insmed, Incorporated(4)

  Drug Discovery & Development   Equity   Common Stock     70,771       1,000       1,230  

Melinta Therapeutics(4)

  Drug Discovery & Development   Equity   Common Stock     51,821       2,000       384  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)

  Drug Discovery & Development   Equity   Common Stock     76,362       2,744       992  

 

See notes to consolidated financial statements.

 

F-16


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Rocket Pharmaceuticals, Ltd (p.k.a. Inotek Pharmaceuticals
Corporation)(4)

  Drug Discovery & Development   Equity   Common Stock     944     $ 1,500     $ 18  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.31%)*

 

    16,778       10,874  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Identiv, Inc.(4)

  Electronics & Computer Hardware   Equity   Common Stock     6,700       34       25  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       25  
         

 

 

   

 

 

 

Information Services

           

DocuSign, Inc.

  Information Services   Equity   Common Stock     385,000       6,081       8,379  
         

 

 

   

 

 

 

Subtotal: Information Services (1.01%)*

 

    6,081       8,379  
         

 

 

   

 

 

 

Internet Consumer & Business Services

           

Blurb, Inc.(15)

  Internet Consumer & Business Services   Equity   Preferred Series B     220,653       175       80  

Brigade Group, Inc. (p.k.a. Philotic, Inc.)

  Internet Consumer & Business Services   Equity   Common Stock     9,023       93       —    

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Equity   Preferred Series C     230,030       250       257  
  Internet Consumer & Business Services   Equity   Preferred Series D     198,677       250       235  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

    428,707       500       492  

OfferUp, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series A     286,080       1,663       1,889  
  Internet Consumer & Business Services   Equity   Preferred Series A-1     108,710       632       718  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

    394,790       2,295       2,607  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Equity   Preferred Series G     218,351       250       416  
  Internet Consumer & Business Services   Equity   Preferred Series H     87,802       250       233  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

    306,153       500       649  

RazorGator Interactive Group, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series AA     34,783       15       —    

Tectura Corporation(7)

  Internet Consumer & Business Services   Equity   Preferred Series BB     1,000,000       —         —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.46%)*

 

    3,578       3,828  
         

 

 

   

 

 

 

Media/Content/Info

           

Pinterest, Inc.

  Media/Content/Info   Equity   Preferred Series Seed     620,000       4,085       4,389  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.53%)*

 

    4,085       4,389  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

AtriCure, Inc.(4)(15)

  Medical Devices & Equipment   Equity   Common Stock     7,536       266       155  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Equity   Preferred Series AA     221,893       1,500       —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Equity   Common Stock     198,202       —         996  
  Medical Devices & Equipment   Equity   Preferred Series A-1     191,210       425       1,056  
  Medical Devices & Equipment   Equity   Preferred Series A-2     191,626       500       1,009  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

    581,038       925       3,061  

 

See notes to consolidated financial statements.

 

F-17


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Equity   Preferred Series E     136,798     $ 250     $ 209  
  Medical Devices & Equipment   Equity   Preferred Series F     73,971       155       171  
  Medical Devices & Equipment   Equity   Preferred Series G     163,934       500       442  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

    374,703       905       822  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Equity   Preferred Series B     6,185,567       3,000       345  
  Medical Devices & Equipment   Equity   Preferred Series C     1,927,309       655       100  
  Medical Devices & Equipment   Equity   Preferred Series D     55,103,923       5,257       3,193  
  Medical Devices & Equipment   Equity   Preferred Series E     31,199,131       2,609       2,618  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    94,415,930       11,521       6,256  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Equity   Preferred Series B     232,061       527       667  

Quanterix Corporation(4)

  Medical Devices & Equipment   Equity   Common Stock     84,778       1,000       1,445  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.50%)*

 

    16,644       12,406  
         

 

 

   

 

 

 

Software

           

CapLinked, Inc.

  Software   Equity   Preferred Series A-3     53,614       51       87  

Druva, Inc.

  Software   Equity   Preferred Series 2     458,841       1,000       1,073  
  Software   Equity   Preferred Series 3     93,620       300       313  
       

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,386  

ForeScout Technologies, Inc.(4)

  Software   Equity   Common Stock     199,842       529       6,483  

HighRoads, Inc.

  Software   Equity   Common Stock     190       307       —    

NewVoiceMedia Limited(5)(10)

  Software   Equity   Preferred Series E     669,173       963       1,392  

Palantir Technologies

  Software   Equity   Preferred Series E     727,696       5,431       4,923  
  Software   Equity   Preferred Series G     326,797       2,211       2,211  
       

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       7,134  

Sprinklr, Inc.

  Software   Equity   Common Stock     700,000       3,749       3,752  

WildTangent, Inc.(15)

  Software   Equity   Preferred Series 3     100,000       402       172  
         

 

 

   

 

 

 

Subtotal: Software (2.46%)*

 

    14,943       20,406  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       48  
  Surgical Devices   Equity   Preferred Series C     656,538       282       65  
  Surgical Devices   Equity   Preferred Series D     1,991,157       711       822  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       542  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,672       1,477  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       427  
  Surgical Devices   Equity   Preferred Series C     119,999       300       340  
  Surgical Devices   Equity   Preferred Series D     260,000       650       1,071  
  Surgical Devices   Equity   Preferred Series F     100,200       500       561  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,399  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.47%)*

 

    4,222       3,876  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

 

   

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Equity   Common Stock     192       761       —    

Modumetal, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series C     3,107,520       500       360  

 

See notes to consolidated financial statements.

 

F-18


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Proterra, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series 5     99,280     $ 500     $ 527  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Equity   Common Stock     288       61,502       12,315  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.59%)*

 

    63,263       13,202  
         

 

 

   

 

 

 

Total: Equity Investments (13.76%)*

 

    164,896       113,999  
         

 

 

   

 

 

 

Warrant Investments

           

Biotechnology Tools

           

Labcyte, Inc.(15)

  Biotechnology Tools   Warrant   Preferred Series C     1,127,624       323       494  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.06%)*

 

    323       494  
         

 

 

   

 

 

 

Communications & Networking

           

Peerless Network Holdings, Inc.

  Communications & Networking   Warrant   Common Stock     3,328       —         16  
  Communications & Networking   Warrant   Preferred Series A     135,000       95       550  
       

 

 

   

 

 

   

 

 

 

Total Peerless Network Holdings, Inc.

    138,328       95       566  

Spring Mobile Solutions, Inc.

  Communications & Networking   Warrant   Common Stock     2,834,375       417       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.07%)*

 

    512       566  
         

 

 

   

 

 

 

Consumer & Business Products

           

Gadget Guard (p.k.a Antenna79)(15)

  Consumer & Business Products   Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

  Consumer & Business Products   Warrant   Preferred Series B     190,234       230       233  

The Neat Company(15)

  Consumer & Business Products   Warrant   Preferred Series C-1     540,540       365       —    
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.03%)*

 

    823       233  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)(15)

  Drug Delivery   Warrant   Common Stock     176,730       786       66  

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     180,274       730       44  

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       1,155  

Celsion Corporation(4)

  Drug Delivery   Warrant   Common Stock     13,927       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     78,595       390       25  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       1,076  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       71  

Pulmatrix Inc.(4)

  Drug Delivery   Warrant   Common Stock     25,150       116       —    

ZP Opco, Inc (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant   Common Stock     3,618       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.29%)*

 

    3,670       2,437  
         

 

 

   

 

 

 

Drug Discovery & Development

           

ADMA Biologics, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     89,750       295       31  

Audentes Therapeutics, Inc(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     9,914       62       142  

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     15,672       249       2  

Brickell Biotech, Inc.

  Drug Discovery & Development   Warrant   Preferred Series C     26,086       119       65  

Cerecor, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     22,328       70       25  

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series D     325,261       490       —    

 

See notes to consolidated financial statements.

 

F-19


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Cleveland BioLabs, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     7,813     $ 105     $ 1  

Concert Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     132,069       545       1,091  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     29,239       165       —    

CytRx Corporation(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     105,694       160       48  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     17,190       369       —    

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     200       28       —    

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     64,194       276       —    

Evofem Biosciences, Inc (p.k.a Neothetics, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     7,806       266       28  

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     73,009       142       43  

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     73,725       266       3  

Immune Pharmaceuticals(4)

  Drug Discovery & Development   Warrant   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

  Drug Discovery & Development   Warrant   Common Stock     40,545       626       1  

Motif BioSciences Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     73,452       282       254  

Myovant Sciences, Ltd.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     73,710       460       831  

Neuralstem, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

  Drug Discovery & Development   Warrant   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     75,214       178       82  

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     32,467       203       93  

Sorrento Therapeutics, Inc.(4)(10)

  Drug Discovery & Development   Warrant   Common Stock     306,748       889       704  

Stealth Bio Therapeutics Corp.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series A     650,000       158       150  

Tricida, Inc.(15)

  Drug Discovery & Development   Warrant   Common Stock     212,765       223       217  

uniQure B.V.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     37,174       218       334  

XOMA Corporation(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     9,063       279       9  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.50%)*

 

    8,202       4,154  
         

 

 

   

 

 

 

Electronics & Computer Hardware

         

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Warrant   Preferred Series D     79,856       100       84  

Clustrix, Inc.

  Electronics & Computer Hardware   Warrant   Common Stock     50,000       12       —    
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       84  
         

 

 

   

 

 

 

Healthcare Services, Other

           

Chromadex Corporation(4)(15)

  Healthcare Services, Other   Warrant   Common Stock     139,673       157       182  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.02%)*

 

    157       182  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-20


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Information Services

           

INMOBI Inc.(5)(10)

  Information Services   Warrant   Common Stock     65,587     $ 82     $ —    

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C-1     898,134       49       34  

MDX Medical, Inc.(15)

  Information Services   Warrant   Common Stock     2,812,500       283       185  

Netbase Solutions, Inc.

  Information Services   Warrant   Preferred Series 1     60,000       356       373  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.07%)*

 

    868       592  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

   

Aria Systems, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series G     231,535       73       —    

Art.com, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series B     311,005       66       66  

Blurb, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     234,280       636       27  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer & Business Services   Warrant   Preferred Series E     968,992       19       211  

Faction Holdings, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A     8,703       234       437  

Intent Media, Inc.(15)

  Internet Consumer & Business Services   Warrant   Common Stock     140,077       168       200  

Interactions Corporation

  Internet Consumer & Business Services   Warrant   Preferred Series G-3     68,187       204       413  

Just Fabulous, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B     206,184       1,102       1,812  

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Warrant   Preferred Series C     245,610       20       99  

LogicSource(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     79,625       30       28  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Warrant   Preferred Series G     174,562       78       192  

ShareThis, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     493,502       547       —    

Snagajob.com, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A     1,800,000       782       1,406  

Tapjoy, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series D     748,670       316       15  

TraceLink, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A-2     283,353       1,833       2,029  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.84%)*

 

    6,108       6,935  
         

 

 

   

 

 

 

Media/Content/Info

           

FanDuel, Inc.

  Media/Content/Info   Warrant   Common Stock     15,570       —         —    
  Media/Content/Info   Warrant   Preferred Series A     4,648       730       1,875  
       

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       3,242  

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       37  

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant   Common Stock     255,818       4       24  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       29  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.63%)*

 

    3,425       5,207  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

Amedica Corporation(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     8,603       459       —    

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B-1     112,858       455       —    

Avedro, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series AA     300,000       401       300  

 

See notes to consolidated financial statements.

 

F-21


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Warrant   Preferred Series AA     155,325     $ 362     $ —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     74,784       78       248  

InspireMD, Inc.(4)(5)(10)

  Medical Devices & Equipment   Warrant   Common Stock     1,124       242       —    

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series 4     1,819,078       294       394  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Warrant   Preferred Series E     455,539       370       264  

Micell Technologies, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series D-2     84,955       262       154  

NetBio, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series A     7,841       408       43  

NinePoint Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     587,840       170       104  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Warrant   Preferred Series E     10,535,275       1,252       271  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Warrant   Preferred Series A     500,000       402       532  

Quanterix Corporation(4)

  Medical Devices & Equipment   Warrant   Common Stock     66,039       204       326  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series D     778,301       133       159  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices & Equipment   Warrant   Preferred Series A     6,464       188       —    

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(4)

  Medical Devices & Equipment   Warrant   Common Stock     13,864       401       —    

Tela Bio, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B     387,930       62       128  

ViewRay, Inc.(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     128,231       333       206  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.38%)*

 

    6,476       3,129  
         

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       160       434  
  Semiconductors   Warrant   Preferred Series D-2     750,000       99       648  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       259       1,082  

Aquantia Corp.(4)

  Semiconductors   Warrant   Common Stock     19,683       4       41  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       46       219  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.16%)*

 

    309       1,342  
         

 

 

   

 

 

 

Software

           

Actifio, Inc.

  Software   Warrant   Common Stock     73,584       249       65  
  Software   Warrant   Preferred Series F     31,673       343       79  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       144  

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A     168,750       188       —    

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433       258       44  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       35  
  Software   Warrant   Preferred Series C     592,019       730       38  
  Software   Warrant   Preferred Series C-A     2,218,214       230       1,441  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       1,514  

DNAnexus, Inc.

  Software   Warrant   Preferred Series C     909,091       97       62  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       218  

Fuze, Inc.(15)

  Software   Warrant   Preferred Series F     256,158       89       5  

Lightbend, Inc.(15)

  Software   Warrant   Preferred Series C-1     391,778       79       75  

Mattersight Corporation(4)

  Software   Warrant   Common Stock     357,143       538       88  

 

See notes to consolidated financial statements.

 

F-22


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718     $ 334     $ 464  

Mobile Posse, Inc.(15)

  Software   Warrant   Preferred Series C     396,430       130       155  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       —    

NewVoiceMedia Limited(5)(10)

  Software   Warrant   Preferred Series E     225,586       33       142  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     228,972       150       172  

PerfectServe, Inc.

  Software   Warrant   Preferred Series C     129,073       720       1,089  

Poplicus, Inc.

  Software   Warrant   Common Stock     132,168       —         —    

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       6  

RapidMiner, Inc.

  Software   Warrant   Preferred Series C-1     4,982       24       32  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series C-Prime     640,603       66       38  

Signpost, Inc.

  Software   Warrant   Preferred Series C     324,005       314       108  

Wrike, Inc.

  Software   Warrant   Common Stock     698,760       462       1,273  
         

 

 

   

 

 

 

Subtotal: Software (0.68%)*

 

    5,493       5,629  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

           

Alimera Sciences, Inc.(4)

  Specialty Pharmaceuticals   Warrant   Common Stock     1,717,709       861       256  
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.03%)*

 

    861       256  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       16  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       307  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       323  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436       225       16  
  Surgical Devices   Warrant   Preferred Series D     175,000       100       474  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       62  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       552  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.11%)*

 

    758       875  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

         

Agrivida, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D     471,327       120       —    

American Superconductor Corporation(4)

  Sustainable and Renewable Technology   Warrant   Common Stock     58,823       39       41  

Calera, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     44,529       513       —    

EcoMotors, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series B     437,500       308       —    

Fluidic, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series D     61,804       102       —    

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Warrant   Common Stock     5,310       181       —    
  Sustainable and Renewable Technology   Warrant   Preferred Series 2-A     63       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    5,373       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series C-1     280,897       275       457  

GreatPoint Energy, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series A     325,000       155       92  
  Sustainable and Renewable Technology   Warrant   Preferred Series B     131,883       63       27  
       

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       119  

 

See notes to consolidated financial statements.

 

F-23


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of Investment(1)

 

Series

  Shares     Cost(3)     Value(4)  

Polyera Corporation(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     311,609     $ 338     $ —    

Proterra, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series 4     477,517       41       518  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series E     234,477       12       3  

Stion Corporation(6)

  Sustainable and Renewable Technology   Warrant   Preferred Series Seed     2,154       1,378       —    

TAS Energy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and Renewable Technology   Warrant   Preferred Series 3-A     1,019,793       189       —    
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.14%)*

 

    4,611       1,138  
       

 

 

   

 

 

 

Total: Warrant Investments (4.01%)*

 

    42,708       33,253  
   

 

 

   

 

 

 

Total Investments in Securities (179.02%)*

 

  $ 1,576,278     $ 1,483,578  
   

 

 

   

 

 

 

 

*

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 4.75% at March 31, 2018. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 1.70%, 1.88%, 2.31% and 2.66%, respectively, at March 31, 2018.

(3)

Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $26.2 million, $128.1 million and $101.8 million respectively. The tax cost of investments is $1.6 billion.

(4)

Except for warrants in 41 publicly traded companies and common stock in 20 publicly traded companies, all investments are restricted at March 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.

(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 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.

(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 March 31, 2018, and is therefore considered non-income producing. Note that at March 31, 2018, only the $10.7 million PIK, or payment-in-kind, 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 Hercules Technology II, L.P., or HT II, or Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business investment companies, or 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 March 31, 2018.

(17)

Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at March 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.

 

F-24


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

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     $ 5,115     $ 5,146  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,115       5,146  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.61%)*

 

    5,115       5,146  
         

 

 

   

 

 

 

Communications & Networking

           

Under 1 Year Maturity

           

OpenPeak, Inc.(8)

  Communications & Networking   Senior Secured   April 2018  

Interest rate PRIME + 8.75%

or Floor rate of 12.00%

  $ 11,464       8,228       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    8,228       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    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%

  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer & Business Products   Senior Secured   December 2019  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%, 2.95% Exit Fee

  $ 18,440       18,580       18,571  

Second Time Around (Simplify Holdings,
LLC)(7)(8)(15)

  Consumer & Business Products   Senior Secured   February 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%, 4.75% Exit Fee

  $ 1,746       1,781       —    
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    20,361       18,571  
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.33%)*

 

    21,361       19,571  
         

 

 

   

 

 

 

Drug Delivery

           

Under 1 Year Maturity

           

Agile Therapeutics, Inc.(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 10,888       11,292       11,292  

Pulmatrix Inc.(9)(11)

  Drug Delivery   Senior Secured   July 2018  

Interest rate PRIME + 6.25%

or Floor rate of 9.50%, 3.50% Exit Fee

  $ 3,259       3,455       3,455  

ZP Opco, Inc (p.k.a. Zosano Pharma)(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 2.70%

or Floor rate of 7.95%, 2.87% Exit Fee

  $ 6,316       6,609       6,609  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    21,356       21,356  
         

 

 

   

 

 

 

1-5 Years Maturity

           

AcelRx Pharmaceuticals, Inc.(10)(11)(15)

  Drug Delivery   Senior Secured   March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 18,653       18,925       18,875  

Antares Pharma Inc.(10)(15)

  Drug Delivery   Senior Secured   July 2022  

Interest rate PRIME + 4.50%

or Floor rate of 9.00%, 4.25% Exit Fee

  $ 25,000       25,006       24,958  

 

See notes to consolidated financial statements.

 

F-25


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Edge Therapeutics, Inc.(12)

  Drug Delivery   Senior Secured   February 2020  

Interest rate PRIME + 4.65%

or Floor rate of 9.15%, 4.95% Exit Fee

  $ 20,000     $ 20,377     $ 20,331  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    64,308       64,164  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (10.17%)*

 

    85,664       85,520  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Under 1 Year Maturity

           

CytRx Corporation(11)(15)

  Drug Discovery & Development   Senior Secured   August 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, 7.09% Exit Fee

  $ 9,986       11,172       11,172  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development   Senior Secured   April 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 3,027       3,310       340  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    14,482       11,512  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Auris Medical Holding, AG(5)(10)

  Drug Discovery & Development   Senior Secured   January 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 10,341       10,610       10,563  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       10,345       10,344  
  Drug Discovery & Development   Senior Secured   July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       9,918       9,915  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       20,263       20,259  

Axovant Sciences Ltd.(5)(10)

  Drug Discovery & Development   Senior Secured   March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       53,631       53,448  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development   Senior Secured   September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 6.75% Exit Fee

  $ 6,090       6,380       6,361  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development   Senior Secured   December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 5,000       4,947       4,947  

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development   Senior Secured   January 2019  

Interest rate PRIME + 2.25%

or Floor rate of 7.25%, 4.95% Exit Fee

  $ 13,851       14,482       14,385  

Insmed, Incorporated (11)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 4.75%

or Floor rate of 9.25%, 4.86% Exit Fee

  $ 55,000       55,425       54,963  

Metuchen Pharmaceuticals LLC(12)(14)

  Drug Discovery & Development   Senior Secured   October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 25,561       25,721       25,643  

Motif BioSciences Inc.(15)

  Drug Discovery & Development   Senior Secured   September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,651       14,651  

Myovant Sciences, Ltd.(5)(10)(13)(17)

  Drug Discovery & Development   Senior Secured   May 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 25,000       24,704       24,704  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(15)

  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,144       39,829  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,040       9,958  

 

See notes to consolidated financial statements.

 

F-26


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000     $ 9,964     $ 9,895  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,148       59,682  

PhaseRx, Inc.(15)

  Drug Discovery & Development   Senior Secured   December 2019  

Interest rate PRIME + 5.75%

or Floor rate of 9.25%, 5.85% Exit Fee

  $ 4,694       4,842       1,917  

Stealth Bio Therapeutics Corp.(5)(10)(12)

  Drug Discovery & Development   Senior Secured   January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 5.00% Exit Fee

  $ 15,000       14,898       14,847  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development   Senior Secured   May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000       20,579       20,543  

Verastem, Inc.(12)(17)

  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,957       4,910  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,996       4,949  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,953       4,907  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 15,000       14,906       14,766  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    346,187       341,679  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (42.00%)*

 

    360,669       353,191  
         

 

 

   

 

 

 

Electronics & Computer Hardware

 

 

1-5 Years Maturity

 

 

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Senior Secured   September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,014       9,887  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    10,014       9,887  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (1.18%)*

 

    10,014       9,887  
         

 

 

   

 

 

 

Healthcare Services, Other

 

 

1-5 Years Maturity

 

 

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 17,607       17,437       17,437  
  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,009       4,963       4,963  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,616       22,400       22,400  

Oak Street Health(12)

  Healthcare Services, Other   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  

PH Group Holdings(13)

  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,878       19,803  
  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 10,000       9,922       9,840  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,800       29,643  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    72,165       72,008  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.56%)*

 

    72,165       72,008  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-27


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Information Services

 

 

1-5 Years Maturity

 

 

MDX Medical, Inc.(14)(15)(17)

  Information Services   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.25%,

PIK Interest 1.70%

  $ 7,568     $ 7,369     $ 7,327  

Netbase Solutions, Inc.(13)(14)

  Information Services   Senior Secured   August 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 9,051       8,730       8,730  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    16,099       16,057  
         

 

 

   

 

 

 

Subtotal: Information Services (1.91%)*

 

    16,099       16,057  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

   

1-5 Years Maturity

 

   

AppDirect, Inc.

  Internet Consumer & Business Services   Senior Secured   January 2022  

Interest rate PRIME + 5.70%

or Floor rate of 9.95%, 3.45% Exit Fee

  $ 10,000       9,885       9,885  

Aria Systems, Inc.(11)(14)

  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 3.20%

or Floor rate of 6.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 2,103       2,104       1,803  
  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 5.20%

or Floor rate of 8.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 18,832       18,839       16,144  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 20,935       20,943       17,947  

Greenphire Inc.

  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate 3-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 3,883       3,883       3,883  
  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate PRIME + 3.75%

or Floor rate of 7.00%

  $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 4,883       4,883       4,883  

Intent Media, Inc.(14)(15)

  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%, 2.00% Exit Fee

  $ 5,050       5,011       5,027  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.35%, 2.00% Exit Fee

  $ 2,020       1,987       1,991  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.50%, 2.00% Exit Fee

  $ 2,022       1,988       1,992  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,092       8,986       9,010  

Interactions Corporation

  Internet Consumer & Business Services   Senior Secured   March 2021  

Interest rate 3-month LIBOR + 8.60%

or Floor rate of 9.85%, 1.75% Exit Fee

  $ 25,000       25,013       25,013  

LogicSource(15)

  Internet Consumer & Business Services   Senior Secured   October 2019  

Interest rate PRIME + 6.25%

or Floor rate of 9.75%, 5.00% Exit Fee

  $ 6,452       6,701       6,726  

Snagajob.com, Inc.(13)(14)

  Internet Consumer & Business Services   Senior Secured   July 2020  

Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%, 2.55% Exit Fee

  $ 41,023       40,633       41,036  

Tectura Corporation(7)(8)(9)(14)

  Internet Consumer & Business Services   Senior Secured   June 2021  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 20,298       20,298       19,219  
  Internet Consumer & Business Services   Senior Secured   June 2021   PIK Interest 8.00%   $ 11,015       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,313       20,538       19,219  

 

See notes to consolidated financial statements.

 

F-28


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

The Faction Group

  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate 3-month LIBOR + 9.25%

or Floor rate of 10.25%

  $ 8,000     $ 8,000     $ 8,000  
  Internet Consumer & Business Services   Senior Secured   January 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,000       2,000       2,000  
         

 

 

   

 

 

   

 

 

 

Total The Faction Group

  $ 10,000       10,000       10,000  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    147,582       143,719  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (17.09%)*

 

    147,582       143,719  
         

 

 

   

 

 

 

Media/Content/Info

 

 

Under 1 Year Maturity

 

 

Machine Zone, Inc.(14)(16)

  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  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    106,641       106,641  
         

 

 

   

 

 

 

1-5 Years Maturity

 

 

Bustle(14)(15)

  Media/Content/Info   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

  $ 19,354       19,762       19,695  
  Media/Content/Info   Convertible Debt   September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       20,762       20,695  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,697       35,630  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (16.92%)*

 

    142,338       142,271  
         

 

 

   

 

 

 

Medical Devices & Equipment

 

 

Under 1 Year Maturity

 

 

Amedica Corporation(9)(15)

  Medical Devices & Equipment   Senior Secured   January 2018  

Interest rate PRIME + 7.70%

or Floor rate of 10.95%, 8.25% Exit Fee

  $ 605       2,255       2,255  

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Senior Secured   October 2018  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 5.42% Exit Fee

  $ 2,527       2,848       2,848  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    5,103       5,103  
         

 

 

   

 

 

 

1-5 Years Maturity

 

   

IntegenX, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 12,500       13,042       12,991  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 2,500       2,599       2,598  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 9.75% Exit Fee

  $ 2,500       2,618       2,601  
         

 

 

   

 

 

   

 

 

 

Total IntegenX, Inc.

  $ 17,500       18,259       18,190  

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 4.95% Exit Fee

  $ 17,500       17,013       17,013  

Micell Technologies, Inc.(12)

  Medical Devices & Equipment   Senior Secured   August 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.50%, 5.00% Exit Fee

  $ 5,469       5,744       5,708  

 

See notes to consolidated financial statements.

 

F-29


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Quanta Fluid Solutions(5)(10)(11)

  Medical Devices & Equipment   Senior Secured   April 2020  

Interest rate PRIME + 8.05%

or Floor rate of 11.55%, 5.00% Exit Fee

  $ 10,117     $ 10,432     $ 10,386  

Quanterix Corporation(11)

  Medical Devices & Equipment   Senior Secured   March 2019  

Interest rate PRIME + 2.75%

or Floor rate of 8.00%, 4.00% Exit Fee

  $ 9,043       9,477       9,477  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Senior Secured   July 2020  

Interest rate PRIME + 4.35%

or Floor rate of 8.85%, 6.05% Exit Fee

  $ 8,000       7,927       7,919  

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

  $ 5,000       4,991       4,973  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    73,843       73,666  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (9.37%)*

 

    78,946       78,769  
         

 

 

   

 

 

 

Semiconductors

 

   

1-5 Years Maturity

 

   

Achronix Semiconductor Corporation(15)(17)

  Semiconductors   Senior Secured   August 2020  

Interest rate PRIME + 7.00%

or Floor rate of 11.00%, 12.50% Exit Fee

  $ 5,000       5,084       5,100  
  Semiconductors   Senior Secured   February 2019  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%

  $ 4,274       4,274       4,273  
         

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

  $ 9,274       9,358       9,373  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,358       9,373  
         

 

 

   

 

 

 

Subtotal: Semiconductors (1.11%)*

 

    9,358       9,373  
         

 

 

   

 

 

 

Software

             

Under 1 Year Maturity

             

Clickfox, Inc.(13)

  Software   Senior Secured   May 2018  

Interest rate PRIME + 8.00%

or Floor rate of 11.50%, 12.01% Exit Fee

  $ 6,378       7,671       7,671  

Digital Train Limited (p.k.a. Jumpstart Games, Inc.)(15)

  Software   Senior Secured   July 2018   Interest rate 12-month LIBOR + 2.50%   $ 5,671       5,671       4,073  
         

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    13,342       11,744  
         

 

 

   

 

 

 

1-5 Years Maturity

 

   

Clarabridge, Inc.(12)(14)

  Software   Senior Secured   April 2021  

Interest rate PRIME + 4.80%

or Floor rate of 8.55%,

PIK Interest 3.25%

  $ 40,893       40,870       41,063  

Emma, Inc.

  Software   Senior Secured   September 2022  

Interest rate daily LIBOR + 7.75%

or Floor rate of 8.75%

  $ 50,000       48,565       48,565  

Evernote Corporation(14)(15)(17)

  Software   Senior Secured   October 2020  

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,974       6,100  
  Software   Senior Secured   July 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 1.25%

  $ 4,023       3,999       3,992  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 10,023       9,973       10,092  

Fuze, Inc.(13)(14)(15)

  Software   Senior Secured   July 2021  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.55%, 3.55% Exit Fee

  $ 50,332       50,464       50,420  

Impact Radius Holdings, Inc.(14)(17)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%, 1.75% Exit Fee

  $ 7,544       7,552       7,498  

 

See notes to consolidated financial statements.

 

F-30


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Lithium Technologies, Inc.(17)

  Software   Senior Secured   October 2022  

Interest rate 1-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 12,000     $ 11,740     $ 11,740  

Microsystems Holding Company, LLC

  Software   Senior Secured   July 2022  

Interest rate 3-month LIBOR + 8.25%

or Floor rate of 9.25%

  $ 12,000       11,821       11,821  

OneLogin, Inc.(14)(15)

  Software   Senior Secured   August 2019  

Interest rate PRIME + 6.45%

or Floor rate of 9.95%,

PIK Interest 3.25%

  $ 15,883       15,811       16,071  

PerfectServe, Inc.

  Software   Senior Secured   April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 16,000       16,023       16,023  
  Software   Senior Secured   April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 4,000       4,005       4,005  
         

 

 

   

 

 

   

 

 

 

Total PerfectServe, Inc.

  $ 20,000       20,028       20,028  

Pollen, Inc.(15)

  Software   Senior Secured   April 2019  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, 4.00% Exit Fee

  $ 7,000       6,964       6,964  

Poplicus, Inc.(8)(14)

  Software   Senior Secured   May 2022  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 1,250       1,250       —    

Quid, Inc.(14)(15)

  Software   Senior Secured   October 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%, 3.00% Exit Fee

  $ 8,303       8,397       8,430  

RapidMiner, Inc.(14)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 5.50%

or Floor rate of 9.75%,

PIK Interest 1.65%

  $ 7,001       6,971       6,971  

Regent Education(14)

  Software   Senior Secured   January 2021  

Interest rate FIXED 10.00%,

PIK Interest 2.00%, 6.35% Exit Fee

  $ 3,285       3,291       3,291  

Signpost, Inc.(14)

  Software   Senior Secured   February 2020  

Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%, 3.75% Exit Fee

  $ 15,510       15,603       15,685  

Vela Trading Technologies

  Software   Senior Secured   July 2022  

Interest rate daily LIBOR + 9.50%

or Floor rate of 10.50%

  $ 20,000       19,495       19,557  

Wrike, Inc.(14)(17)

  Software   Senior Secured   February 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 10,165       9,971       10,007  

ZocDoc

  Software   Senior Secured   April 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 20,000       20,011       20,011  
  Software   Senior Secured   November 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 10,000       10,005       10,005  
         

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,016       30,016  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    318,782       318,219  
         

 

 

   

 

 

 

Subtotal: Software (39.24%)*

 

    332,124       329,963  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-31


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

 

Type of

Investment(1)

 

Maturity Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Specialty Pharmaceuticals

           

Under 1 Year Maturity

           

Jaguar Animal Health, Inc.(11)

  Specialty Pharmaceuticals   Senior Secured   August 2018  

Interest rate PRIME + 5.65%

or Floor rate of 9.90%, 7.00% Exit Fee

  $ 1,089     $ 1,496     $ 1,496  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,496       1,496  
           

 

 

   

 

 

 

1-5 Years Maturity

           

Alimera Sciences, Inc.(11)(14)

  Specialty Pharmaceuticals   Senior Secured   November 2020  

Interest rate PRIME + 7.50%

or Floor rate of 11.00%,

PIK Interest 1.00%, 4.00% Exit Fee

  $ 35,398       35,517       35,517  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,517       35,517  
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (4.40%)*

 

    37,013       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       8,756       8,757  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    8,756       8,757  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (1.04%)*

 

    8,756       8,757  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Under 1 Year Maturity

           

FuelCell Energy, Inc.(12)

  Sustainable and Renewable Technology   Senior Secured   October 2018  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 8.50% Exit Fee

  $ 16,806       18,190       18,190  

Kinestral Technologies Inc.

  Sustainable and Renewable Technology   Senior Secured   October 2018  

Interest rate 3-month LIBOR +

7.75% or Floor rate of 8.75%, 3.23% Exit Fee

  $ 3,867       3,882       3,882  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    22,072       22,072  
           

 

 

   

 

 

 

1-5 Years Maturity

           

ChargePoint Inc.

  Sustainable and Renewable Technology   Senior Secured   August 2020  

Interest rate 3-month LIBOR + 8.75%

or Floor rate of 9.75%, 2.00% Exit Fee

  $ 19,394       19,416       19,416  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Senior Secured   August 2019  

Interest rate PRIME + 8.70%

or Floor rate of 12.95%, 4.50% Exit Fee

  $ 14,000       13,604       13,604  

Proterra, Inc.(11)(14)(17)

  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 5.95% Exit Fee

  $ 25,036       25,997       26,097  
  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 7.00% Exit Fee

  $ 5,007       5,173       5,190  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,043       31,170       31,287  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Senior Secured   January 2019  

Interest rate PRIME + 6.20%

or Floor rate of 9.45%, 4.00% Exit Fee

  $ 4,258       4,498       4,515  

Tendril Networks(12)

  Sustainable and Renewable Technology   Senior Secured   June 2019   Interest rate FIXED 9.25%, 8.50% Exit Fee   $ 13,156       13,863       13,845  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    82,551       82,667  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (12.45%)*

 

    104,623       104,739  
         

 

 

   

 

 

 

Total: Debt Investments (168.38%)*

 

    1,440,055       1,415,984  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-32


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(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)

   
Biotechnology
Tools
 
 
    Equity       Common Stock       55,780     $ 500     $ —    
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
         

 

 

   

 

 

 

Communications & Networking

 

   

Achilles Technology Management Co II, Inc.(7)(15)

   
Communications &
Networking
 
 
    Equity       Common Stock       100       3,100       242  

GlowPoint, Inc.(4)

   
Communications &
Networking
 
 
    Equity       Common Stock       114,192       102       41  

Peerless Network Holdings, Inc.

   
Communications &
Networking
 
 
    Equity       Preferred Series A       1,000,000       1,000       5,865  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.73%)*

 

    4,202       6,148  
         

 

 

   

 

 

 

Diagnostic

 

   

Singulex, Inc.

    Diagnostic       Equity       Common Stock       937,998       750       720  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.09%)*

 

    750       720  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)

    Drug Delivery       Equity       Common Stock       54,240       108       109  

BioQ Pharma Incorporated(15)

    Drug Delivery       Equity       Preferred Series D       165,000       500       826  

Edge Therapeutics, Inc.(4)

    Drug Delivery       Equity       Common Stock       49,965       309       468  

Neos Therapeutics, Inc.(4)(15)

    Drug Delivery       Equity       Common Stock       125,000       1,500       1,275  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.32%)*

 

    2,417       2,678  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(4)(10)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       1,901,791       1,715       5,315  

Axovant Sciences Ltd.(4)(5)(10)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       129,827       1,270       707  

Cerecor, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       119,087       1,000       381  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       13,550       1,000       29  

Dicerna Pharmaceuticals, Inc.(4)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       142,858       1,000       1,290  

Dynavax Technologies(4)(10)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       20,000       550       374  

Epirus Biopharmaceuticals, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       200,000       1,000       —    

Genocea Biosciences, Inc.(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       223,463       2,000       259  

Inotek Pharmaceuticals Corporation(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       3,778       1,500       10  

Insmed, Incorporated(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       70,771       1,000       2,154  

Melinta Therapeutics(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       43,840       2,000       693  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       76,362       2,743       1,367  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.50%)*

 

    16,778       12,579  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Identiv, Inc.(4)

   
Electronics &
Computer Hardware
 
 
    Equity       Common Stock       6,700       34       22  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       22  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-33


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry     Type of
Investment(1)
    Series     Shares     Cost(3)     Value(4)  

Information Services

           

DocuSign, Inc.

    Information Services       Equity       Common Stock       385,000     $ 6,081     $ 8,011  
         

 

 

   

 

 

 

Subtotal: Information Services (0.95%)*

 

    6,081       8,011  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

       
Blurb, Inc.(15)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series B       220,653       175       46  
Brigade Group, Inc. (p.k.a. Philotic, Inc.)    
Internet Consumer &
Business Services
 
 
    Equity       Common Stock       9,023       93       —    
Lightspeed POS, Inc.(5)(10)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series C       230,030       250       233  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series D       198,677       250       213  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

 

    428,707       500       446  
OfferUp, Inc.    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A       286,080       1,663       2,236  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A-1       108,710       632       850  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

 

    394,790       2,295       3,086  
Oportun (p.k.a. Progress Financial)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series G       218,351       250       451  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series H       87,802       250       255  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

 

    306,153       500       706  
RazorGator Interactive Group, Inc.    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series AA       34,783       15       49  
Tectura Corporation(7)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series BB       1,000,000       —         —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.52%)*

 

    3,578       4,333  
       

 

 

   

 

 

 

Media/Content/Info

 

       
Pinterest, Inc.     Media/Content/Info       Equity       Preferred Series Seed       620,000       4,085       5,055  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.60%)*

 

    4,085       5,055  
       

 

 

   

 

 

 

Medical Devices & Equipment

 

       
AtriCure, Inc.(4)(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       7,536       266       138  
Flowonix Medical Incorporated    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series AA       221,893       1,500       —    
Gelesis, Inc.(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       198,202       —         879  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-1       191,210       425       939  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-2       191,626       500       894  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

 

    581,038       925       2,712  
Medrobotics Corporation(15)    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series E       136,798       250       302  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series F       73,971       155       225  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series G       163,934       500       532  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

 

    374,703       905       1,059  
Optiscan Biomedical, Corp.(6)(15)    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series B       6,185,567       3,000       402  

 

See notes to consolidated financial statements.

 

F-34


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  
  Medical Devices &
Equipment
  Equity   Preferred Series C     1,927,309     $ 655     $ 114  
  Medical Devices &
Equipment
  Equity   Preferred Series D     55,103,923       5,257       4,232  
  Medical Devices &
Equipment
  Equity   Preferred Series E     15,638,888       1,307       1,457  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    78,855,687       10,219       6,205  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices &
Equipment
  Equity   Preferred Series B     232,061       527       596  
Quanterix Corporation(4)   Medical Devices &
Equipment
  Equity   Common Stock     84,778       1,000       1,820  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.49%)*

 

    15,342       12,530  
       

 

 

   

 

 

 

Software

       
CapLinked, Inc.   Software   Equity   Preferred Series A-3     53,614       51       90  
Druva, Inc.   Software   Equity   Preferred Series 2     458,841       1,000       1,044  
  Software   Equity   Preferred Series 3     93,620       300       312  
       

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,356  
ForeScout Technologies, Inc.(4)   Software   Equity   Common Stock     199,844       529       6,373  
HighRoads, Inc.   Software   Equity   Common Stock     190       307       —    
NewVoiceMedia Limited(5)(10)   Software   Equity   Preferred Series E     669,173       963       1,544  
Palantir Technologies   Software   Equity   Preferred Series E     727,696       5,431       4,923  
  Software   Equity   Preferred Series G     326,797       2,211       2,211  
       

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       7,134  
Sprinklr, Inc.   Software   Equity   Common Stock     700,000       3,749       4,600  
WildTangent, Inc.(15)   Software   Equity   Preferred Series 3     100,000       402       179  
       

 

 

   

 

 

 

Subtotal: Software (2.53%)*

 

    14,943       21,276  
       

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       44  
  Surgical Devices   Equity   Preferred Series C     656,538       282       60  
  Surgical Devices   Equity   Preferred Series D     1,991,157       712       795  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       521  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,673       1,420  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       376  
  Surgical Devices   Equity   Preferred Series C     119,999       300       309  
  Surgical Devices   Equity   Preferred Series D     260,000       650       957  
  Surgical Devices   Equity   Preferred Series F     100,200       500       531  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,173  
       

 

 

   

 

 

 

Subtotal: Surgical Devices (0.43%)*

 

    4,223       3,593  
       

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Equity   Common Stock     19,250       761       —    

Modumetal, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series C     3,107,520       500       477  

Proterra, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series 5     99,280       500       539  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and
Renewable Technology
  Equity   Common Stock     288       61,502       11,400  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.48%)*

 

    63,263       12,416  
       

 

 

   

 

 

 

Total: Equity Investments (10.63%)*

 

    136,196       89,361  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-35


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Warrant Investments

           

Biotechnology Tools

           

Labcyte, Inc.(15)

  Biotechnology
Tools
  Warrant   Preferred Series C     1,127,624     $ 323     $ 458  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.05%)*

 

    323       458  
         

 

 

   

 

 

 

Communications & Networking

           

PeerApp, Inc.

  Communications &
Networking
  Warrant   Preferred Series B     298,779       61       —    

Peerless Network Holdings, Inc.

  Communications &
Networking
  Warrant   Preferred Series A     135,000       95       501  

Spring Mobile Solutions, Inc.

  Communications &
Networking
  Warrant   Common Stock     2,834,375       418       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.06%)*

 

    574       501  
         

 

 

   

 

 

 

Consumer & Business Products

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer &
Business Products
  Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

  Consumer &
Business Products
  Warrant   Preferred Series B     190,234       230       221  

The Neat Company(15)

  Consumer &
Business Products
  Warrant   Preferred Series C-1     540,540       365       —    
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.03%)*

 

    823       221  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)(15)

  Drug Delivery   Warrant   Common Stock     176,730       786       61  

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     180,274       730       65  

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       968  

Celsion Corporation(4)

  Drug Delivery   Warrant   Common Stock     13,927       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     78,595       390       230  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       1,540  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       148  

Pulmatrix Inc.(4)

  Drug Delivery   Warrant   Common Stock     25,150       116       4  

ZP Opco, Inc (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant   Common Stock     72,379       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.36%)*

 

    3,670       3,016  
         

 

 

   

 

 

 

Drug Discovery & Development

       

ADMA Biologics, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     89,750       295       12  

Anthera Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     5,022       984       —    

Audentes Therapeutics, Inc(4)(10)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     9,914       62       147  

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     156,726       249       19  

Brickell Biotech, Inc.

  Drug Discovery &
Development
  Warrant   Preferred Series C     26,086       119       93  

Cerecor, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     22,328       70       15  

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery &
Development
  Warrant   Preferred Series D     325,261       490       —    

Cleveland BioLabs, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     7,813       105       3  

Concert Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     132,069       545       1,344  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     29,239       165       2  

 

See notes to consolidated financial statements.

 

F-36


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

CytRx Corporation(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     105,694     $ 160     $ 58  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     17,190       369       —    

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     200       28       —    

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     64,194       276       —    

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

  Drug Discovery &
Development
  Warrant   Common Stock     73,009       142       29  

Genocea Biosciences, Inc.(4)

  Drug Discovery &
Development
  Warrant   Common Stock     73,725       266       4  

Immune Pharmaceuticals(4)

  Drug Discovery &
Development
  Warrant   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

  Drug Discovery &
Development
  Warrant   Common Stock     31,655       626       12  

Motif BioSciences Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     73,452       282       414  

Myovant Sciences, Ltd.(4)(5)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     49,800       283       128  

Neothetics, Inc. (p.k.a. Lithera, Inc)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     46,838       266       53  

Neuralstem, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     75,214       178       212  

PhaseRx, Inc.(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     63,000       125       —    

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     32,467       203       8  

Sorrento Therapeutics, Inc.(4)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     306,748       889       453  

Stealth Bio Therapeutics Corp.(5)(10)

  Drug Discovery &
Development
  Warrant   Preferred Series A     487,500       116       107  

uniQure B.V.(4)(5)(10)

  Drug Discovery &
Development
  Warrant   Common Stock     37,174       218       240  

XOMA Corporation(4)(10)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     9,063       279       50  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.40%)*

 

    8,869       3,403  
         

 

 

   

 

 

 

Electronics & Computer Hardware

       
908 DEVICES INC.(15)   Electronics &
Computer Hardware
  Warrant   Preferred Series D     79,856       100       73  
Clustrix, Inc.   Electronics &
Computer Hardware
  Warrant   Common Stock     50,000       12       —    
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       73  
         

 

 

   

 

 

 

Healthcare Services, Other

       
Chromadex Corporation(4)(15)   Healthcare
Services, Other
  Warrant   Common Stock     139,673       157       329  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.04%)*

 

    157       329  
         

 

 

   

 

 

 

Information Services

       

INMOBI Inc.(5)(10)

  Information
Services
  Warrant   Common Stock     65,587       82       —    

 

See notes to consolidated financial statements.

 

F-37


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C     648,400     $ 98     $ 21  
  Information Services   Warrant   Preferred Series C-1     1,165,183       74       37  
       

 

 

   

 

 

   

 

 

 

Total InXpo, Inc.

    1,813,583       172       58  

MDX Medical, Inc.(15)

  Information Services   Warrant   Common Stock     2,250,000       246       129  

Netbase Solutions, Inc.

  Information Services   Warrant   Preferred Series 1     60,000       356       363  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.07%)*

 

    954       550  
         

 

 

   

 

 

 

Internet Consumer & Business Services

       

Aria Systems, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series G     231,535       73       —    

Blurb, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     234,280       636       9  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer &
Business Services
  Warrant   Preferred Series E     968,992       18       154  

The Faction Group

  Internet Consumer &
Business Services
  Warrant   Preferred Series A     8,703       234       234  

Intent Media, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Common Stock     140,077       168       207  

Interactions Corporation

  Internet Consumer &
Business Services
  Warrant   Preferred Series G-3     68,187       204       204  

Just Fabulous, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series B     206,184       1,102       2,627  

Lightspeed POS, Inc.(5)(10)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     245,610       20       93  

LogicSource (15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     79,625       30       36  

Oportun (p.k.a. Progress Financial)

  Internet Consumer &
Business Services
  Warrant   Preferred Series G     174,562       78       196  

ShareThis, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     493,502       547       —    

Snagajob.com, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series A     1,800,000       782       1,257  

Tapjoy, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series D     748,670       316       7  

TraceLink, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series A-2     283,353       1,833       1,833  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.82%)*

 

    6,041       6,857  
         

 

 

   

 

 

 

Media/Content/Info

       

FanDuel, Inc.

  Media/Content/Info   Warrant   Common Stock     15,570       —         —    
  Media/Content/Info   Warrant   Preferred Series A     4,648       730       1,875  
       

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.(16)

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       3,743  

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       4  

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant   Common Stock     255,818       4       17  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       33  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.67%)*

 

    3,425       5,672  
         

 

 

   

 

 

 

Medical Devices & Equipment

       

Amedica Corporation(4)(15)

  Medical Devices &
Equipment
  Warrant   Common Stock     8,603       459       1  

Aspire Bariatrics, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series B-1     112,858       455       65  

Avedro, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     300,000       401       275  

 

See notes to consolidated financial statements.

 

F-38


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Flowonix Medical Incorporated

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     155,325     $ 362     $ —    

Gelesis, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series A-1     74,784       78       216  

InspireMD, Inc.(4)(5)(10)

  Medical Devices &
Equipment
  Warrant   Common Stock     39,364       242       —    

IntegenX, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series C     547,752       15       —    

Intuity Medical, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series 4     1,819,078       294       294  

Medrobotics Corporation(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series E     455,539       370       411  

Micell Technologies, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series D-2     84,955       262       150  

NetBio, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series A     7,841       408       56  

NinePoint Medical, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series A-1     587,840       170       82  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series D     10,535,275       1,252       86  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices &
Equipment
  Warrant   Preferred Series A     500,000       402       430  

Quanterix Corporation(4)

  Medical Devices &
Equipment
  Warrant   Common Stock     66,039       205       536  

Sebacia, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series D     778,301       133       127  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices &
Equipment
  Warrant   Preferred Series A     6,464       188       —    

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(4)

  Medical Devices &
Equipment
  Warrant   Common Stock     13,864       401       —    

Tela Bio, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series B     387,930       62       153  

ViewRay, Inc.(4)(15)

  Medical Devices &
Equipment
  Warrant   Common Stock     128,231       333       414  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.39%)*

 

    6,492       3,296  
         

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       160       308  
  Semiconductors   Warrant   Preferred Series D-2     750,000       99       519  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       259       827  

Aquantia Corp.(4)

  Semiconductors   Warrant   Common Stock     19,683       4       11  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       46       195  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.12%)*

 

    309       1,033  
         

 

 

   

 

 

 

Software

       

Actifio, Inc.

  Software   Warrant   Common Stock     73,584       249       84  
  Software   Warrant   Preferred Series F     31,673       343       79  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       163  

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A     168,750       188       —    

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433       258       113  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       129  
  Software   Warrant   Preferred Series C     592,019       730       179  
  Software   Warrant   Preferred Series C-A     2,218,214       230       4,458  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       4,766  

DNAnexus, Inc.

  Software   Warrant   Preferred Series C     909,091       97       97  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       175  

Fuze, Inc.(15)

  Software   Warrant   Preferred Series F     256,158       89       53  

 

See notes to consolidated financial statements.

 

F-39


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  

Mattersight Corporation(4)

  Software   Warrant   Common Stock     357,143     $ 538     $ 168  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718       334       639  

Mobile Posse, Inc.(15)

  Software   Warrant   Preferred Series C     396,430       130       353  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       —    

NewVoiceMedia Limited(5)(10)

  Software   Warrant   Preferred Series E     225,586       33       190  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     228,972       150       227  

PerfectServe, Inc.

  Software   Warrant   Preferred Series C     129,073       720       720  

Poplicus, Inc.

  Software   Warrant   Common Stock     132,168       —         —    

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       7  

RapidMiner, Inc.

  Software   Warrant   Preferred Series C-1     4,982       23       23  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series C-Prime     640,603       66       44  

Signpost, Inc.

  Software   Warrant   Preferred Series C     324,005       314       106  

Wrike, Inc.

  Software   Warrant   Common Stock     698,760       462       1,040  
         

 

 

   

 

 

 

Subtotal: Software (1.06%)*

 

    5,413       8,884  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

       

Alimera Sciences, Inc.(4)

  Specialty
Pharmaceuticals
  Warrant   Common Stock     1,717,709       861       488  
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.06%)*

 

    861       488  
         

 

 

   

 

 

 

Surgical Devices

       

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       15  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       291  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       306  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436       225       16  
  Surgical Devices   Warrant   Preferred Series D     175,000       100       429  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       60  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       505  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.10%)*

 

    758       811  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

       

Agrivida, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     471,327       120       88  

Alphabet Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 1B     13,667       82       —    

American Superconductor Corporation(4)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     58,823       39       7  

Brightsource Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 1     116,666       104       —    

Calera, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     44,529       513       —    

EcoMotors, Inc. (15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series B     437,500       308       —    

Fluidic, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     61,804       102       —    

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     530,811       181       —    
  Sustainable and
Renewable Technology
  Warrant   Preferred Series 2-A     6,229       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    537,040       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C-1     280,897       275       357  

GreatPoint Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series A     325,000       155       155  

 

See notes to consolidated financial statements.

 

F-40


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(unaudited)

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(3)     Value(4)  
  Sustainable and
Renewable Technology
  Warrant   Preferred Series B     131,883     $ 63     $ 63  
       

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       218  

Polyera Corporation(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     311,609       338       —    

Proterra, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 4     477,517       41       599  

Rive Technology, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series E     234,477       12       8  

Stion Corporation(6)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series Seed     2,154       1,378       —    

TAS Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 3-A     1,019,793       189       —    
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.15%)*

 

    4,797       1,277  
         

 

 

   

 

 

 

Total: Warrant Investments (4.38%)*

 

    43,578       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 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.

(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 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.

(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, or payment-in-kind, 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 Hercules Technology II, L.P., or HT II, or Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business investment companies, or 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.

 

F-41


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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, 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 Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was subject to tax as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a regulated investment company, or 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 Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”).

Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“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. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they 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, or (“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 II and HT III hold approximately $113.1 million and $285.8 million in assets, respectively, and they accounted for approximately 5.7% and 14.4% of the Company’s total assets, respectively, prior to consolidation at March 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. generally accepted accounting principles (“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.

The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIE. All significant inter-company accounts and transactions have been eliminated in consolidation. As provided under Regulation S-X and ASC 946, the Company will not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose

 

F-42


Table of Contents
Index to Financial Statements

business consists of providing services to the Company. Rather, an investment company’s interest in portfolio companies that are not investment companies should be measured at fair value in accordance with ASC Topic 946.

The accompanying consolidated interim financial statements have been prepared in conformity with U.S. GAAP for interim financial information, and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the full fiscal year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2017. The year-end Consolidated Statement of Assets and Liabilities data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

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.

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.

 

F-43


Table of Contents
Index to Financial Statements

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 2021 Asset-Backed Notes (as defined herein). See “Note 4 – Borrowings”.

Reclassification

Certain balances from prior years have been reclassified in order to conform to the current year presentation.

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 March 31, 2018, approximately 91.6% 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 Company’s 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, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.

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 Company’s Board of Directors is 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 Company’s Board of Directors has 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;

 

F-44


Table of Contents
Index to Financial Statements

(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 March 31, 2018 and as of December 31, 2017. The Company transfers investments in and out of Level 1, 2 and 3 as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended March 31, 2018, there were no transfers between Levels 1 or 2.

 

(in thousands)

Description

   Balance
March 31,
2018
     Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior Secured Debt

   $ 1,322,451      $ —        $ —        $ 1,322,451  

Unsecured Debt

     13,875        —          —          13,875  

Preferred Stock

     65,451        —          —          65,451  

Common Stock

     48,548        20,216        —          28,332  

Warrants

     33,253        —          5,068        28,185  

Escrow Receivable

     1,280        —          —          1,280  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,484,858      $ 20,216      $ 5,068      $ 1,459,574  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-45


Table of Contents
Index to Financial Statements

(in thousands)

Description

   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)
 

Senior Secured Debt

   $ 1,415,984      $ —        $ —        $ 1,415,984  

Preferred Stock

     40,683        —          —          40,683  

Common Stock

     48,678        22,825        —          25,853  

Warrants

     36,869        —          5,664        31,205  

Escrow Receivable

     752        —          —          752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,542,966      $ 22,825      $ 5,664      $ 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 three months ended March 31, 2018 and the year ended December 31, 2017.

 

(in thousands)

  Balance
January 1,
2018
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(3)
    Gross
Transfers
out of
Level 3(3)
    Balance
March 31,
2018
 

Senior Debt

  $ 1,415,984     $ (5,008   $ (6,679   $ 196,692     $ —       $ (278,538   $ —       $ —       $ 1,322,451  

Unsecured Debt

    —         —         (1,598     15,473       —         —         —         —         13,875  

Preferred Stock

    40,683       —         (2,071     26,839       —         —         —         —         65,451  

Common Stock

    25,853       —         618       1,861       —         —         —         —         28,332  

Warrants

    31,205       (386     (3,081     447       —         —         —         —         28,185  

Escrow Receivable

    752       78       —         875       (425     —         —         —         1,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,514,477     $ (5,316   $ (12,811   $ 242,187     $ (425   $ (278,538   $ —       $ —       $ 1,459,574  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands)

  Balance
January 1,
2017
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(4)
    Gross
Transfers
out of
Level 3(4)
    Balance
December 31,
2017
 

Senior Debt

  $ 1,323,978     $ (24,684   $ 29,610     $ 776,648     $ —       $ (626,897   $ —       $ (62,671   $ 1,415,984  

Preferred Stock

    39,418       (7,531     11,955       2,683       (468     —         —         (5,374     40,683  

Common Stock

    10,965       (487     (49,462     3,748       (1,582     —         62,671       —         25,853  

Warrants

    24,246       727       8,450       5,449       (7,303     —         —         (364     31,205  

Escrow Receivable

    1,382       261       —         3,127       (4,018     —         —         —         752  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,399,989     $ (31,714   $ 553     $ 791,655     $ (13,371   $ (626,897   $ 62,671     $ (68,409   $ 1,514,477  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in net realized gains or losses in the accompanying Consolidated Statement of Operations.

(2)

Included in net change in unrealized appreciation (depreciation) in the accompanying Consolidated Statement of Operations.

(3)

There were no transfers in or out of Level 3 during the three months ended March 31, 2018.

(4)

Transfers out of Level 3 during the year ended December 31, 2017 relate to the conversion of the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s 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 Theraputics, Inc. Transfers into Level 3 during the year ended December 31, 2017 relate to the conversion of the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s debt investment in Gamma Medica, Inc. to common stock through bankruptcy transactions.

(5)

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.

(6)

Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures.

For the three months ended March 31, 2018, approximately $2.1 million in net unrealized depreciation and $618,000 in net unrealized appreciation 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 $13.5 million in net unrealized depreciation and $3.4 million in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.

 

F-46


Table of Contents
Index to Financial Statements

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 March 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

   Fair Value at
March 31, 2018
(in thousands)
     Valuation Techniques/
Methodologies
  Unobservable Input(1)   Range    Weighted
Average(2)
 
Pharmaceuticals    $ 59,128      Originated Within 4-6 Months   Origination Yield   10.55% - 12.71%      12.50%  
     310,692      Market Comparable Companies   Hypothetical Market Yield   10.60% - 16.34%      13.65%  
        Premium/(Discount)   (0.25%) - 1.00%   
     —        Liquidation(3)   Probability weighting of
alternative outcomes
  100.00%   
Technology      91,882      Originated Within 4-6 Months   Origination Yield   10.40% - 15.15%      11.59%  
     364,111      Market Comparable Companies   Hypothetical Market Yield   10.02% - 26.08%      13.84%  
        Premium/(Discount)   (0.25%) - 1.00%   
     16,421      Liquidation(3)   Probability weighting of
alternative outcomes
  5.00% - 100.00%   
Sustainable and Renewable      17,630      Originated Within 4-6 Months   Origination Yield   11.97%      11.97%  
Technology      69,376      Market Comparable Companies   Hypothetical Market Yield   11.25% - 20.61%      14.04%  
Medical Devices      17,132      Originated Within 4-6 Months   Origination Yield   13.49%      13.49%  
     50,832      Market Comparable Companies   Hypothetical Market Yield   11.07% - 15.94%      12.45%  
        Premium/(Discount)   0.00% - 0.75%   
     839      Liquidation(3)   Probability weighting of
alternative outcomes
  10.00% - 50.00%   
Lower Middle Market      60,257      Originated Within 4-6 Months   Origination Yield   8.56% - 12.05%      11.75%  
     37,371      Market Comparable Companies   Hypothetical Market Yield   12.75% - 13.29%      13.04%  
        Premium/(Discount)   0.00%   
     17,095      Liquidation(3)   Probability weighting of
alternative outcomes
  5.00% - 80.00%   
      Debt Investments Where Fair Value Approximates Cost     
     159,641      Debt Investments originated within 3 months     
     63,919      Debt Investments Maturing in Less than One Year     
  

 

 

           
   $ 1,336,326      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

 

F-47


Table of Contents
Index to Financial Statements
  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, Diversified Financial Services, and Specialty Pharmaceuticals industries in the Consolidated Schedule of Investments.

 

(2)

The weighted averages are calculated based on the fair market value of each investment.

 

(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

Investment Type -Level

Three Debt Investments

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input(1)

  Range     Weighted
Average (2)
 

Pharmaceuticals

  $ 44,301    

Originated Within 6 Months

 

Origination Yield

    10.71% - 12.61%       11.89%  
    379,841     Market Comparable Companies   Hypothetical Market Yield     10.14% - 16.14%       12.94%  
     

Premium/(Discount)

    (0.25%) - 0.75%    
    2,257     Liquidation(3)   Probability weighting of alternative outcomes     100.00%    

Technology

    158,916    

Originated Within 6 Months

 

Origination Yield

    9.4% - 25.11%       11.68%  
    290,561     Market Comparable Companies   Hypothetical Market Yield     9.47% - 19.21%       13.55%  
      Premium/(Discount)     (0.25%) - 1.00%    
    22,020     Liquidation(3)   Probability weighting of alternative outcomes     5.00% - 100.00%    

Sustainable and Renewable

    33,020     Originated Within 6 Months   Origination Yield     11.97% - 20.06%       15.31%  

Technology

    49,647    

Market Comparable Companies

  Hypothetical Market Yield     11.15% - 14.16%       12.13%  
      Premium/(Discount)     0.00% - 0.25%    

Medical Devices

    17,013     Originated Within 6 Months   Origination Yield     13.49%       13.49%  
    89,869     Market Comparable Companies  

Hypothetical Market Yield

    9.66% - 17.57%       12.28%  
      Premium/(Discount)     0.00% - 0.50%    

Lower Middle Market

    97,291    

Originated Within 6 Months

  Origination Yield     8.29% - 12.68%       12.01%  
    19,219    

Liquidation(3)

  Probability weighting of alternative outcomes     10.00% - 100.00%    
    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.

 

F-48


Table of Contents
Index to Financial Statements
   

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)

The weighted averages are calculated based on the fair market value of each investment.

 

(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

(4)

Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

 

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
March 31, 2018
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input (1)

  Range     Weighted
Average (6)

Equity Investments

  $ 9,019    

Market Comparable Companies

 

EBITDA Multiple(2)

    3.7x - 58.1x     16.4x
     

Revenue Multiple(2)

    0.6x - 11.8x     3.9x
     

Discount for Lack of Marketability(3)

    12.12% - 18.46%     17.39%
     

Average Industry Volatility(4)

    32.5% - 80.36%     54.51%
     

Risk-Free Interest Rate

    1.97% - 2.25%     2.19%
     

Estimated Time to Exit (in months)

    8 - 23     19
    18,670     Market Adjusted OPM Backsolve   Market Equity Adjustment(5)     (42.3%) - 42.71%     6.61%
     

Average Industry Volatility(4)

    33.52% - 85.47%     71.87%
     

Risk-Free Interest Rate

    0.88% - 2.15%     1.86%
     

Estimated Time to Exit (in months)

    11 - 23     18
    12,432    

Liquidation

 

Probability weighting of alternative outcomes

    50% - 100%    
    53,662    

Other(7)

     
Warrant Investments     18,169     Market Comparable Companies  

EBITDA Multiple(2)

    3.7x - 58.1x     17.9x
     

Revenue Multiple(2)

    0.5x - 11.8x     3.2x
     

Discount for Lack of Marketability(3)

    11.13% - 28.69%     15.76%
     

Average Industry Volatility(4)

    27.33% - 99.42%     57.06%
     

Risk-Free Interest Rate

    2.05% - 2.46%     2.12%
     

Estimated Time to Exit (in months)

    11 - 47     15
    7,986     Market Adjusted OPM Backsolve  

Market Equity Adjustment(5)

    (31.02%) - 186.26%     14.68%
     

Average Industry Volatility(4)

    19.08% - 103.43%     67.94%
     

Risk-Free Interest Rate

    0.96% - 2.47%     1.85%
      Estimated Time to Exit (in months)     11 - 47     20
    2,030     Other(7)      
 

 

 

         
Total Level Three Warrant and Equity Investments   $ 121,968          
 

 

 

         

 

(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 Black Scholes option pricing model (“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. The significant unobservable input used in the fair value measurement of impaired equity securities is the probability weighting of alternative outcomes.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Represents the range of changes in industry valuations since the portfolio company’s last external valuation event.

(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.

 

F-49


Table of Contents
Index to Financial Statements

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input (1)

  Range     Weighted
Average (6)

Equity Investments

  $ 7,684    

Market Comparable Companies

 

EBITDA Multiple(2)

    5.1x - 40.2x     13.2x
     

Revenue Multiple(2)

    0.5x - 6.2x     2.9x
     

Discount for Lack of  Marketability(3)

    7.49% - 12.97%     8.77%
     

Average Industry Volatility(4)

    27.8% - 77.3%     53.35%
     

Risk-Free Interest Rate

    1.40% - 1.90%     1.47%
     

Estimated Time to Exit (in months)

    3 - 10     5
    19,323     Market Adjusted OPM Backsolve   Market Equity Adjustment(5)     (16.43%) - 29.4%     11.79%
     

Average Industry Volatility(4)

    33.17% - 78.77%     68.99%
     

Risk-Free Interest Rate

    0.84% - 1.51%     1.42%
     

Estimated Time to Exit (in months)

    5 - 26     13
    39,529     Other (7)      

Warrant Investments

    19,310    

Market Comparable Companies

 

EBITDA Multiple(2)

    5x - 40.2x     14.6x
     

Revenue Multiple(2)

    0.5x - 6.4x     2.6x
     

Discount for Lack of  Marketability(3)

    5.16% - 27.41%     13.57%
     

Average Industry Volatility(4)

    27.8% - 102.77%     55.15%
     

Risk-Free Interest Rate

    1.31% - 2.09%     1.66%
     

Estimated Time to Exit (in months)

    2 - 48     13
    6,713     Market Adjusted OPM Backsolve  

Market Equity Adjustment(5)

    (68.52%) - 154.5%     11.76%
     

Average Industry Volatility(4)

    33.17% - 110.32%     66.97%
     

Risk-Free Interest Rate

    0.96% - 2.09%     1.59%
     

Estimated Time to Exit (in months)

    5 - 48     20
    5,182     Other(7)      
 

 

 

         
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 Black Scholes 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.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Represents the range of changes in industry valuations since the portfolio company’s last external valuation event.

(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.

 

F-50


Table of Contents
Index to Financial Statements

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/assess market based movements.

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

 

F-51


Table of Contents
Index to Financial Statements

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 March 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.

 

F-52


Table of Contents
Index to Financial Statements

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 three months ended March 31, 2018 and 2017.

 

(in thousands)                For the Three Months Ended March 31, 2018  

Portfolio Company

   Type     Fair Value at
March 31,
2018
    Investment
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Realized
Gain/(Loss)
 

Control Investments

          

Achilles Technology Management Co II, Inc.

     Control     $ 117     $ —       $ (125   $ —    

Gibraltar Business Capital, LLC

     Control       37,201       127       —         —    

Second Time Around (Simplify Holdings, LLC)

     Control       —         —         1,781       (1,743

Tectura Corporation

     Control       17,095       459       (2,276     335  
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

     $ 54,413     $ 586     $ (620   $ (1,408
    

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

          

Optiscan BioMedical, Corp.

     Affiliate     $ 6,527     $ —       $ (1,065     —    

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

     Affiliate       23,998       669       828       —    

Stion Corporation

     Affiliate       —         —         —         —    
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

     $ 30,525     $ 669     $ (237   $ —    
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

     $ 84,938     $ 1,255     $ (857   $ (1,408
 

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)                For the Three Months Ended March 31, 2017  

Portfolio Company

   Type     Fair Value at
March 31,
2017
    Investment
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Realized
Gain/(Loss)
 

Control Investments

          

Achilles Technology Management Co II, Inc.

     Control     $ 2,833     $ 74     $ (1,941   $ —    

SkyCross, Inc.

     Control       2,103       —         2,103       —    

Tectura Corporation

     Control       19,839       445       51       (51
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

     $ 24,775     $ 519     $ 213     $ (51
    

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

          

Optiscan BioMedical, Corp.

     Affiliate     $ 5,311     $ —       $ 439     $ —    

Stion Corporation

     Affiliate       —         2       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

     $ 5,311     $ 2     $ 439     $ —    
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

     $ 30,086     $ 521     $ 652     $ (51
 

 

 

   

 

 

   

 

 

   

 

 

 

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 this investment is classified as a control investment as of September 30, 2017. As of 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

 

F-53


Table of Contents
Index to Financial Statements

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, 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 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 June 2016, Achilles Technology Management Co II, Inc. acquired the assets of a global antenna company that produces radio frequency system solutions as part of an article 9 consensual foreclosure and public auction for total consideration in the amount of $4.0 million. In September and November 2016, the Company made a $1.0 million and $250,000 debt investment, respectively, in Achilles Technology Management II, Inc. to provide working capital under the terms of a loan servicing agreement.

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. The remaining equity investment in Achilles Technology Management II, Inc. is carried on the consolidated statement of assets and liabilities at fair value.

The following table shows the fair value of the Company’s portfolio of investments by asset class as of March 31, 2018 and December 31, 2017:

 

     March 31, 2018     December 31, 2017  

(in thousands)

   Investments at
Fair Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior Secured Debt with Warrants

   $ 736,137        49.6   $ 880,115        57.1

Senior Secured Debt

     619,567        41.8     572,738        37.1

Unsecured Debt

     13,875        0.9     —          —    

Preferred Stock

     65,451        4.4     40,683        2.6

Common Stock

     48,548        3.3     48,678        3.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,483,578        100.0   $ 1,542,214        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.

 

F-54


Table of Contents
Index to Financial Statements

A summary of the Company’s investment portfolio, at value, by geographic location as of March 31, 2018 and December 31, 2017 is shown as follows:

 

     March 31, 2018     December 31, 2017  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 1,274,185        86.0   $ 1,404,235        91.1

United Kingdom

     112,221        7.6     91,105        5.9

Australia

     34,682        2.3     —          0.0

Netherlands

     20,913        1.4     20,783        1.3

Cayman Islands

     19,822        1.3     14,954        1.0

Sweden

     11,933        0.8     —          0.0

Switzerland

     9,206        0.6     10,581        0.7

Canada

     616        0.0     556        0.0

Israel

     —          0.0     —          0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,483,578        100.0   $ 1,542,214        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the fair value of the Company’s portfolio by industry sector at March 31, 2018 and December 31, 2017:

 

     March 31, 2018     December 31, 2017  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Software

   $ 393,088        26.5   $ 360,123        23.4

Drug Discovery & Development

     387,371        26.1     369,173        23.9

Internet Consumer & Business Services

     178,502        12.0     154,909        10.0

Sustainable and Renewable Technology

     115,085        7.8     118,432        7.7

Drug Delivery

     84,494        5.7     91,214        5.9

Healthcare Services, Other

     72,041        4.8     72,337        4.7

Medical Devices & Equipment

     69,174        4.6     94,595        6.1

Media/Content/Info

     45,569        3.0     152,998        9.9

Diversified Financial Services

     37,201        2.5     —          0.0

Information Services

     32,196        2.2     24,618        1.6

Electronics & Computer Hardware

     21,906        1.5     9,982        0.6

Consumer & Business Products

     19,366        1.3     19,792        1.3

Surgical Devices

     12,663        0.9     13,161        0.9

Communications & Networking

     6,768        0.5     6,649        0.4

Biotechnology Tools

     5,645        0.4     5,604        0.4

Semiconductors

     1,342        0.1     10,406        0.7

Diagnostic

     911        0.1     720        0.1

Specialty Pharmaceuticals

     256        0.0     37,501        2.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,483,578        100.0   $ 1,542,214        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

No single portfolio investment represents more than 10% of the fair value of the investments as of March 31, 2018 and 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 March 31, 2018, approximately 85.6% of the Company’s debt investments were in a senior secured first lien position, with 48.0% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 33.3% 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, 1.7% of the Company’s debt investments were senior secured by the equipment of the portfolio company and 2.6% 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,

 

F-55


Table of Contents
Index to Financial Statements

including its intellectual property. Another 13.4% of the Company’s debt investments were secured by a second priority security interest in all of the portfolio company’s assets, other than intellectual property, and 1.0% were unsecured as a result of the terms of the acquisition of two of our portfolio companies.

Cash, Restricted Cash, and Cash Equivalents

Cash and cash equivalents consists 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.

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 March 31, 2018, the Company had four debt investments on non-accrual with a cumulative investment cost and approximate fair value of $12.3 million and $0, respectively. At December 31, 2017, the Company had five debt investments on non-accrual with cumulative investment cost and fair value of approximately $14.8 million and $340,000, respectively. The decrease in the cost of debt investments on non-accrual between December 31, 2017 and March 31, 2018 is the result of the write-off of one debt investment that was on non-accrual at December 31, 2017 which resulted in a realized loss of approximately $1.7 million.

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 us 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 $33.0 million of unamortized fees at March 31, 2018, of which approximately $28.8 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $4.2 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 as 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 $3.2 million and $565,000 in one-time fee income during the three months ended March 31, 2018 and 2017, respectively.

 

F-56


Table of Contents
Index to Financial Statements

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 March 31, 2018, the Company had approximately $22.9 million in exit fees receivable, of which approximately $20.4 million was included as a component of the cost basis of the Company’s current debt investments and approximately $2.5 million was a deferred receivable 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.

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 the 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 $2.3 million and $2.2 million in PIK income during the three months ended March 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 three months ended March 31, 2018 and 2017.

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 March 31, 2018, the 2022 Notes, 2021 Asset-Backed Notes and 2022 Convertible Notes were quoted for 1.011, 1.000 and 1.015 per dollar at par value, respectively. At March 31, 2018, the 2024 Notes were trading on the NYSE for $25.28 per unit at par value. The par value at underwriting for the 2024 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 $193.8 million, compared to the carrying amount of $190.2 million as of March 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.

 

F-57


Table of Contents
Index to Financial Statements

The following tables provide additional information about the fair value and level in the fair value hierarchy of the Company’s outstanding borrowings at March 31, 2018 and December 31, 2017:

 

(in thousands)

Description(1)

   March 31, 2018      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

SBA Debentures

   $ 193,778      $ —        $ —        $ 193,778  

2022 Notes

     151,611        —          151,611        —    

2024 Notes

     185,565        —          185,565        —    

2021 Asset-Backed Notes

     33,575        —          33,575        —    

2022 Convertible Notes

     233,450        —          233,450        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 797,979      $ —        $ 604,201      $ 193,778  
  

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

Description(1)

   December 31, 2017      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

SBA Debentures

   $ 198,038      $ —        $ —        $ 198,038  

2022 Notes

     152,091        —          152,091        —    

2024 Notes

     188,061        —          188,061        —    

2021 Asset-Backed Notes

     49,199        —          49,199        —    

2022 Convertible Notes

     236,470        —          236,470        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 823,859      $ —        $ 625,821      $ 198,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

As of March 31, 2018, and December 31, 2017, there were no borrowings outstanding on both the Wells Facility and Union Facility.

4. Borrowings

Outstanding Borrowings

At March 31, 2018 and December 31, 2017, the Company had the following available and outstanding borrowings:

 

     March 31, 2018      December 31, 2017  

(in thousands)

   Total Available      Principal      Carrying Value(1)      Total Available      Principal      Carrying Value(1)  

SBA Debentures(2)

   $ 190,200      $ 190,200      $ 188,299      $ 190,200      $ 190,200      $ 188,141  

2022 Notes

     150,000        150,000        147,698        150,000        150,000        147,572  

2024 Notes

     183,510        183,510        179,161        183,510        183,510        179,001  

2021 Asset-Backed Notes

     33,575        33,575        33,156        49,153        49,153        48,650  

2022 Convertible Notes

     230,000        230,000        223,878        230,000        230,000        223,488  

Wells Facility(3)

     120,000        —          —          120,000        —          —    

Union Bank Facility(3)

     75,000        —          —          75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 982,285      $ 787,285      $ 772,192      $ 997,863      $ 802,863      $ 786,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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.

(2)

At both March 31, 2018 and 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.

(3)

Availability subject to the Company meeting the borrowing base requirements.

 

F-58


Table of Contents
Index to Financial Statements

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, were as follows as of March 31, 2018 and December 31, 2017:

 

(in thousands)

   March 31, 2018      December 31, 2017  

SBA Debentures

   $ 1,901      $ 2,059  

2022 Notes

     1,548        1,633  

2024 Notes

     4,417        4,591  

2021 Asset-Backed Notes

     420        503  

2022 Convertible Notes

     3,492        3,715  

Wells Facility(1)

     726        227  

Union Bank Facility(1)

     306        379  
  

 

 

    

 

 

 

Total

   $ 12,810      $ 13,107  
  

 

 

    

 

 

 

 

(1)

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 is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With the Company’s net investment of $44.0 million in HT II as of March 31, 2018, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of March 31, 2018. As of March 31, 2018, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of March 31, 2018 the Company held investments in HT II in 34 companies with a fair value of approximately $84.9 million, accounting for approximately 5.7% of the Company’s total investment portfolio at March 31, 2018. HT II held approximately $113.1 million in assets and accounted for approximately 5.7% of the Company’s total assets prior to consolidation at March 31, 2018.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to 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 March 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 March 31, 2018. As of March 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 March 31, 2018, the Company held investments in HT III in 47 companies with a fair value of approximately $236.0 million, accounting for approximately 15.9% of the Company’s total investment portfolio at March 31, 2018. HT III held approximately $285.8 million in assets and accounted for approximately 14.4% of the Company’s total assets prior to consolidation at March 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

 

F-59


Table of Contents
Index to Financial Statements

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 subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their 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 II and HT III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of March 31, 2018 as a result of having sufficient capital as defined under the SBA regulations.

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 March 2009, the initial maturity of SBA debentures will occur in March 2019. 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 II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. 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 SBA debentures range from 3.05% to 5.53% when including these annual fees.

The average amount of debentures outstanding for the three months ended March 31, 2018 for HT II was approximately $41.2 million with an average interest rate of approximately 4.56%. The average amount of debentures outstanding for the three months ended March 31, 2018 for HT III was approximately $149.0 million with an average interest rate of approximately 3.46%.

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the SBA debentures are as follows:

 

     Three Months Ended March 31,  

(in thousands)

       2018              2017      

Interest expense

   $ 1,718      $ 1,719  

Amortization of debt issuance cost (loan fees)

     158        168  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 1,876      $ 1,887  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 3,442      $ 3,442  

In aggregate, at March 31, 2018, with the Company’s net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At March 31, 2018, the Company has issued $190.2 million in SBA-guaranteed debentures in the Company’s SBIC subsidiaries.

 

F-60


Table of Contents
Index to Financial Statements

The Company reported the following SBA debentures outstanding principal balances as of March 31, 2018 and December 31, 2017:

 

(in thousands) Issuance/Pooling Date

   Maturity Date      Interest
Rate(1)
    March 31,
2018
     December 31,
2017
 

March 25, 2009

     March 1, 2019        5.53   $ 18,400      $ 18,400  

September 23, 2009

     September 1, 2019        4.64     3,400        3,400  

September 22, 2010

     September 1, 2020        3.62     6,500        6,500  

September 22, 2010

     September 1, 2020        3.50     22,900        22,900  

March 29, 2011

     March 1, 2021        4.37     28,750        28,750  

September 21, 2011

     September 1, 2021        3.16     25,000        25,000  

March 21, 2012

     March 1, 2022        3.28     25,000        25,000  

March 21, 2012

     March 1, 2022        3.05     11,250        11,250  

September 19, 2012

     September 1, 2022        3.05     24,250        24,250  

March 27, 2013

     March 1, 2023        3.16     24,750        24,750  
       

 

 

    

 

 

 

Total SBA Debentures

        $ 190,200      $ 190,200  
       

 

 

    

 

 

 

 

(1)

Interest rate includes annual charge

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 three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2019 Notes are as follows:

 

     Three Months Ended March 31,  

(in thousands)

       2018              2017      

Interest expense

   $ —        $ 1,159  

Amortization of debt issuance cost (loan fees)

     —          1,546  
  

 

 

    

 

 

 

Total interest expense and fees

   $ —        $ 2,705  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ 1,911  

2022 Notes

On October 23, 2017, the Company issued $150.0 million in aggregate principal amount of 4.625% Notes due 2022 (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 $147.5 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 $1.7 million.

 

F-61


Table of Contents
Index to Financial Statements

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 March 31, 2018, the Company was in compliance with the terms of the 2022 Notes Indenture.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Notes were as follows:

 

(in thousands)

   March 31, 2018      December 31, 2017  

Principal amount of debt

   $ 150,000      $ 150,000  

Unamortized debt issuance cost

     (1,548      (1,633

Original issue discount, net of accretion

     (754      (795
  

 

 

    

 

 

 

Carrying value of 2022 Notes

   $ 147,698      $ 147,572  
  

 

 

    

 

 

 

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2022 Notes are as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

       2018              2017      

Interest expense

   $ 1,734      $ —    

Amortization of debt issuance cost (loan fees)

     84        —    

Accretion of original issue discount

     41        —    
  

 

 

    

 

 

 

Total interest expense and fees

   $ 1,859      $ —    
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —    

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 of 6.25% unsecured notes due 2024 (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.

 

F-62


Table of Contents
Index to Financial Statements

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 of 1933, as amended (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.

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.

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 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 three months ended March 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 March 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.”

On February 9, 2018, the Company’s 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. See “Note 12—Subsequent Events.”

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

 

F-63


Table of Contents
Index to Financial Statements

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 March 31, 2018, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2024 Notes were as follows:

 

(in thousands)

   March 31, 2018     December 31, 2017  

Principal amount of debt

   $ 183,510     $ 183,510  

Unamortized debt issuance cost

     (4,417     (4,591

Original issue premium, net of amortization

     68       82  
  

 

 

   

 

 

 

Carrying value of 2024 Notes

   $ 179,161     $ 179,001  
  

 

 

   

 

 

 

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows:

 

     Three Months Ended March 31,  

(in thousands)

       2018             2017      

Interest expense

   $ 2,881     $ 3,987  

Amortization of debt issuance cost (loan fees)

     174       249  

Amortization of original issue premium

     (13     (16
  

 

 

   

 

 

 

Total interest expense and fees

   $ 3,042     $ 4,220  
  

 

 

   

 

 

 

Cash paid for interest expense

   $ 2,867     $ 3,977  

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 fixed rate asset-backed notes (the “2021 Asset-Backed Notes”), which were rated A(sf) by Kroll Bond Rating Agency, Inc. 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.

As part of this transaction, the Company entered into a sale and contribution agreement with the 2014 Trust Depositor under which the Company has agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2014 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor.

 

F-64


Table of Contents
Index to Financial Statements

In connection with the issuance and sale of the 2021 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to the Company. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rules 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Section 2(a)(51)(A) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S under the Securities Act. The 2014 Securitization Issuer is not registered under the 1940 Act in reliance on an exemption provided by Section 3(c)(7) thereof and Rule 3a-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants.

The 2014 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2014 Loans. The Company is entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). The Company also serves as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At March 31, 2018 and December 31, 2017, the 2021 Asset-Backed Notes had an outstanding principal balance of $33.6 million and $49.2 million, respectively.

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the 2021 Asset-Backed Notes are as follows:

 

     Three Months
Ended March 31,
 

(in thousands)

       2018              2017      

Interest expense

   $ 341      $ 888  

Amortization of debt issuance cost (loan fees)

     83        210  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 424      $ 1,098  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 387      $ 940  

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. There was approximately $3.6 million and $3.7 million of restricted cash as of March 31, 2018 and December 31, 2017, respectively, funded through interest collections.

 

F-65


Table of Contents
Index to Financial Statements

Convertible Notes

2022 Convertible Notes

On January 25, 2017, the Company issued $230.0 million in aggregate principal amount of 4.375% Convertible Notes due 2022 (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 March 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.

 

F-66


Table of Contents
Index to Financial Statements

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%.

As of March 31, 2018 and December 31, 2017, the components of the carrying value of the 2022 Convertible Notes were as follows:

 

(in thousands)

   March 31,
2018
     December 31,
2017
 

Principal amount of debt

   $ 230,000      $ 230,000  

Unamortized debt issuance cost

     (3,492      (3,715

Original issue discount, net of accretion

     (2,630      (2,797
  

 

 

    

 

 

 

Carrying value of 2022 Convertible Notes

   $ 223,878      $ 223,488  
  

 

 

    

 

 

 

For the three months ended March 31, 2018 and 2017, the components of interest expense, fees and cash paid for interest expense for the 2022 Convertible notes were as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

   2018      2017  

Interest expense

   $ 2,516      $ 1,758  

Amortization of debt issuance cost (loan fees)

     223        133  

Accretion of original issue discount

     168        112  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 2,907      $ 2,003  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 5,031      $ —    

As of March 31, 2018, the Company is in compliance with the terms of the indentures governing the 2022 Convertible Notes.

Credit Facilities

As of March 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 (the “Wells Facility”) 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.

The Wells Facility matures on August 2, 2019, unless terminated sooner in accordance with its terms.

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. 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

 

F-67


Table of Contents
Index to Financial Statements

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 three months ended March 31, 2018 and 2017, this non-use fee was $150,000 and $145,000, 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.

As of March 31, 2018, the minimum tangible net worth covenant increased to $742.7 million as a result of the public offering of 18.2 million shares of common stock issued for a total gross proceeds of approximately $242.8 million under an At-The-Market (“ATM”) equity distribution agreement (the “Prior Equity Distribution Agreement”) with JMP Securities (“JMP”) through February 2017, and a new ATM equity distribution agreement in September 2017 (the “Equity Distribution Agreement”) with JMP for the issuance of 1.6 million shares for gross proceeds of $20.5 million during 2017, and the issuance of 478,000 shares for gross proceeds of $6.3 million during the three months ended March 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, the Company paid an additional $750,000 in structuring fees and in connection with the amendment in December 2015, the Company paid an additional $188,000 in structuring fees. These fees are being amortized through the end of the term of the Wells Facility.

The Company did not make any draws or repayments on the available facility during the three months ended March 31, 2018. The Company had aggregate draws of $8.5 million on the available facility during the three months ended March 31, 2017 offset by repayments of $13.5 million. There were no borrowings outstanding on the facility as of March 31, 2018 and December 31, 2017.

For the three months ended March 31, 2018 and 2017, the components of interest expense and related fees and cash paid for interest expense for the Wells Facility are as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

       2018              2017      

Interest expense

   $ —        $ 2  

Amortization of debt issuance cost (loan fees)

     44        107  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 44      $ 109  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ 256  

 

F-68


Table of Contents
Index to Financial Statements

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 credit facility (the “Union Bank Facility”) with MUFG 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 company’s credit facility (the “Prior Union Bank Facility”) entered into on August 14, 2014 (as amended and restated from time to time) with MUFG Union Bank, as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility 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 July 18, 2016, the Company entered into the First Amendment to the Loan and Security Agreement, dated as of May 5, 2016 with MUFG Union Bank, N.A. 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.

Under the Union Bank Facility, MUFG Union Bank made commitments of $75.0 million. 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 MUFG 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 MUFG 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 three months ended March 31, 2018, the company incurred non-use fees of $94,000. For the three months ended March 31, 2017, the company incurred non-use fees under the Prior Union Bank Facility of $94,000.

The Union Bank Facility also includes various financial and other covenants applicable to the Company and its 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 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.

As of March 31, 2018, the minimum tangible net worth covenant increased to $789.2 million as a result the public offering of 18.2 million shares of common stock issued for a total net proceeds of approximately $239.8 million under the Prior Equity Distribution Agreement through February 2017, and the issuance of 1.6 million shares for net proceeds of $20.0 million during 2017, and the issuance of 478,000 shares for net proceeds of $6.0 million during the three months ended March 31, 2018 under the Equity Distribution Agreement. 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.

 

F-69


Table of Contents
Index to Financial Statements

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 MUFG Union Bank, as agent. Under the Sale Agreement, the Company agrees to (i) sell or transfer certain loans to Hercules Funding III under the MUFG Union Bank Facility and (ii) act as servicer for the loans sold or transferred.

The Company did not make any draws or repayments on the available facility during the three months ended March 31, 2018 and 2017. At March 31, 2018 and December 31, 2017, there were no borrowings outstanding on the Union Bank Facility.

For the three months ended March 31, 2018 and 2017, 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:

 

     Three Months Ended March 31,  

(in thousands)

       2018              2017      

Interest expense

   $ —        $ —    

Amortization of debt issuance cost (loan fees)

     74        112  
  

 

 

    

 

 

 

Total interest expense and fees

   $ 74      $ 112  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —    

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.

During the three months ended March 31, 2018, the Company declared a distribution of $0.31 per share. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s taxable year generally based upon its taxable income for the full taxable year and distributions paid for the full taxable year. As a result, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full taxable year. If the Company had determined the tax attributes of our distributions taxable year-to-date as of March 31, 2018, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the actual tax attributes of the Company’s 2018 distributions to stockholders will be.

 

F-70


Table of Contents
Index to Financial Statements

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 sum of (1) 98% of the Company’s ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of the Company’s 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. 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 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 at normal corporate tax rates based on its taxable income.

Taxable income for the three months ended March 31, 2018 was approximately $23.6 million or $0.28 per share. Taxable net realized gains for the same period were $219,000 or approximately $0.00 per share. Taxable income for the three months ended March 31, 2017 was approximately $20.5 million or $0.25 per share. Taxable net realized gains for the same period were $3.9 million or approximately $0.05 per share.

For the three months ended March 31, 2018, the Company paid approximately $667,000 of tax expense and had no accrued but unpaid tax expense as of the balance sheet date. For the three months ended March 31, 2017, the Company paid approximately $1.0 million of tax expense and had no accrued but unpaid tax expense as of the balance sheet date.

The Company intends to distribute 100% of spillover earnings from ordinary income from the Company’s taxable year ended December 31, 2017 to the Company’s stockholders during 2018.

6. Stockholder’s 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, we 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

 

F-71


Table of Contents
Index to Financial Statements

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 three months ended March 31, 2018, the Company sold 478,000 shares of common stock for total accumulated net proceeds of approximately $6.0 million, including $312,000 of offering expenses under the Equity Distribution Agreement.

During the three months ended March 31, 2017, the Company sold 3.3 million shares of common stock under the Prior Equity Distribution Agreement for total accumulated net proceeds of approximately $46.9 million, including $495,000 of offering expenses.

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 March 31, 2018, approximately 9.9 million shares remain available for issuance and sale under the Equity Distribution Agreement. See “Note 12—Subsequent Events.”

The Company has issued stock options for common stock subject to future issuance, of which 542,690 and 590,525 were outstanding at March 31, 2018 and December 31, 2017, respectively.

7. Equity Incentive Plan

The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 12.0 million shares of common stock.

The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) 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. In the future, we may adopt a Non-Employee Director Plan that, among other things, provides for the issuance of restricted stock to directors. Under the 2006 Plan, the Company is authorized to issue 1.0 million shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007.

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.

 

F-72


Table of Contents
Index to Financial Statements

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 Company’s Board of Directors approved a further 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.

The following table summarizes the common stock option activities for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  
     2018      2017  
     Common Stock
Options
    Weighted
Average
Exercise
Price
     Common Stock
Options
    Weighted
Average
Exercise
Price
 

Outstanding at December 31,

     590,525     $ 13.60        668,171     $ 13.73  

Granted

     22,000     $ 12.11        56,000     $ 14.56  

Exercised

     (38,208   $ 11.31        (24,023   $ 11.23  

Forfeited

     (20,628   $ 13.41        (4,723   $ 10.46  

Expired

     (10,999   $ 14.39        —       $ —    
  

 

 

      

 

 

   

Outstanding at March 31,

     542,690     $ 13.69        695,425     $ 13.91  
  

 

 

      

 

 

   

Shares Expected to Vest at March 31,

     176,076     $ 13.69        297,487     $ 13.91  

The following table summarizes common stock options outstanding and exercisable at March 31, 2018:

 

(Dollars in thousands,

except exercise price)

   Options Outstanding      Options Exercisable  

Range of exercise prices

   Number
of

shares
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
     Weighted
Average
Exercise
Price
     Number
of
shares
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
     Weighted
Average
Exercise
Price
 

$9.25 - $14.02  

     305,884        5.67      $ 115,163      $ 12.35        157,004        5.13      $ 87,521      $ 12.07  

$14.56 - $16.34  

     236,806        3.70        —        $ 15.42        209,610        3.40        —        $ 15.49  
  

 

 

       

 

 

       

 

 

       

 

 

    

$9.25 - $16.34  

     542,690        4.81      $ 115,163      $ 13.69        366,614        4.14      $ 87,521      $ 14.02  
  

 

 

       

 

 

       

 

 

       

 

 

    

Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months.

 

F-73


Table of Contents
Index to Financial Statements

All options may be exercised for a period ending seven years after the date of grant. At March 31, 2018 options for 366,614 shares were exercisable at a weighted average exercise price of approximately $14.02 per share with a weighted average remaining contractual term of 4.14 years.

The Company determined that the fair value of options granted under the Plans during the three months ended March 31, 2018 and 2017 was approximately $12,000 and $40,000, respectively. During the three months ended March 31, 2018 and 2017, approximately $14,000 and $20,000 of share-based cost due to stock option grants was expensed, respectively. As of March 31, 2018, there was approximately $85,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average remaining vesting period of 1.91 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 the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  
     2018     2017  

Expected Volatility

     21.19     23.07

Expected Dividends

     10     10

Expected term (in years)

     4.5       4.5  

Risk-free rate

     2.19% - 2.64%       1.70% - 2.02%  

During the three months ended March 31, 2018 and 2017, the Company granted 334,995 shares and 4,464 shares, respectively, of restricted stock awards pursuant to the Plans. The Company determined that the fair value of restricted stock awards granted under the Plans during the three months ended March 31, 2018 and 2017 was approximately $4.4 million and $65,000, respectively. As of March 31, 2018, there was approximately $5.7 million of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average remaining vesting period of 2.22 years.

The following table summarizes the activities for the Company’s unvested restricted stock awards for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  
     2018      2017  
     Restricted Stock
Awards
    Weighted
Average

Grant Date
Fair Value
     Restricted Stock
Awards
    Weighted
Average

Grant Date
Fair Value
 

Unvested at December 31,

     261,245     $ 12.43        799,558     $ 12.54  

Granted

     334,995     $ 13.04        4,464     $ 14.56  

Vested

     (83,054   $ 13.03        (240,299   $ 12.42  

Forfeited

     (1,168   $ 12.01        (1,602   $ 13.60  
  

 

 

      

 

 

   

Unvested at March 31,

     512,018     $ 12.73        562,121     $ 12.61  
  

 

 

      

 

 

   

During the three months ended March 31, 2018, and 2017, the Company granted 411,689 shares and 600,461 shares of restricted stock units pursuant to the Plans based on the December 2016 amended terms. The Company determined that the fair value of restricted stock units granted under the Plans during the three months ended March 31, 2018 and 2017, was approximately $5.4 million and $8.5 million. As of March 31, 2018, there was approximately $9.6 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average remaining vesting period of 2.32 years.

 

F-74


Table of Contents
Index to Financial Statements

The following table summarizes the activities for the Company’s unvested restricted stock units for the three months ended March 31, 2018:

 

     Three Months Ended March 31,      Three Months Ended March 31,  
     2018      2017  
     Restricted Stock
Units
    Weighted
Average

Grant Date
Fair Value
     Restricted Stock
Units
    Weighted
Average

Grant Date
Fair Value
 

Unvested at December 31,

     594,322     $ 12.99        —       $ —    

Granted

     411,689     $ 13.04        600,461     $ 13.94  

Distribution Equivalent Unit Granted

     20,386     $ 12.42        11,788     $ 13.94  

Vested(1)

     (198,006   $ 12.91        —       $ —    

Forfeited

     (3,544   $ 12.66        (1,078   $ 13.92  
  

 

 

      

 

 

   

Unvested at March 31,

     824,847     $ 12.69        611,171     $ 13.94  
  

 

 

      

 

 

   

 

(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 three months ended March 31, 2018, the Company expensed approximately $2.3 million of compensation expense related to restricted stock awards and restricted stock units. The Company had approximately $1.8 million in compensation expense related to restricted stock awards during the three months ended March 31, 2017.

The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of the Company’s stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make a cash payment at the time of option exercise or to pay taxes on restricted stock.

8. Earnings Per Share

Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

 

     Three Months Ended March 31,  

(in thousands, except per share data)

       2018             2017      

Numerator

    

Net increase in net assets resulting from operations

   $ 5,946     $ (5,588

Less: Distributions declared-common and restricted shares

     (26,419     (25,667
  

 

 

   

 

 

 

Undistributed earnings

     (20,473     (31,255
  

 

 

   

 

 

 

Undistributed earnings-common shares

     (20,473     (31,255

Add: Distributions declared-common shares

     26,247       25,479  
  

 

 

   

 

 

 

Numerator for basic and diluted change in net assets per common share

   $ 5,774     $ (5,776
  

 

 

   

 

 

 

Denominator

    

Basic weighted average common shares outstanding

     84,596       81,420  

Common shares issuable

     70       —    
  

 

 

   

 

 

 

Weighted average common shares outstanding assuming dilution

     84,666       81,420  

Change in net assets per common share

    

Basic

   $ 0.07     $ (0.07

Diluted

   $ 0.07     $ (0.07

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.

 

F-75


Table of Contents
Index to Financial Statements

For the three months ended March 31, 2018 and 2017, the effect of the 2022 Convertible Notes under the treasury stock method is anti-dilutive and, accordingly, is excluded from the calculation of diluted earnings per share.

The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti-dilutive shares. For the three months ended March 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 4.3 million shares related to 2022 Convertible Notes, 73,024 shares of unvested common stock options, and no shares of unvested restricted stock units. For the three months ended March 31, 2017, 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 1.2 million shares related to 2022 Convertible Notes, 72,796 shares of unvested common stock options, and 30,649 shares of unvested restricted stock units.

At March 31, 2018 and December 31, 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.

9. Financial Highlights

Following is a schedule of financial highlights for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,  
         2018             2017      

Per share data(1):

    

Net asset value at beginning of period

   $ 9.96     $ 9.90  

Net investment income

     0.31       0.28  

Net realized gain (loss) on investments

     (0.06     0.04  

Net unrealized appreciation (depreciation) on investments

     (0.18     (0.39
  

 

 

   

 

 

 

Total from investment operations

     0.07       (0.07

Net increase (decrease) in net assets from capital share transactions(1)

     (0.03     0.22  

Distributions of net investment income(6)

     (0.31     (0.31

Distributions of capital gains(6)

     —         —    

Stock-based compensation expense included in investment income(2)

     0.03       0.02  
  

 

 

   

 

 

 

Net asset value at end of period

   $ 9.72     $ 9.76  
  

 

 

   

 

 

 

Ratios and supplemental data:

    

Per share market value at end of period

   $ 12.10     $ 15.13  

Total return(3)

     (5.44 %)      9.47

Shares outstanding at end of period

     85,239       82,801  

Weighted average number of common shares outstanding

     84,596       81,420  

Net assets at end of period

   $ 828,731     $ 807,896  

Ratio of total expense to average net assets(4)

     10.64     11.48

Ratio of net investment income before investment gains and losses to average net assets(4)

     12.25     10.99

Portfolio turnover rate(5)

     15.62     10.89

Weighted average debt outstanding

   $ 795,060     $ 785,915  

Weighted average debt per common share

   $ 9.40     $ 9.65  

 

(1)

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.

(2)

Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC Topic 718 (“Compensation – Stock Compensation”), net investment income includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.

(3)

The total return for the three months ended March 31, 2018 and 2017 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.

(4)

These ratios are calculated based on weighted average net assets for the relevant period and are annualized. The ratio of total expense to average net assets for the period ended March 31, 2017 was incorrectly computed. The ratio was revised from 7.99% as previously disclosed to 11.48% as adjusted. The ratio was incorrectly computed for June 30, 2017 as well. It will be revised from 7.63% as previously disclosed to 11.24% in the June 30, 2018 Consolidated Financial Statements.

 

F-76


Table of Contents
Index to Financial Statements
(5)

The portfolio turnover rate for the three months ended March 31, 2018 and 2017 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 shares.

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 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 March 31, 2018, the Company had approximately $51.9 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 $174.0 million of non-binding term sheets outstanding at March 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 March 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

   Unfunded
Commitments(1)
 

Chemocentryx, Inc.

   $ 10,000  

Evernote Corporation

     10,000  

Proterra, Inc.

     10,000  

Impact Radius Holdings, Inc.

     5,000  

Wrike, Inc.

     5,000  

Achronix Semiconductor Corporation

     5,000  

Oak Street Health

     5,000  

Lithium Technologies, Inc.

     878  

Greenphire

     500  

Insurance Technologies Corp.

     500  
  

 

 

 

Total

   $ 51,878  
  

 

 

 

 

(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.

 

F-77


Table of Contents
Index to Financial Statements

Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense amounted to approximately $451,000 and $444,000 during the three months ended March 31, 2018 and 2017.

The Company’s contractual obligations as of March 31, 2018 include:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less than 1 year      1 - 3 years      3 - 5 years      After 5 years  

Borrowings(2)(3)(5)

   $ 787,285      $ 151,975      $ 61,550      $ 490,250      $ 83,510  

Operating Lease Obligations(4)

     17,290        2,436        5,005        5,912        3,937  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 804,575      $ 154,411      $ 66,555      $ 496,162      $ 87,447  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to the Company’s portfolio companies.

(2)

Includes $190.2 million in principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $183.5 million of the 2024 Notes, $33.6 million of the 2021 Asset-Backed Notes and $230.0 million of the 2022 Convertible Notes as of March 31, 2018.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to the Company’s consolidated financial statements.

(4)

Facility leases and licenses.

(5)

Reflects announced redemption of a portion of the 2024 Notes in April 2018. See “Note 4—Borrowings.”

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. 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.

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

 

F-78


Table of Contents
Index to Financial Statements

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 October 2016, the SEC adopted new rules and forms and amended other rules to enhance the reporting and disclosure of information by registered investment companies. As part of these changes, the SEC amended Regulation S-X to standardize and enhance disclosures in investment company financial statements. Implementation of the new or amended rules is required for reporting periods ending after August 1, 2017. The Company has reviewed the requirements and adopted the amendments to Regulation S-X 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.

12. Subsequent Events

Distribution Declaration

On April 25, 2018 the Board of Directors declared a cash distribution of $0.31 per share to be paid on May 21, 2018 to stockholders of record as of May 14, 2018. This distribution represents the Company’s fifty-first consecutive distribution since the Company’s IPO, bringing the total cumulative distribution to date to $14.33 per share.

Redemption of 2024 Notes

On February 9, 2018, the Company’s Board of Directors approved a redemption of $100.0 million of outstanding aggregate principal amount of the 2024 Notes, which were redeemed on April 2, 2018.

ATM Equity Program Issuances

Subsequent to March 31, 2018 and as of April 30, 2018, the Company sold 679,800 shares of common stock for total accumulated net proceeds of approximately $8.2 million, including $74,000 of offering expenses, under the Equity Distribution Agreement with JMP. As of April 30, 2018, approximately 9.2 million shares remain available for issuance and sale under the Equity Distribution Agreement.

2025 Notes

On April 26, 2018, the Company issued $75.0 million in aggregate principal amount of 5.25% notes due 2025 (the “2025 Notes”). The 2025 Notes were issued pursuant to the Fifth Supplemental Indenture to the Base Indenture, dated April 26, 2018 (the “2025 Notes Indenture”), between the Company and U.S. Bank, National Association, as trustee. The sale of the 2025 Notes generated net proceeds of approximately $73.0 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $2.0 million.

 

F-79


Table of Contents
Index to Financial Statements

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.

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 Hercules Capital, Inc.

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.

The 2025 Notes are listed on the NYSE, and trade on the NYSE under the symbol “HCXZ.”

Portfolio Company Developments

As of April 30, 2018, the Company held warrants or equity positions in three companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. All 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 initial public offerings will do so in a timely manner or at all. In addition, subsequent to March 31, 2018, the following companies announced or completed liquidity events:

 

  1.

In March 2018, our portfolio company IntegenX, Inc., the market leader of rapid human DNA identification technology for use in forensics and law enforcement applications, announced that they have been acquired by Thermo Fisher Scientific Inc., the world leader in serving science. Terms of the transaction were not disclosed.

 

  2.

In April 2018, our portfolio company, DocuSign, Inc. completed its initial public offering.

 

F-80


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

For the Three Months Ended March 31, 2018

(in thousands)

 

Portfolio Company

  Investment (1)   Amount of
Interest
Credited to
Income(2)
    Realized
Gain (Loss)
    As of
December 31,
2017
Fair Value
    Gross
Additions(3)
    Gross
Reductions(4)
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    As of
March 31,
2018
Fair Value
 

Control Investments

               

Majority Owned Control Investments

               

Achilles Technology Management Co II, Inc.

  Common Stock   $ —       $ —       $ 242     $ —       $ —       $ (125   $ 117  

Gibraltar Business Capital,
LLC(8)

  Senior Debt     127       —         —         9,802       —         —         9,802  
  Preferred Stock     —         —         —         25,538       —         —         25,538  
  Common Stock     —         —         —         1,861       —         —         1,861  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Majority Owned Control Investments

    $ 127     $ —       $ 242     $ 37,201     $ —       $ (125   $ 37,318  

Other Control Investments

               

Second Time Around (Simplify Holdings, LLC)(7)

  Senior Debt   $ —       $ (1,743   $ —       $ —       $ (1,781   $ 1,781     $ —    

Tectura Corporation(5)

  Senior Debt     459       335       19,219       487       (335     (2,276     17,095  
  Preferred Stock     —         —         —         —         —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Control Investments

    $ 459     $ (1,408   $ 19,219     $ 487     $ (2,116   $ (495   $ 17,095  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 586     $ (1,408   $ 19,461     $ 37,688     $ (2,116   $ (620   $ 54,413  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

               

Optiscan BioMedical, Corp.

  Preferred Warrants   $ —       $ —       $ 86     $ —       $ —       $ 185     $ 271  
  Preferred Stock     —         —         6,205       1,301       —         (1,250     6,256  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Senior Debt     561       —         13,604       166       (2,000     (87     11,683  
  Common Stock     —         —         11,400       —         —         915       12,315  

Stion Corporation

  Preferred Warrants     —         —         —         —         —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 561     $ —       $ 31,295     $ 1,467     $ (2,000   $ (237   $ 30,525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control and Affiliate Investments

    $ 1,147     $ (1,408   $ 50,756     $ 39,155     $ (4,116   $ (857   $ 84,938  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

(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

 

F-81


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of March 31, 2018

(in thousands)

 

Portfolio Company

 

Industry

  Type of
Investment(1)
    Maturity
Date
    Interest Rate
and Floor
    Principal
or Shares
    Cost     Value(2)  

Control Investments

             

Majority Owned Control Investments

             

Achilles Technology Management Co II, Inc.

  Communications & Networking     Common Stock           100     $ 3,100     $ 117  

Gibraltar Business Capital, LLC

  Diversified Financial Services     Unsecured Debt       March 2023      
Interest rate FIXED
14.50%
 
 
  $ 10,000       9,802       9,802  
  Diversified Financial Services     Preferred Stock           10,602,752       25,538       25,538  
  Diversified Financial Services     Common Stock           830,000       1,861       1,861  
           

 

 

   

 

 

 

Total Gibraltar Business Capital, LLC

            $ 37,201     $ 37,201  
           

 

 

   

 

 

 

Total Majority Owned Control Investments (4.51%)*

            $ 40,301     $ 37,318  

Other Control Investments

             

Tectura Corporation

  Internet Consumer & Business Services     Senior Secured Debt       June 2021      

Interest rate FIXED
6.00%,

PIK Interest 3.00%

 
 

 

  $ 20,450     $ 20,450     $ 17,095  
  Internet Consumer & Business Services     Senior Secured Debt       June 2021       PIK Interest 8.00%     $ 10,680       240       —    
  Internet Consumer & Business Services    
Preferred Series BB
Equity
 
 
        1,000,000       —         —    
           

 

 

   

 

 

 

Total Tectura Corporation

              20,690       17,095  
           

 

 

   

 

 

 

Total Other Control Investments (2.06%)*

            $ 20,690     $ 17,095  
           

 

 

   

 

 

 

Total Control Investments (6.57%)*

            $ 60,991     $ 54,413  
           

 

 

   

 

 

 

Affiliate Investments

             
Optiscan BioMedical, Corp.   Medical Devices & Equipment    
Preferred Series B
Equity
 
 
        6,185,567     $ 3,000     $ 345  
  Medical Devices & Equipment    
Preferred Series C
Equity
 
 
        1,927,309       655       100  
  Medical Devices & Equipment    
Preferred Series D
Equity
 
 
        55,103,923       5,257       3,193  
  Medical Devices & Equipment    
Preferred Series E
Equity
 
 
        31,199,131       2,609       2,618  
 

Medical Devices & Equipment

   
Preferred Series E
Warrants
 
 
        10,535,275       1,252       271  
           

 

 

   

 

 

 

Total Optiscan BioMedical, Corp.

              12,773       6,527  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

  Sustainable and Renewable Technology     Senior Secured Debt       August 2019      


Interest rate
PRIME + 8.70%

or Floor rate of
12.95%,

4.50% Exit Fee

 
 

 
 

 

  $ 12,000       11,770       11,683  
  Sustainable and Renewable Technology     Common Stock           288       61,502       12,315  
           

 

 

   

 

 

 

Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

            $ 73,272     $ 23,998  

Stion Corporation

  Sustainable and Renewable Technology    
Preferred Series
Seed Warrants
 
 
        2,154       1,378       —    
           

 

 

   

 

 

 

Total Affiliate Investments (3.68%)*

            $ 87,423     $ 30,525  
           

 

 

   

 

 

 

Total Control and Affiliate Investments (10.25%)*

            $ 148,414     $ 84,938  
           

 

 

   

 

 

 

 

*

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.

 

F-82


Table of Contents
Index to Financial Statements

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 as of December 31, 2017 and 2016, 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, 2017, 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, 2017 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, 2017 and 2016, and the results of their operations, changes in their net assets and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, 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, 2017 and 2016 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.

 

F-83


Table of Contents
Index to Financial Statements

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 22, 2018

We have served as the Company’s auditor since 2010.

 

F-84


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(in thousands, except per share data)

 

     December 31, 2017     December 31, 2016  

Assets

    

Investments:

    

Non-control/Non-affiliate investments (cost of $1,506,454 and $1,475,918, respectively)

   $ 1,491,458     $ 1,414,210  

Control investments (cost of $25,419 and $22,598, respectively)

     19,461       4,700  

Affiliate investments (cost of $87,956 and $13,010, respectively)

     31,295       5,032  
  

 

 

   

 

 

 

Total investments in securities, at value (cost of $1,619,829 and $1,511,526, respectively)

     1,542,214       1,423,942  

Cash and cash equivalents

     91,309       13,044  

Restricted cash

     3,686       8,322  

Interest receivable

     12,262       11,614  

Other assets

     5,244       7,282  
  

 

 

   

 

 

 

Total assets

   $ 1,654,715     $ 1,464,204  
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued liabilities

   $ 26,896     $ 21,463  

Credit Facilities

     —         5,016  

2021 Asset-Backed Notes, net (principal of $49,153 and $109,205, respectively)(1)

     48,650       107,972  

Convertible Notes, net (principal of $230,000 and $0, respectively)(1)

     223,488       —    

2019 Notes, net (principal of $0 and $110,364, respectively)(1)

     —         108,818  

2022 Notes, net (principal of $150,000 and $0, respectively)(1)

     147,572       —    

2024 Notes, net (principal of $183,510 and $252,873, respectively)(1)

     179,001       245,490  

SBA Debentures, net (principal of $190,200 and $190,200, respectively)(1)

     188,141       187,501  
  

 

 

   

 

 

 

Total liabilities

   $ 813,748     $ 676,260  

Commitments and Contingencies (Note 10)

    

Net assets consist of:

    

Common stock, par value

     85       80  

Capital in excess of par value

     908,501       839,657  

Unrealized depreciation on investments(2)

     (79,760     (89,025

Accumulated undistributed realized gains (losses) on investments

     (20,374     14,314  

Undistributed net investment income

     32,515       22,918  
  

 

 

   

 

 

 

Total net assets

   $ 840,967     $ 787,944  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,654,715     $ 1,464,204  
  

 

 

   

 

 

 

Shares of common stock outstanding ($0.001 par value, 200,000,000 authorized)

     84,424       79,555  

Net asset value per share

   $ 9.96     $ 9.90  

 

(1)

The Company’s 2021 Asset-Backed Notes, Convertible Notes, 2019 Notes, 2022 Notes, 2024 Notes, and SBA debentures, as each term is defined herein, are presented net of the associated debt issuance costs for each instrument. See “Note 4—Borrowings.”

(2)

Amounts includes $2.1 million and $1.4 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, and estimated taxes payable liabilities as of December 31, 2017 and 2016, respectively.

See notes to consolidated financial statements.

 

F-85


Table of Contents
Index to Financial Statements

The following table presents the assets and liabilities of our consolidated securitization trust for the 2021 Asset-Backed Notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, 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)

   December 31, 2017      December 31, 2016  

Assets

     

Restricted Cash

   $ 3,686      $ 8,322  

Total investments in securities, at value (cost of $146,208 and $244,695, respectively)

     144,513        242,349  
  

 

 

    

 

 

 

Total assets

   $ 148,199      $ 250,671  
  

 

 

    

 

 

 

Liabilities

     

2021 Asset-Backed Notes, net (principal of $49,153 and $109,205, respectively)(1)

   $ 48,650      $ 107,972  
  

 

 

    

 

 

 

Total liabilities

   $ 48,650      $ 107,972  
  

 

 

    

 

 

 

 

(1)

The Company’s 2021 Asset-Backed Notes are presented net of the associated debt issuance costs. See “Note 4—Borrowings.”

 

 

 

 

See notes to consolidated financial statements.

 

F-86


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

 

     For the Year Ended
December 31,
 
     2017     2016     2015  

Investment income:

      

Interest and PIK interest income

      

Interest income:

      

Non-control/Non-affiliate investments

   $ 160,131     $ 150,705     $ 135,261  

Control investments

     1,304       38       —    

Affiliate investments

     801       160       347  
  

 

 

   

 

 

   

 

 

 

Total interest income

     162,236       150,903       135,608  
  

 

 

   

 

 

   

 

 

 

PIK interest income:

      

Non-control/Non-affiliate investments

     9,293       7,784       4,658  

Control investments

     667       40       —    
  

 

 

   

 

 

   

 

 

 

Total PIK interest income

     9,960       7,824       4,658  
  

 

 

   

 

 

   

 

 

 

Total interest and PIK interest income

     172,196       158,727       140,266  
  

 

 

   

 

 

   

 

 

 

Fee income

      

Non-control/Non-affiliate investments

     18,630       16,318       16,865  

Control investments

     11       6       —    

Affiliate investments

     43       —         1  
  

 

 

   

 

 

   

 

 

 

Total fees

     18,684       16,324       16,866  
  

 

 

   

 

 

   

 

 

 

Total investment income

     190,880       175,051       157,132  

Operating expenses:

      

Interest

     37,857       32,016       30,834  

Loan fees

     8,728       5,042       6,055  

General and administrative:

      

Legal expenses

     4,572       4,823       3,079  

Other expenses

     11,533       11,283       13,579  
  

 

 

   

 

 

   

 

 

 

Total general and administrative

     16,105       16,106       16,658  

Employee compensation:

      

Compensation and benefits

     24,555       22,500       20,713  

Stock-based compensation

     7,191       7,043       9,370  
  

 

 

   

 

 

   

 

 

 

Total employee compensation

     31,746       29,543       30,083  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     94,436       82,707       83,630  

Other income (loss)

     —         8,000       (1
  

 

 

   

 

 

   

 

 

 

Net investment income

     96,444       100,344       73,501  

Net realized gain (loss) on investments

      

Non-control/Non-affiliate investments

     (10,235     4,576       5,147  

Control investments

     (16,476     —         —    
  

 

 

   

 

 

   

 

 

 

Total net realized gain (loss) on investments

     (26,711     4,576       5,147  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

      

Non-control/Non-affiliate investments

     43,796       (29,970     (36,839

Control investments

     14,152       (4,025     —    

Affiliate investments

     (48,683     (2,222     1,107  
  

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     9,265       (36,217     (35,732
  

 

 

   

 

 

   

 

 

 

Total net realized and unrealized loss

     (17,446     (31,641     (30,585
  

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 78,998     $ 68,703     $ 42,916  
  

 

 

   

 

 

   

 

 

 

Net investment income before investment gains and losses per common share:

      

Basic

   $ 1.16     $ 1.34     $ 1.04  
  

 

 

   

 

 

   

 

 

 

Change in net assets resulting from operations per common share:

      

Basic

   $ 0.95     $ 0.91     $ 0.60  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.95     $ 0.91     $ 0.59  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

      

Basic

     82,519       73,753       69,479  
  

 

 

   

 

 

   

 

 

 

Diluted

     82,640       73,775       69,663  
  

 

 

   

 

 

   

 

 

 

Distributions declared per common share:

      

Basic

   $ 1.24     $ 1.24     $ 1.24  

See notes to consolidated financial statements.

 

F-87


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(dollars and shares in thousands)

 

   

 

Common Stock

    Capital
in excess

of par
value
    Unrealized
Appreciation
(Depreciation)

on
Investments
    Accumulated
Undistributed
Realized
Gains
(Losses) on
Investments
    Undistributed
Net
Investment

Income
    Provision
for Income
Taxes on
Investment

Gains
    Net
Assets
 
    Shares     Par Value  

Balance at December 31, 2014

    64,715     $ 65     $ 657,233     $ (17,076   $ 14,079     $ 4,905     $ (342   $ 658,864  

Net increase (decrease) in net assets resulting from operations

    —         —         —         (35,732     5,147       73,501       —         42,916  

Public offering, net of offering expenses

    7,591       8       100,084       —         —         —         —         100,092  

Acquisition of common stock under repurchase plan

    (437     —         (4,644     —         —         —         —         (4,644

Issuance of common stock due to stock option exercises

    64       —         427       —         —         —         —         427  

Retired shares from net issuance

    (29     —         (423     —         —         —         —         (423

Issuance of common stock under restricted stock plan

    676       1       (1     —         —         —         —         —    

Retired shares for restricted stock vesting

    (662     (1     (4,566     —         —         —         —         (4,567

Distributions reinvested in common stock

    200       —         2,446       —         —         —         —         2,446  

Distributions

    —         —         —         —         (15,327     (72,111     —         (87,438

Stock-based compensation(1)

    —         —         9,461       —         —         —         —         9,461  

Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles

    —         —         (7,773     —         8,767       (994     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

    72,118     $ 73     $ 752,244     $ (52,808   $ 12,666     $ 5,301     $ (342   $ 717,134  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

    —       $ —       $ —       $ (36,217   $ 4,576     $ 100,344     $ —       $ 68,703  

Public offering, net of offering expenses

    7,428       7       92,820       —         —         —         —         92,827  

Acquisition of common stock under repurchase plan

    (450     (1     (4,789     —         —         —         —         (4,790

Issuance of common stock due to stock option exercises

    55       —         654       —         —         —         —         654  

Retired shares from net issuance

    (17     —         (235     —         —         —         —         (235

Issuance of common stock under restricted stock plan

    556       1       (1     —         —         —         —         —    

Retired shares for restricted stock vesting

    (279     —         (2,944     —         —         —         —         (2,944

Distributions reinvested in common stock

    144       —         1,799       —         —         —         —         1,799  

Distributions

    —         —         —         —         (7,962     (84,371     —         (92,333

Stock-based compensation(1)

    —         —         7,129       —         —         —         —         7,129  

Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles

    —         —         (7,020     —         5,034       1,644       342       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    79,555     $ 80     $ 839,657     $ (89,025   $ 14,314     $ 22,918     $ —       $ 787,944  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

    —       $ —       $ —       $ 9,265     $ (26,711   $ 96,444     $ —       $ 78,998  

Public offering, net of offering expenses

    4,919       5       66,930       —         —         —         —         66,935  

Issuance of common stock due to stock option exercises

    49       —         500       —         —         —         —         500  

Retired shares from net issuance

    (21     —         (209     —         —         —         —         (209

Issuance of common stock under restricted stock plan

    10       —         —         —         —         —         —         —    

Retired shares for restricted stock vesting

    (252     —         (2,976     —         —         —         —         (2,976

Distributions reinvested in common stock

    164       —         2,202       —         —         —         —         2,202  

Issuance of Convertible Notes

    —         —         3,413       —         —         —         —         3,413  

Distributions

    —         —         —         —         (14,893     (88,194     —         (103,087

Stock-based compensation(1)

    —         —         7,247       —         —         —         —         7,247  

Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles

    —         —         (8,263     —         6,916       1,347       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    84,424     $ 85     $ 908,501     $ (79,760   $ (20,374   $ 32,515     $ —       $ 840,967  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Stock-based compensation includes $57, $87 and $90 of restricted stock and option expense related to director compensation for the years ended December 31, 2017, 2016 and 2015, respectively.

See notes to consolidated financial statements.

 

F-88


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     For the Year Ended December 31,  
     2017     2016     2015  

Cash flows from operating activities:

      

Net increase in net assets resulting from operations

   $ 78,998     $ 68,703     $ 42,916  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

      

Purchase of investments

     (764,795     (680,971     (712,701

Principal and fee payments received on investments

     641,016       444,758       509,593  

Proceeds from the sale of investments

     23,881       18,998       17,892  

Net unrealized depreciation (appreciation) on investments

     (9,265     36,217       35,732  

Net realized loss (gain) on investments

     26,711       (4,576     (5,147

Accretion of paid-in-kind principal

     (9,686     (7,319     (4,037

Accretion of loan discounts

     (6,711     (7,163     (8,049

Accretion of loan discount on convertible notes

     615       82       246  

Loss on debt extinguishment (convertible notes)

     —         —         1  

Payment of loan discount on convertible notes

     —         —         (5

Accretion of loan exit fees

     (19,098     (22,614     (14,947

Change in deferred loan origination revenue

     962       347       1,904  

Unearned fees related to unfunded commitments

     1,048       (758     (2,064

Amortization of debt fees and issuance costs

     7,492       3,773       5,161  

Depreciation

     201       202       193  

Stock-based compensation and amortization of restricted stock grants(1)

     7,247       7,129       9,461  

Change in operating assets and liabilities:

      

Interest and fees receivable

     (648     (2,375     213  

Prepaid expenses and other assets

     (1,097     3,234       4,826  

Accounts payable

     (10     56       (639

Accrued liabilities

     4,739       3,892       5,090  
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (18,400     (138,385     (114,361

Cash flows from investing activities:

      

Purchases of capital equipment

     (274     (252     (187

Reduction of restricted cash

     4,636       869       3,469  
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities

     4,362       617       3,282  

Cash flows from financing activities:

      

Issuance of common stock, net

     66,935       92,827       100,092  

Repurchase of common stock, net

     —         (4,790     (4,645

Retirement of employee shares

     (2,685     (2,525     (4,562

Distributions paid

     (100,885     (90,534     (84,992

Issuance of Convertible Notes

     230,000       —         —    

Issuance of 2022 Notes

     150,000       —         —    

Issuance of 2024 Notes

     5,636       149,873       —    

Repayments of 2017 Asset-Backed Notes

     —         —         (16,049

Repayments of 2019 Notes

     (110,364     —         (60,000

Repayments of 2021 Asset-Backed Notes

     (60,053     (20,095     —    

Repayments of 2024 Notes

     (75,000     —         —    

Borrowings of credit facilities

     8,497       285,891       138,689  

Repayments of credit facilities

     (13,513     (330,877     (88,689

Cash paid for debt issuance costs

     (6,342     (5,289     —    

Cash paid for redemption of convertible notes

     —         (17,604     (65

Fees paid for credit facilities and debentures

     77       (1,261     (620
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     92,303       55,616       (20,841

Net increase (decrease) in cash and cash equivalents

     78,265       (82,152     (131,920
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     13,044       95,196       227,116  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 91,309     $ 13,044     $ 95,196  
  

 

 

   

 

 

   

 

 

 

Supplemental non-cash investing and financing activities:

      

Interest paid

   $ 33,579     $ 31,011     $ 30,527  

Income taxes paid

   $ 1,076     $ 184     $ 973  

Distributions reinvested

   $ 2,202     $ 1,799     $ 2,446  

 

(1)

Stock-based compensation includes $57, $87 and $90 of restricted stock and option expense related to director compensation for the years ended December 31, 2017, 2016 and 2015, respectively.

See notes to consolidated financial statements.

 

F-89


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

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     $ 5,115     $ 5,146  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,115       5,146  
           

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.61%)*

 

    5,115       5,146  
           

 

 

   

 

 

 

Communications & Networking

             

Under 1 Year Maturity

             

OpenPeak, Inc.(8)

  Communications & Networking   Senior Secured  

April

2018

 

Interest rate PRIME + 8.75%

or Floor rate of 12.00%

  $ 11,464       8,228       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    8,228       —    
           

 

 

   

 

 

 

Subtotal: Communications & Networking (0.00%)*

 

    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%

  $ 1,000       1,000       1,000  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,000       1,000  
           

 

 

   

 

 

 

1-5 Years Maturity

             

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer & Business Products   Senior Secured   December 2019  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%, 2.95% Exit Fee

  $ 18,440       18,580       18,571  

Second Time Around (Simplify Holdings, LLC)(7)(8)(15)

  Consumer & Business Products   Senior Secured   February 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%, 4.75% Exit Fee

  $ 1,746       1,781       —    
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    20,361       18,571  
           

 

 

   

 

 

 

Subtotal: Consumer & Business Products (2.33%)*

 

    21,361       19,571  
           

 

 

   

 

 

 

Drug Delivery

 

   

Under 1 Year Maturity

 

   

Agile Therapeutics, Inc.(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%, 3.70% Exit Fee

  $ 10,888       11,292       11,292  

Pulmatrix Inc.(9)(11)

  Drug Delivery   Senior Secured  

July

2018

 

Interest rate PRIME + 6.25%

or Floor rate of 9.50%, 3.50% Exit Fee

  $ 3,259       3,455       3,455  

ZP Opco, Inc (p.k.a. Zosano Pharma)(11)

  Drug Delivery   Senior Secured   December 2018  

Interest rate PRIME + 2.70%

or Floor rate of 7.95%, 2.87% Exit Fee

  $ 6,316       6,609       6,609  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    21,356       21,356  
           

 

 

   

 

 

 

1-5 Years Maturity

 

 

AcelRx Pharmaceuticals, Inc.(10)(11)(15)

  Drug Delivery   Senior Secured   March 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

  $ 18,653       18,925       18,875  

Antares Pharma Inc.(10)(15)

  Drug Delivery   Senior Secured  

July

2022

 

Interest rate PRIME + 4.50%

or Floor rate of 9.00%, 4.25% Exit Fee

  $ 25,000       25,006       24,958  

 

See notes to consolidated financial statements.

 

F-90


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Edge Therapeutics, Inc.(12)

  Drug Delivery     Senior Secured     February 2020  

Interest rate PRIME + 4.65%

or Floor rate of 9.15%, 4.95% Exit Fee

  $ 20,000     $ 20,377     $ 20,331  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    64,308       64,164  
           

 

 

   

 

 

 

Subtotal: Drug Delivery (10.17%)*

 

    85,664       85,520  
           

 

 

   

 

 

 

Drug Discovery & Development

 

   

Under 1 Year Maturity

             

CytRx Corporation(11)(15)

  Drug Discovery & Development     Senior Secured     August 2018  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%, 7.09% Exit Fee

  $ 9,986       11,172       11,172  

Epirus Biopharmaceuticals, Inc.(8)

  Drug Discovery & Development     Senior Secured     April 2018  

Interest rate PRIME + 4.70%

or Floor rate of 7.95%, 3.00% Exit Fee

  $ 3,027       3,310       340  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    14,482       11,512  
           

 

 

   

 

 

 

1-5 Years Maturity

           

Auris Medical Holding, AG(5)(10)

  Drug Discovery & Development     Senior Secured     January 2020  

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 5.75% Exit Fee

  $ 10,341       10,610       10,563  

Aveo Pharmaceuticals, Inc.(10)(13)

  Drug Discovery & Development     Senior Secured     July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 5.40% Exit Fee

  $ 10,000       10,345       10,344  
  Drug Discovery & Development     Senior Secured     July 2021  

Interest rate PRIME + 4.70%

or Floor rate of 9.45%, 3.00% Exit Fee

  $ 10,000       9,918       9,915  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

  $ 20,000       20,263       20,259  

Axovant Sciences Ltd.(5)(10)

  Drug Discovery & Development     Senior Secured     March 2021  

Interest rate PRIME + 6.80%

or Floor rate of 10.55%

  $ 55,000       53,631       53,448  

Brickell Biotech, Inc.(12)

  Drug Discovery & Development     Senior Secured     September 2019  

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 6.75% Exit Fee

  $ 6,090       6,380       6,361  

Chemocentryx, Inc.(10)(15)(17)

  Drug Discovery & Development     Senior Secured     December 2021  

Interest rate PRIME + 3.30%

or Floor rate of 8.05%, 6.25% Exit Fee

  $ 5,000       4,947       4,947  

Genocea Biosciences, Inc.(11)

  Drug Discovery & Development     Senior Secured     January 2019  

Interest rate PRIME + 2.25%

or Floor rate of 7.25%, 4.95% Exit Fee

  $ 13,851       14,482       14,385  

Insmed, Incorporated(11)

  Drug Discovery & Development     Senior Secured     October 2020  

Interest rate PRIME + 4.75%

or Floor rate of 9.25%, 4.86% Exit Fee

  $ 55,000       55,425       54,963  

Metuchen Pharmaceuticals LLC(12)(14)

  Drug Discovery & Development     Senior Secured     October 2020  

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%, 2.25% Exit Fee

  $ 25,561       25,721       25,643  

Motif BioSciences Inc.(15)

  Drug Discovery & Development     Senior Secured     September 2021  

Interest rate PRIME + 5.50%

or Floor rate of 10.00%, 2.15% Exit Fee

  $ 15,000       14,651       14,651  

Myovant Sciences, Ltd.(5)(10)(13)(17)

  Drug Discovery & Development     Senior Secured     May 2021  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 6.55% Exit Fee

  $ 25,000       24,704       24,704  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(15)

  Drug Discovery & Development     Senior Secured     September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 40,000       40,144       39,829  
  Drug Discovery & Development     Senior Secured     September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 4.50% Exit Fee

  $ 10,000       10,040       9,958  

 

See notes to consolidated financial statements.

 

F-91


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Drug Discovery & Development   Senior Secured   September 2020  

Interest rate PRIME + 2.75%

or Floor rate of 8.50%, 2.25% Exit Fee

  $ 10,000     $ 9,964     $ 9,895  
         

 

 

   

 

 

   

 

 

 

Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)

  $ 60,000       60,148       59,682  

PhaseRx, Inc.(15)

  Drug Discovery & Development   Senior Secured   December 2019  

Interest rate PRIME + 5.75%

or Floor rate of 9.25%, 5.85% Exit Fee

  $ 4,694       4,842       1,917  

Stealth Bio Therapeutics Corp.(5)(10)(12)

  Drug Discovery & Development   Senior Secured   January 2021  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 5.00% Exit Fee

  $ 15,000       14,898       14,847  

uniQure B.V.(5)(10)(11)

  Drug Discovery & Development   Senior Secured   May 2020  

Interest rate PRIME + 3.00%

or Floor rate of 8.25%, 5.48% Exit Fee

  $ 20,000       20,579       20,543  

Verastem, Inc.(12)(17)

  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,957       4,910  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,996       4,949  
  Drug Discovery & Development   Senior Secured   December 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee

  $ 5,000       4,953       4,907  
         

 

 

   

 

 

   

 

 

 

Total Verastem, Inc.

  $ 15,000       14,906       14,766  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    346,187       341,679  
           

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (42.00%)*

 

    360,669       353,191  
           

 

 

   

 

 

 

Electronics & Computer Hardware

           

1-5 Years Maturity

           

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Senior Secured   September 2020  

Interest rate PRIME + 4.00%

or Floor rate of 8.25%, 4.25% Exit Fee

  $ 10,000       10,014       9,887  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    10,014       9,887  
           

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (1.18%)*

 

    10,014       9,887  
           

 

 

   

 

 

 

Healthcare Services, Other

           

1-5 Years Maturity

           

Medsphere Systems Corporation(14)(15)

  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 17,607       17,437       17,437  
  Healthcare Services, Other   Senior Secured   February 2021  

Interest rate PRIME + 4.75%

or Floor rate of 9.00%,

PIK Interest 1.75%

  $ 5,009       4,963       4,963  
         

 

 

   

 

 

   

 

 

 

Total Medsphere Systems Corporation

  $ 22,616       22,400       22,400  

Oak Street Health(12)

  Healthcare Services, Other   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  

PH Group Holdings(13)

  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,878       19,803  
  Healthcare Services, Other   Senior Secured   September 2020  

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 10,000       9,922       9,840  
         

 

 

   

 

 

   

 

 

 

Total PH Group Holdings

  $ 30,000       29,800       29,643  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    —         —    
           

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (8.56%)*

 

    72,165       72,008  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-92


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Information Services

           

1-5 Years Maturity

           

MDX Medical, Inc.(14)(15)(17)

  Information Services   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.25%,

PIK Interest 1.70%

  $ 7,568     $ 7,369     $ 7,327  

Netbase Solutions, Inc.(13)(14)

  Information Services   Senior Secured   August 2020  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 9,051       8,730       8,730  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    16,099       16,057  
           

 

 

   

 

 

 

Subtotal: Information Services (1.91%)*

 

    16,099       16,057  
           

 

 

   

 

 

 

Internet Consumer & Business Services

           

1-5 Years Maturity

           

AppDirect, Inc.

  Internet Consumer & Business Services   Senior Secured   January 2022  

Interest rate PRIME + 5.70%

or Floor rate of 9.95%, 3.45% Exit Fee

  $ 10,000       9,885       9,885  

Aria Systems, Inc.(11)(14)

  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 3.20%

or Floor rate of 6.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 2,103       2,104       1,803  
  Internet Consumer & Business Services   Senior Secured   June 2019  

Interest rate PRIME + 5.20%

or Floor rate of 8.95%,

PIK Interest 1.95%, 1.50% Exit Fee

  $ 18,832       18,839       16,144  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 20,935       20,943       17,947  

Greenphire Inc.

  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate 3-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 3,883       3,883       3,883  
  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate PRIME + 3.75%

or Floor rate of 7.00%

  $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total Greenphire Inc.

  $ 4,883       4,883       4,883  

Intent Media, Inc.(14)(15)

  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%, 2.00% Exit Fee

  $ 5,050       5,011       5,027  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.35%, 2.00% Exit Fee

  $ 2,020       1,987       1,991  
  Internet Consumer & Business Services   Senior Secured   May 2019  

Interest rate PRIME + 5.50%

or Floor rate of 9.00%,

PIK Interest 2.50%, 2.00% Exit Fee

  $ 2,022       1,988       1,992  
         

 

 

   

 

 

   

 

 

 

Total Intent Media, Inc.

  $ 9,092       8,986       9,010  

Interactions Corporation

  Internet Consumer & Business Services   Senior Secured   March 2021  

Interest rate 3-month LIBOR + 8.60%

or Floor rate of 9.85%, 1.75% Exit Fee

  $ 25,000       25,013       25,013  

LogicSource(15)

  Internet Consumer & Business Services   Senior Secured   October 2019  

Interest rate PRIME + 6.25%

or Floor rate of 9.75%, 5.00% Exit Fee

  $ 6,452       6,701       6,726  

Snagajob.com, Inc.(13)(14)

  Internet Consumer & Business Services   Senior Secured   July 2020  

Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%, 2.55% Exit Fee

  $ 41,023       40,633       41,036  

 

See notes to consolidated financial statements.

 

F-93


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Tectura Corporation(7)(8)(9)(14)

  Internet Consumer & Business Services   Senior Secured   June 2021  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 20,298     $ 20,298     $ 19,219  
  Internet Consumer & Business Services   Senior Secured   June 2021   PIK Interest 8.00%   $ 11,015       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 31,313       20,538       19,219  

The Faction Group

  Internet Consumer & Business Services   Senior Secured   January 2021  

Interest rate 3-month LIBOR + 9.25%

or Floor rate of 10.25%

  $ 8,000       8,000       8,000  
  Internet Consumer & Business Services   Senior Secured   January 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,000       2,000       2,000  
         

 

 

   

 

 

   

 

 

 

Total The Faction Group

  $ 10,000       10,000       10,000  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    147,582       143,719  
           

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (17.09%)*

 

    147,582       143,719  
           

 

 

   

 

 

 

Media/Content/Info

           

Under 1 Year Maturity

           

Machine Zone, Inc.(14)(16)

  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  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    106,641       106,641  
           

 

 

   

 

 

 

1-5 Years Maturity

             

Bustle(14)(15)

  Media/Content/Info   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

  $ 19,354       19,762       19,695  
  Media/Content/Info   Convertible
Debt
  September 2020   PIK Interest 25.00%   $ 1,000       1,000       1,000  
         

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

  $ 20,354       20,762       20,695  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,697       35,630  
           

 

 

   

 

 

 

Subtotal: Media/Content/Info (16.92%)*

 

    142,338       142,271  
           

 

 

   

 

 

 

Medical Devices & Equipment

           

Under 1 Year Maturity

             

Amedica Corporation(9)(15)

  Medical Devices & Equipment   Senior Secured   January 2018  

Interest rate PRIME + 7.70%

or Floor rate of 10.95%, 8.25% Exit Fee

  $ 605       2,255       2,255  

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Senior Secured   October 2018  

Interest rate PRIME + 4.00%

or Floor rate of 9.25%, 5.42% Exit Fee

  $ 2,527       2,848       2,848  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    5,103       5,103  
           

 

 

   

 

 

 

1-5 Years Maturity

           

IntegenX, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 12,500       13,042       12,991  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 6.75% Exit Fee

  $ 2,500       2,599       2,598  

 

See notes to consolidated financial statements.

 

F-94


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Medical Devices & Equipment   Senior Secured   June 2019  

Interest rate PRIME + 6.05%

or Floor rate of 10.05%, 9.75% Exit Fee

  $ 2,500     $ 2,618     $ 2,601  
         

 

 

   

 

 

   

 

 

 

Total IntegenX, Inc.

  $ 17,500       18,259       18,190  

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Senior Secured   June 2021  

Interest rate PRIME + 5.00%

or Floor rate of 9.25%, 4.95% Exit Fee

  $ 17,500       17,013       17,013  

Micell Technologies, Inc.(12)

  Medical Devices & Equipment   Senior Secured   August 2019  

Interest rate PRIME + 7.25%

or Floor rate of 10.50%, 5.00% Exit Fee

  $ 5,469       5,744       5,708  

Quanta Fluid Solutions(5)(10)(11)

  Medical Devices & Equipment   Senior Secured  

April

2020

 

Interest rate PRIME + 8.05%

or Floor rate of 11.55%, 5.00% Exit Fee

  $ 10,117       10,432       10,386  

Quanterix Corporation(11)

  Medical Devices & Equipment   Senior Secured   March 2019  

Interest rate PRIME + 2.75%

or Floor rate of 8.00%, 4.00% Exit Fee

  $ 9,043       9,477       9,477  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Senior Secured   July 2020  

Interest rate PRIME + 4.35%

or Floor rate of 8.85%, 6.05% Exit Fee

  $ 8,000       7,927       7,919  

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

  $ 5,000       4,991       4,973  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    73,843       73,666  
           

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (9.37%)*

 

    78,946       78,769  
           

 

 

   

 

 

 

Semiconductors

             

1-5 Years Maturity

             

Achronix Semiconductor Corporation(15)(17)

  Semiconductors   Senior Secured   August 2020  

Interest rate PRIME + 7.00%

or Floor rate of 11.00%, 12.50% Exit Fee

  $ 5,000       5,084       5,100  
  Semiconductors   Senior Secured   February 2019  

Interest rate PRIME + 6.00%

or Floor rate of 10.00%

  $ 4,274       4,274       4,273  
         

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

  $ 9,274       9,358       9,373  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,358       9,373  
           

 

 

   

 

 

 

Subtotal: Semiconductors (1.11%)*

 

    9,358       9,373  
           

 

 

   

 

 

 

Software

             

Under 1 Year Maturity

             

Clickfox, Inc.(13)

  Software   Senior Secured   May 2018  

Interest rate PRIME + 8.00%

or Floor rate of 11.50%, 12.01% Exit Fee

  $ 6,378       7,671       7,671  

Digital Train Limited (p.k.a. Jumpstart Games, Inc.)(15)

  Software   Senior Secured   July 2018   Interest rate 12-month LIBOR + 2.50%   $ 5,671       5,671       4,073  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    13,342       11,744  
         

 

 

   

 

 

 

1-5 Years Maturity

             

Clarabridge, Inc.(12)(14)

  Software   Senior Secured   April 2021  

Interest rate PRIME + 4.80%

or Floor rate of 8.55%,

PIK Interest 3.25%

  $ 40,893       40,870       41,063  

Emma, Inc.

  Software   Senior Secured   September 2022  

Interest rate daily LIBOR + 7.75%

or Floor rate of 8.75%

  $ 50,000       48,565       48,565  

Evernote Corporation(14)(15)(17)

  Software   Senior Secured   October 2020  

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,974       6,100  

 

See notes to consolidated financial statements.

 

F-95


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  
  Software   Senior Secured   July 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 1.25%

  $ 4,023     $ 3,999     $ 3,992  
         

 

 

   

 

 

   

 

 

 

Total Evernote Corporation

  $ 10,023       9,973       10,092  

Fuze, Inc.(13)(14)(15)

  Software   Senior Secured   July 2021  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.55%, 3.55% Exit Fee

  $ 50,332       50,464       50,420  

Impact Radius Holdings, Inc.(14)(17)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 4.25%

or Floor rate of 8.75%,

PIK Interest 1.55%, 1.75% Exit Fee

  $ 7,544       7,552       7,498  

Lithium Technologies, Inc.(17)

  Software   Senior Secured   October 2022  

Interest rate 1-month LIBOR + 8.00%

or Floor rate of 9.00%

  $ 12,000       11,740       11,740  

Microsystems Holding Company, LLC

  Software   Senior Secured   July 2022  

Interest rate 3-month LIBOR + 8.25%

or Floor rate of 9.25%

  $ 12,000       11,821       11,821  

OneLogin, Inc.(14)(15)

  Software   Senior Secured   August 2019  

Interest rate PRIME + 6.45%

or Floor rate of 9.95%,

PIK Interest 3.25%

  $ 15,883       15,811       16,071  

PerfectServe, Inc.

  Software   Senior Secured   April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 16,000       16,023       16,023  
  Software   Senior Secured   April 2021  

Interest rate 3-month LIBOR + 9.00%

or Floor rate of 10.00%, 2.50% Exit Fee

  $ 4,000       4,005       4,005  
         

 

 

   

 

 

   

 

 

 

Total PerfectServe, Inc.

  $ 20,000       20,028       20,028  

Pollen, Inc.(15)

  Software   Senior Secured   April 2019  

Interest rate PRIME + 4.25%

or Floor rate of 8.50%, 4.00% Exit Fee

  $ 7,000       6,964       6,964  

Poplicus, Inc.(8)(14)

  Software   Senior Secured   May 2022  

Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 1,250       1,250       —    

Quid, Inc.(14)(15)

  Software   Senior Secured   October 2019  

Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%, 3.00% Exit Fee

  $ 8,303       8,397       8,430  

RapidMiner, Inc.(14)

  Software   Senior Secured   December 2020  

Interest rate PRIME + 5.50%

or Floor rate of 9.75%,

PIK Interest 1.65%

  $ 7,001       6,971       6,971  

Regent Education(14)

  Software   Senior Secured   January 2021  

Interest rate FIXED 10.00%,

PIK Interest 2.00%, 6.35% Exit Fee

  $ 3,285       3,291       3,291  

Signpost, Inc.(14)

  Software   Senior Secured   February 2020  

Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%, 3.75% Exit Fee

  $ 15,510       15,603       15,685  

Vela Trading Technologies

  Software   Senior Secured   July 2022  

Interest rate daily LIBOR + 9.50%

or Floor rate of 10.50%

  $ 20,000       19,495       19,557  

Wrike, Inc.(14)(17)

  Software   Senior Secured   February 2021  

Interest rate PRIME + 6.00%

or Floor rate of 9.50%,

PIK Interest 2.00%, 3.00% Exit Fee

  $ 10,165       9,971       10,007  

 

See notes to consolidated financial statements.

 

F-96


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
   

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

ZocDoc

  Software     Senior Secured     April 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 20,000     $ 20,011     $ 20,011  
  Software     Senior Secured     November 2021  

Interest rate 3-month LIBOR + 9.50%

or Floor rate of 10.50%, 1.00% Exit Fee

  $ 10,000       10,005       10,005  
           

 

 

   

 

 

 

Total ZocDoc

  $ 30,000       30,016       30,016  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    318,782       318,219  
         

 

 

   

 

 

 

Subtotal: Software (39.24%)*

 

    332,124       329,963  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

 

   

Under 1 Year Maturity

 

         

Jaguar Animal Health, Inc.(11)

  Specialty Pharmaceuticals     Senior Secured     August 2018  

Interest rate PRIME + 5.65%

or Floor rate of 9.90%, 7.00% Exit Fee

  $ 1,089       1,496       1,496  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,496       1,496  
           

 

 

   

 

 

 

1-5 Years Maturity

     

Alimera Sciences, Inc.(11)(14)

  Specialty Pharmaceuticals     Senior Secured     November 2020  

Interest rate PRIME + 7.50%

or Floor rate of 11.00%,

PIK Interest 1.00%, 4.00% Exit Fee

  $ 35,398       35,517       35,517  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    35,517       35,517  
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (4.40%)*

 

    37,013       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       8,756       8,757  
           

 

 

   

 

 

 
Subtotal: 1-5 Years Maturity

 

    8,756       8,757  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (1.04%)*

 

    8,756       8,757  
           

 

 

   

 

 

 

Sustainable and Renewable Technology

 

   

Under 1 Year Maturity

 

   

FuelCell Energy, Inc.(12)

  Sustainable and Renewable Technology     Senior Secured     October 2018  

Interest rate PRIME + 5.50%

or Floor rate of 9.50%, 8.50% Exit Fee

  $ 16,806       18,190       18,190  

Kinestral Technologies Inc.

  Sustainable and Renewable Technology     Senior Secured     October 2018  

Interest rate 3-month LIBOR + 7.75%

or Floor rate of 8.75%, 3.23% Exit Fee

  $ 3,867       3,882       3,882  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    22,072       22,072  
           

 

 

   

 

 

 

1-5 Years Maturity

 

   

ChargePoint Inc.

  Sustainable and Renewable Technology     Senior Secured     August 2020  

Interest rate 3-month LIBOR + 8.75%

or Floor rate of 9.75%, 2.00% Exit Fee

  $ 19,394       19,416       19,416  

 

See notes to consolidated financial statements.

 

F-97


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

Portfolio Company

 

Sub-Industry

  Type of
Investment(1)
 

Maturity
Date

 

Interest Rate and Floor(2)

  Principal
Amount
    Cost(3)     Value(4)  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Senior Secured   August 2019  

Interest rate PRIME + 8.70%

or Floor rate of 12.95%, 4.50% Exit Fee

  $ 14,000     $ 13,604     $ 13,604  

Proterra, Inc.(11)(14)(17)

  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 5.95% Exit Fee

  $ 25,036       25,997       26,097  
  Sustainable and Renewable Technology   Senior Secured   November 2020  

Interest rate PRIME + 3.70%

or Floor rate of 7.95%,

PIK Interest 1.75%, 7.00% Exit Fee

  $ 5,007       5,173       5,190  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 30,043       31,170       31,287  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Senior Secured   January 2019  

Interest rate PRIME + 6.20%

or Floor rate of 9.45%, 4.00% Exit Fee

  $ 4,258       4,498       4,515  

Tendril Networks(12)

  Sustainable and Renewable Technology   Senior Secured   June 2019   Interest rate FIXED 9.25%, 8.50% Exit Fee   $ 13,156       13,863       13,845  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    82,551       82,667  
           

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (12.45%)*

 

    104,623       104,739  
           

 

 

   

 

 

 

Total: Debt Investments (168.38%)*

 

    1,440,055       1,415,984  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-98


Table of Contents
Index to Financial Statements

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)

  Biotechnology Tools   Equity   Common Stock     55,780     $ 500     $ —    
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.00%)*

 

    500       —    
         

 

 

   

 

 

 

Communications & Networking

           

Achilles Technology Management Co II, Inc.(7)(15)

  Communications & Networking   Equity   Common Stock     100       3,100       242  

GlowPoint, Inc.(4)

  Communications & Networking   Equity   Common Stock     114,192       102       41  

Peerless Network Holdings, Inc.

  Communications & Networking   Equity   Preferred Series A     1,000,000       1,000       5,865  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.73%)*

 

    4,202       6,148  
         

 

 

   

 

 

 

Diagnostic

           

Singulex, Inc.

  Diagnostic   Equity   Common Stock     937,998       750       720  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.09%)*

 

    750       720  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)

  Drug Delivery   Equity   Common Stock     54,240       108       109  

BioQ Pharma Incorporated(15)

  Drug Delivery   Equity   Preferred Series D     165,000       500       826  

Edge Therapeutics, Inc.(4)

  Drug Delivery   Equity   Common Stock     49,965       309       468  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Equity   Common Stock     125,000       1,500       1,275  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.32%)*

 

    2,417       2,678  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(4)(10)(15)

  Drug Discovery & Development   Equity   Common Stock     1,901,791       1,715       5,315  

Axovant Sciences Ltd.(4)(5)(10)

  Drug Discovery & Development   Equity   Common Stock     129,827       1,270       707  

Cerecor, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     119,087       1,000       381  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Equity   Common Stock     13,550       1,000       29  

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Equity   Common Stock     142,858       1,000       1,290  

Dynavax Technologies(4)(10)

  Drug Discovery & Development   Equity   Common Stock     20,000       550       374  

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     200,000       1,000       —    

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Equity   Common Stock     223,463       2,000       259  

Inotek Pharmaceuticals Corporation(4)

  Drug Discovery & Development   Equity   Common Stock     3,778       1,500       10  

Insmed, Incorporated(4)

  Drug Discovery & Development   Equity   Common Stock     70,771       1,000       2,154  

Melinta Therapeutics(4)

  Drug Discovery & Development   Equity   Common Stock     43,840       2,000       693  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)

  Drug Discovery & Development   Equity   Common Stock     76,362       2,743       1,367  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (1.50%)*

 

    16,778       12,579  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-99


Table of Contents
Index to Financial Statements

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)  

Electronics & Computer Hardware

           

Identiv, Inc. (4)

  Electronics & Computer Hardware   Equity   Common Stock     6,700     $ 34     $ 22  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       22  
         

 

 

   

 

 

 

Information Services

           

DocuSign, Inc.

  Information Services   Equity   Common Stock     385,000       6,081       8,011  
         

 

 

   

 

 

 

Subtotal: Information Services (0.95%)*

 

    6,081       8,011  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

   

Blurb, Inc.(15)

  Internet Consumer & Business Services   Equity   Preferred Series B     220,653       175       46  

Brigade Group, Inc. (p.k.a. Philotic, Inc.)

  Internet Consumer & Business Services   Equity   Common Stock     9,023       93       —    

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Equity   Preferred Series C     230,030       250       233  
  Internet Consumer & Business Services   Equity   Preferred Series D     198,677       250       213  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

    428,707       500       446  

OfferUp, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series A     286,080       1,663       2,236  
  Internet Consumer & Business Services   Equity   Preferred Series A-1     108,710       632       850  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

    394,790       2,295       3,086  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Equity   Preferred Series G     218,351       250       451  
  Internet Consumer & Business Services   Equity   Preferred Series H     87,802       250       255  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

    306,153       500       706  

RazorGator Interactive Group, Inc.

  Internet Consumer & Business Services   Equity   Preferred Series AA     34,783       15       49  

Tectura Corporation(7)

  Internet Consumer & Business Services   Equity   Preferred Series BB     1,000,000       —         —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.52%)*

 

    3,578       4,333  
         

 

 

   

 

 

 

Media/Content/Info

           

Pinterest, Inc.

  Media/Content/Info   Equity   Preferred Series Seed     620,000       4,085       5,055  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.60%)*

 

    4,085       5,055  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

AtriCure, Inc.(4)(15)

  Medical Devices & Equipment   Equity   Common Stock     7,536       266       138  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Equity   Preferred Series AA     221,893       1,500       —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Equity   Common Stock     198,202       —         879  
  Medical Devices & Equipment   Equity   Preferred Series A-1     191,210       425       939  
  Medical Devices & Equipment   Equity   Preferred Series A-2     191,626       500       894  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

    581,038       925       2,712  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Equity   Preferred Series E     136,798       250       302  
  Medical Devices & Equipment   Equity   Preferred Series F     73,971       155       225  

 

See notes to consolidated financial statements.

 

F-100


Table of Contents
Index to Financial Statements

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)  
  Medical Devices & Equipment   Equity   Preferred Series G     163,934     $ 500     $ 532  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

    374,703       905       1,059  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Equity   Preferred Series B     6,185,567       3,000       402  
  Medical Devices & Equipment   Equity   Preferred Series C     1,927,309       655       114  
  Medical Devices & Equipment   Equity   Preferred Series D     55,103,923       5,257       4,232  
  Medical Devices & Equipment   Equity   Preferred Series E     15,638,888       1,307       1,457  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    78,855,687       10,219       6,205  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Equity   Preferred Series B     232,061       527       596  

Quanterix Corporation(4)

  Medical Devices & Equipment   Equity   Common Stock     84,778       1,000       1,820  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.49%)*

 

    15,342       12,530  
         

 

 

   

 

 

 

Software

           

CapLinked, Inc.

  Software   Equity   Preferred Series A-3     53,614       51       90  

Druva, Inc.

  Software   Equity   Preferred Series 2     458,841       1,000       1,044  
  Software   Equity   Preferred Series 3     93,620       300       312  
       

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

    552,461       1,300       1,356  

ForeScout Technologies, Inc.(4)

  Software   Equity   Common Stock     199,844       529       6,373  

HighRoads, Inc.

  Software   Equity   Common Stock     190       307       —    

NewVoiceMedia Limited(5)(10)

  Software   Equity   Preferred Series E     669,173       963       1,544  

Palantir Technologies

  Software   Equity   Preferred Series E     727,696       5,431       4,923  
  Software   Equity   Preferred Series G     326,797       2,211       2,211  
       

 

 

   

 

 

   

 

 

 

Total Palantir Technologies

    1,054,493       7,642       7,134  

Sprinklr, Inc.

  Software   Equity   Common Stock     700,000       3,749       4,600  

WildTangent, Inc.(15)

  Software   Equity   Preferred Series 3     100,000       402       179  
         

 

 

   

 

 

 

Subtotal: Software (2.53%)*

 

    14,943       21,276  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       44  
  Surgical Devices   Equity   Preferred Series C     656,538       282       60  
  Surgical Devices   Equity   Preferred Series D     1,991,157       712       795  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       521  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,673       1,420  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       376  
  Surgical Devices   Equity   Preferred Series C     119,999       300       309  
  Surgical Devices   Equity   Preferred Series D     260,000       650       957  
  Surgical Devices   Equity   Preferred Series F     100,200       500       531  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,173  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.43%)*

 

    4,223       3,593  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

 

   

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Equity   Common Stock     19,250       761       —    

Modumetal, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series C     3,107,520       500       477  

Proterra, Inc.

  Sustainable and Renewable Technology   Equity   Preferred Series 5     99,280       500       539  

 

See notes to consolidated financial statements.

 

F-101


Table of Contents
Index to Financial Statements

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)  

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(6)

  Sustainable and Renewable Technology   Equity   Common Stock     288     $ 61,502     $ 11,400  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (1.48%)*

 

    63,263       12,416  
         

 

 

   

 

 

 

Total: Equity Investments (10.63%)*

 

    136,196       89,361  
         

 

 

   

 

 

 

Warrant Investments

           

Biotechnology Tools

           

Labcyte, Inc.(15)

  Biotechnology Tools   Warrant   Preferred Series C     1,127,624       323       458  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.05%)*

 

    323       458  
         

 

 

   

 

 

 

Communications & Networking

           

PeerApp, Inc.

  Communications & Networking   Warrant   Preferred Series B     298,779       61       —    

Peerless Network Holdings, Inc.

  Communications & Networking   Warrant   Preferred Series A     135,000       95       501  

Spring Mobile Solutions, Inc.

  Communications & Networking   Warrant   Common Stock     2,834,375       418       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.06%)*

 

    574       501  
         

 

 

   

 

 

 

Consumer & Business Products

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

 

Consumer &

Business Products

  Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

 

Consumer &

Business Products

  Warrant   Preferred Series B     190,234       230       221  

The Neat Company(15)

 

Consumer &

Business Products

  Warrant   Preferred Series C-1     540,540       365       —    
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.03%)*

 

    823       221  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(4)(10)(15)

  Drug Delivery   Warrant   Common Stock     176,730       786       61  

Agile Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     180,274       730       65  

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       968  

Celsion Corporation(4)

  Drug Delivery   Warrant   Common Stock     13,927       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

Edge Therapeutics, Inc.(4)

  Drug Delivery   Warrant   Common Stock     78,595       390       230  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       1,540  

Neos Therapeutics, Inc.(4)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       148  

Pulmatrix Inc.(4)

  Drug Delivery   Warrant   Common Stock     25,150       116       4  

ZP Opco, Inc (p.k.a. Zosano Pharma)(4)

  Drug Delivery   Warrant   Common Stock     72,379       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.36%)*

 

    3,670       3,016  
         

 

 

   

 

 

 

Drug Discovery & Development

           

ADMA Biologics, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     89,750       295       12  

Anthera Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     5,022       984       —    

Audentes Therapeutics, Inc(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     9,914       62       147  

Auris Medical Holding, AG(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     156,726       249       19  

Brickell Biotech, Inc.

  Drug Discovery & Development   Warrant   Preferred Series C     26,086       119       93  

Cerecor, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     22,328       70       15  

Chroma Therapeutics, Ltd.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series D     325,261       490       —    

 

See notes to consolidated financial statements.

 

F-102


Table of Contents
Index to Financial Statements

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)  

Cleveland BioLabs, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     7,813     $ 105     $ 3  

Concert Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     132,069       545       1,344  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     29,239       165       2  

CytRx Corporation(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     105,694       160       58  

Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     17,190       369       —    

Dicerna Pharmaceuticals, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     200       28       —    

Epirus Biopharmaceuticals, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     64,194       276       —    

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(4)

  Drug Discovery & Development   Warrant   Common Stock     73,009       142       29  

Genocea Biosciences, Inc.(4)

  Drug Discovery & Development   Warrant   Common Stock     73,725       266       4  

Immune Pharmaceuticals(4)

  Drug Discovery & Development   Warrant   Common Stock     10,742       164       —    

Melinta Therapeutics(4)

  Drug Discovery & Development   Warrant   Common Stock     31,655       626       12  

Motif BioSciences Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     73,452       282       414  

Myovant Sciences, Ltd.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     49,800       283       128  

Neothetics, Inc. (p.k.a. Lithera, Inc)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     46,838       266       53  

Neuralstem, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     5,783       77       —    

Ology Bioservices, Inc. (p.k.a. Nanotherapeutics, Inc.)(15)

  Drug Discovery & Development   Warrant   Common Stock     171,389       838       —    

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     75,214       178       212  

PhaseRx, Inc.(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     63,000       125       —    

Savara Inc. (p.k.a. Mast Therapeutics, Inc.)(4)(15)

  Drug Discovery & Development   Warrant   Common Stock     32,467       203       8  

Sorrento Therapeutics, Inc.(4)(10)

  Drug Discovery & Development   Warrant   Common Stock     306,748       889       453  

Stealth Bio Therapeutics Corp.(5)(10)

  Drug Discovery & Development   Warrant   Preferred Series A     487,500       116       107  

uniQure B.V.(4)(5)(10)

  Drug Discovery & Development   Warrant   Common Stock     37,174       218       240  

XOMA Corporation(4)(10)(15)

  Drug Discovery & Development   Warrant   Common Stock     9,063       279       50  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.40%)*

 

    8,869       3,403  
         

 

 

   

 

 

 

Electronics & Computer Hardware

         

908 DEVICES INC.(15)

  Electronics & Computer Hardware   Warrant   Preferred Series D     79,856       100       73  

Clustrix, Inc.

  Electronics & Computer Hardware   Warrant   Common Stock     50,000       12       —    
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.01%)*

 

    112       73  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-103


Table of Contents
Index to Financial Statements

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)  

Healthcare Services, Other

           

Chromadex Corporation(4)(15)

  Healthcare Services, Other   Warrant   Common Stock     139,673     $ 157     $ 329  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.04%)*

 

    157       329  
         

 

 

   

 

 

 

Information Services

           

INMOBI Inc.(5)(10)

  Information Services   Warrant   Common Stock     65,587       82       —    

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C     648,400       98       21  
  Information Services   Warrant   Preferred Series C-1     1,165,183       74       37  
         

 

 

   

 

 

 

Total InXpo, Inc.

    1,813,583       172       58  

MDX Medical, Inc.(15)

  Information Services   Warrant   Common Stock     2,250,000       246       129  

Netbase Solutions, Inc.

  Information Services   Warrant   Preferred Series 1     60,000       356       363  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.07%)*

 

    954       550  
       

 

 

   

 

 

 

Internet Consumer & Business Services

 

   

Aria Systems, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series G     231,535       73       —    

Blurb, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     234,280       636       9  

ClearObject, Inc. (p.k.a. CloudOne, Inc.)

  Internet Consumer & Business Services   Warrant   Preferred Series E     968,992       18       154  

The Faction Group

  Internet Consumer & Business Services   Warrant   Preferred Series A     8,703       234       234  

Intent Media, Inc.(15)

  Internet Consumer & Business Services   Warrant   Common Stock     140,077       168       207  

Interactions Corporation

  Internet Consumer & Business Services   Warrant   Preferred Series G-3     68,187       204       204  

Just Fabulous, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series B     206,184       1,102       2,627  

Lightspeed POS, Inc.(5)(10)

  Internet Consumer & Business Services   Warrant   Preferred Series C     245,610       20       93  

LogicSource(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     79,625       30       36  

Oportun (p.k.a. Progress Financial)

  Internet Consumer & Business Services   Warrant   Preferred Series G     174,562       78       196  

ShareThis, Inc.(15)

  Internet Consumer & Business Services   Warrant   Preferred Series C     493,502       547       —    

Snagajob.com, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A     1,800,000       782       1,257  

Tapjoy, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series D     748,670       316       7  

TraceLink, Inc.

  Internet Consumer & Business Services   Warrant   Preferred Series A-2     283,353       1,833       1,833  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.82%)*

 

    6,041       6,857  
       

 

 

   

 

 

 

Media/Content/Info

           

FanDuel, Inc.

  Media/Content/Info   Warrant   Common Stock     15,570       —         —    
  Media/Content/Info   Warrant   Preferred Series A     4,648       730       1,875  
       

 

 

   

 

 

   

 

 

 

Total FanDuel, Inc.

    20,218       730       1,875  

Machine Zone, Inc.(16)

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       3,743  

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       4  

WP Technology, Inc. (Wattpad, Inc.)(5)(10)

  Media/Content/Info   Warrant   Common Stock     255,818       4       17  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       33  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.67%)*

 

    3,425       5,672  
       

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-104


Table of Contents
Index to Financial Statements

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)  

Medical Devices & Equipment

           

Amedica Corporation(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     8,603     $ 459     $ 1  

Aspire Bariatrics, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B-1     112,858       455       65  

Avedro, Inc.(15)

 

Medical Devices &

Equipment

  Warrant   Preferred Series AA     300,000       401       275  

Flowonix Medical Incorporated

  Medical Devices & Equipment   Warrant   Preferred Series AA     155,325       362       —    

Gelesis, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     74,784       78       216  

InspireMD, Inc.(4)(5)(10)

  Medical Devices & Equipment   Warrant   Common Stock     39,364       242       —    

IntegenX, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series C     547,752       15       —    

Intuity Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series 4     1,819,078       294       294  

Medrobotics Corporation(15)

  Medical Devices & Equipment   Warrant   Preferred Series E     455,539       370       411  

Micell Technologies, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series D-2     84,955       262       150  

NetBio, Inc.

  Medical Devices & Equipment   Warrant   Preferred Series A     7,841       408       56  

NinePoint Medical, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series A-1     587,840       170       82  

Optiscan Biomedical, Corp.(6)(15)

  Medical Devices & Equipment   Warrant   Preferred Series D     10,535,275       1,252       86  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices & Equipment   Warrant   Preferred Series A     500,000       402       430  

Quanterix Corporation(4)

  Medical Devices & Equipment   Warrant   Common Stock     66,039       205       536  

Sebacia, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series D     778,301       133       127  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices & Equipment   Warrant   Preferred Series A     6,464       188       —    

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(4)

  Medical Devices & Equipment   Warrant   Common Stock     13,864       401       —    

Tela Bio, Inc.(15)

  Medical Devices & Equipment   Warrant   Preferred Series B     387,930       62       153  

ViewRay, Inc.(4)(15)

  Medical Devices & Equipment   Warrant   Common Stock     128,231       333       414  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.39%)*

 

    6,492       3,296  
       

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       160       308  
  Semiconductors   Warrant   Preferred Series D-2     750,000       99       519  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    1,110,000       259       827  

Aquantia Corp.(4)

  Semiconductors   Warrant   Common Stock     19,683       4       11  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       46       195  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.12%)*

 

    309       1,033  
       

 

 

   

 

 

 

Software

           

Actifio, Inc.

  Software   Warrant   Common Stock     73,584       249       84  
  Software   Warrant   Preferred Series F     31,673       343       79  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       163  

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A     168,750       188       —    

 

See notes to consolidated financial statements.

 

F-105


Table of Contents
Index to Financial Statements

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)  

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433     $ 258     $ 113  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       129  
  Software   Warrant   Preferred Series C     592,019       730       179  
  Software   Warrant   Preferred Series C-A     2,218,214       230       4,458  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       4,766  

DNAnexus, Inc.

  Software   Warrant   Preferred Series C     909,091       97       97  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       175  

Fuze, Inc.(15)

  Software   Warrant   Preferred Series F     256,158       89       53  

Mattersight Corporation(4)

  Software   Warrant   Common Stock     357,143       538       168  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718       334       639  

Mobile Posse, Inc.(15)

  Software   Warrant   Preferred Series C     396,430       130       353  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       —    

NewVoiceMedia Limited(5)(10)

  Software   Warrant   Preferred Series E     225,586       33       190  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     228,972       150       227  

PerfectServe, Inc.

  Software   Warrant   Preferred Series C     129,073       720       720  

Poplicus, Inc.

  Software   Warrant   Common Stock     132,168       —         —    

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       7  

RapidMiner, Inc.

  Software   Warrant   Preferred Series C-1     4,982       23       23  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series C-Prime     640,603       66       44  

Signpost, Inc.

  Software   Warrant   Preferred Series C     324,005       314       106  

Wrike, Inc.

  Software   Warrant   Common Stock     698,760       462       1,040  
         

 

 

   

 

 

 

Subtotal: Software (1.06%)*

 

    5,413       8,884  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

           

Alimera Sciences, Inc.(4)

 

Specialty

Pharmaceuticals

  Warrant   Common Stock     1,717,709       861       488  
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.06%)*

 

    861       488  
       

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       15  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       291  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       306  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436       225       16  
  Surgical Devices   Warrant   Preferred Series D     175,000       100       429  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       60  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       505  
       

 

 

   

 

 

 

Subtotal: Surgical Devices (0.10%)*

 

    758       811  
       

 

 

   

 

 

 

Sustainable and Renewable Technology

         

Agrivida, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D     471,327       120       88  

Alphabet Energy, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series 1B     13,667       82       —    

American Superconductor Corporation(4)

  Sustainable and Renewable Technology   Warrant   Common Stock     58,823       39       7  

Brightsource Energy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series 1     116,666       104       —    

Calera, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     44,529       513       —    

EcoMotors, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series B     437,500       308       —    

Fluidic, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series D     61,804       102       —    

 

See notes to consolidated financial statements.

 

F-106


Table of Contents
Index to Financial Statements

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)  

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and Renewable Technology   Warrant   Common Stock     530,811     $ 181     $ —    
  Sustainable and Renewable Technology   Warrant   Preferred Series 2-A     6,229       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    537,040       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series C-1     280,897       275       357  

GreatPoint Energy, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series D-1     393,212       548       —    

Kinestral Technologies, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series A     325,000       155       155  
  Sustainable and Renewable Technology   Warrant   Preferred Series B     131,883       63       63  
       

 

 

   

 

 

   

 

 

 

Total Kinestral Technologies, Inc.

    456,883       218       218  

Polyera Corporation(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series C     311,609       338       —    

Proterra, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series 4     477,517       41       599  

Rive Technology, Inc.(15)

  Sustainable and Renewable Technology   Warrant   Preferred Series E     234,477       12       8  

Stion Corporation(6)

  Sustainable and Renewable Technology   Warrant   Preferred Series Seed     2,154       1,378       —    

TAS Energy, Inc.

  Sustainable and Renewable Technology   Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and Renewable Technology   Warrant   Preferred Series 3-A     1,019,793       189       —    
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.15%)*

 

    4,797       1,277  
       

 

 

   

 

 

 

Total: Warrant Investments (4.38%)*

 

    43,578       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 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.

(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 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.

(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, or payment-in-kind, 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.

 

See notes to consolidated financial statements.

 

F-107


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(dollars in thousands)

 

(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 Hercules Technology II, L.P., or HT II, or Hercules Technology III, L.P., or HT III, the Company’s wholly owned small business investment companies, or 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.

 

F-108


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry     Type of
Investment(1)
    Maturity Date     Interest Rate and Floor     Principal
Amount
    Cost(2)     Value(3)  

Debt Investments

             

Biotechnology Tools

 

           

1-5 Years Maturity

 

           

Exicure, Inc.(11)(14A)

    Biotechnology Tools       Senior Secured       September 2019      

Interest rate PRIME + 6.45%

or Floor rate of 9.95%

 

 

  $ 6,000     $ 5,971     $ 6,035  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    5,971       6,035  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.77%)*

 

    5,971       6,035  
         

 

 

   

 

 

 

Communications & Networking

 

           

Under 1 Year Maturity

 

           

Achilles Technology Management Co II, Inc.(6)(13)(14B)

    Communications & Networking       Senior Secured       August 2017       PIK Interest 10.50%     $ 1,278       1,304       1,304  

OpenPeak, Inc.(7)

    Communications & Networking       Senior Secured       April 2017      

Interest rate PRIME + 8.75%

or Floor rate of 12.00%

 

 

  $ 12,211       8,975       —    
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    10,279       1,304  
         

 

 

   

 

 

 

1-5 Years Maturity

 

           

Avanti Communications Group(4)(9)

    Communications & Networking       Senior Secured       October 2019       Interest rate FIXED 10.00%     $ 8,025       7,212       4,825  

SkyCross, Inc.(6)(7)(13)(14B)(15)

    Communications & Networking       Senior Secured       January 2018      

Interest rate FIXED 10.95%,

PIK Interest 5.00%

 

 

  $ 16,758       16,900       —    

Spring Mobile Solutions, Inc.(12)(14B)

    Communications & Networking       Senior Secured       January 2019      

Interest rate PRIME + 6.70%

or Floor rate of 9.95%

 

 

  $ 3,000       3,038       3,044  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    27,150       7,869  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (1.16%)*

 

    37,429       9,173  
         

 

 

   

 

 

 

Consumer & Business Products

 

           

1-5 Years Maturity

 

           

Antenna79 (p.k.a. Pong Research Corporation)(14A)(15)

    Consumer & Business Products       Senior Secured       December 2019      

Interest rate PRIME + 7.45%

or Floor rate of 10.95%

 

 

  $ 20,000       19,837       19,837  
    Consumer & Business Products       Senior Secured       December 2018      

Interest rate PRIME + 6.00%

or Floor rate of 9.50%

 

 

  $ 1,000       965       965  
         

 

 

   

 

 

   

 

 

 

Total Antenna79 (p.k.a. Pong Research Corporation)

 

  $ 21,000       20,802       20,802  

Nasty Gal(14B)(15)

    Consumer & Business Products       Senior Secured       May 2019      

Interest rate PRIME + 5.45%

or Floor rate of 8.95%

 

 

  $ 13,241       13,148       13,148  

Second Time Around (Simplify Holdings, LLC)(14A)(15)

    Consumer & Business Products       Senior Secured       February 2019      

Interest rate PRIME + 7.25%

or Floor rate of 10.75%

 

 

  $ 2,280       2,302       2,283  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    36,252       36,233  
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (4.60%)*

 

    36,252       36,233  
         

 

 

   

 

 

 

Drug Delivery

 

           

Under 1 Year Maturity

 

           

AcelRx Pharmaceuticals, Inc.(9)(10)(14A)(15)

    Drug Delivery       Senior Secured       October 2017      

Interest rate PRIME + 3.85%

or Floor rate of 9.10%

 

 

  $ 20,466       21,151       21,151  

Celsion Corporation(10)(14A)

    Drug Delivery       Senior Secured       June 2017      

Interest rate PRIME + 8.00%

or Floor rate of 11.25%

 

 

  $ 2,246       2,575       2,575  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    23,726       23,726  
         

 

 

   

 

 

 

1-5 Years Maturity

 

           

Agile Therapeutics, Inc.(10)(14A)

    Drug Delivery       Senior Secured       December 2018      

Interest rate PRIME + 4.75%

or Floor rate of 9.00%

 

 

  $ 16,500       16,524       16,434  

Aprecia Pharmaceuticals Company(11)(14A)

    Drug Delivery       Senior Secured       January 2020      

Interest rate PRIME + 5.75%

or Floor rate of 9.25%

 

 

  $ 20,000       19,700       19,706  

BioQ Pharma Incorporated(10)(14A)(14B)

    Drug Delivery       Senior Secured       May 2018      

Interest rate PRIME + 8.00%

or Floor rate of 11.25%

 

 

  $ 8,231       8,636       8,577  
    Drug Delivery       Senior Secured       May 2018      

Interest rate PRIME + 7.00%

or Floor rate of 10.25%

 

 

  $ 2,464       2,511       2,509  
         

 

 

   

 

 

   

 

 

 

Total BioQ Pharma Incorporated

 

  $ 10,695       11,147       11,086  

 

See notes to consolidated financial statements.

 

F-109


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
    Maturity Date     Interest Rate and Floor     Principal
Amount
    Cost(2)     Value(3)  

Edge Therapeutics, Inc.(11)(14A)(17)

  Drug Delivery     Senior Secured       February 2020      

Interest rate PRIME + 4.65%

or Floor rate of 9.15%

 

 

  $ 15,000     $ 15,004     $ 15,045  

Pulmatrix Inc.(8)(10)(14A)

  Drug Delivery     Senior Secured       July 2018      

Interest rate PRIME + 6.25%

or Floor rate of 9.50%

 

 

  $ 5,954       6,022       6,013  

ZP Opco, Inc (p.k.a. Zosano Pharma)(10)(14A)

  Drug Delivery     Senior Secured       December 2018      

Interest rate PRIME + 2.70%

or Floor rate of 7.95%

 

 

  $ 12,123       12,325       12,238  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    80,722       80,522  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (13.23%)*

 

    104,448       104,248  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Under 1 Year Maturity

           

Cerecor, Inc.(11)(14A)

  Drug Discovery &
Development
    Senior Secured       August 2017      

Interest rate PRIME + 4.70%

or Floor rate of 7.95%

 

 

  $ 2,374       2,499       2,499  

Neuralstem, Inc.(14A)(15)

  Drug Discovery &
Development
    Senior Secured       April 2017      

Interest rate PRIME + 6.75%

or Floor rate of 10.00%

 

 

  $ 3,766       3,996       3,996  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    6,495       6,495  
         

 

 

   

 

 

 

1-5 Years Maturity

           

Auris Medical Holding, AG(4)(9)(14B)

  Drug Discovery &
Development
    Senior Secured       January 2020      

Interest rate PRIME + 6.05%

or Floor rate of 9.55%

 

 

  $ 12,500       12,317       12,326  

Aveo Pharmaceuticals, Inc.(9)(12)(14A)(14B)

  Drug Discovery &
Development
    Senior Secured       December 2019      

Interest rate PRIME + 6.90%

or Floor rate of 11.90%

 

 

  $ 10,000       10,269       10,218  
  Drug Discovery &
Development
    Senior Secured       December 2019      

Interest rate PRIME + 6.90%

or Floor rate of 11.90%

 

 

  $ 5,000       4,926       4,918  
         

 

 

   

 

 

   

 

 

 

Total Aveo Pharmaceuticals, Inc.

 

  $ 15,000       15,195       15,136  

Bellicum Pharmaceuticals, Inc.(14A)(14B)(15)

  Drug Discovery &
Development
    Senior Secured       March 2020      

Interest rate PRIME + 5.85%

or Floor rate of 9.35%

 

 

  $ 15,000       15,212       15,387  
  Drug Discovery &
Development
    Senior Secured       March 2020      

Interest rate PRIME + 5.85%

or Floor rate of 9.35%

 

 

  $ 5,000       4,981       5,049  
         

 

 

   

 

 

   

 

 

 

Total Bellicum Pharmaceuticals, Inc.

 

  $ 20,000       20,193       20,436  

Brickell Biotech, Inc.(11)(14B)

  Drug Discovery &
Development
    Senior Secured       September 2019      

Interest rate PRIME + 5.70%

or Floor rate of 9.20%

 

 

  $ 7,500       7,521       7,560  

Cerulean Pharma, Inc.(12)(14B)

  Drug Discovery &
Development
    Senior Secured       July 2018      

Interest rate PRIME + 1.55%

or Floor rate of 7.30%

 

 

  $ 13,078       13,994       13,908  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(10)(14A)

  Drug Discovery &
Development
    Senior Secured       December 2018      

Interest rate PRIME + 7.70%

or Floor rate of 10.95%

 

 

  $ 19,548       19,276       19,372  

CytRx Corporation(10)(14B)(15)

  Drug Discovery &
Development
    Senior Secured       February 2020      

Interest rate PRIME + 6.00%

or Floor rate of 9.50%

 

 

  $ 25,000       25,086       25,166  

Epirus Biopharmaceuticals, Inc.(7)(14A)

  Drug Discovery &
Development
    Senior Secured       April 2018      

Interest rate PRIME + 4.70%

or Floor rate of 7.95%

 

 

  $ 3,066       3,349       —    

Genocea Biosciences, Inc.(10)(14A)

  Drug Discovery &
Development
    Senior Secured       January 2019      

Interest rate PRIME + 2.25%

or Floor rate of 7.25%

 

 

  $ 17,000       17,313       17,376  

Immune Pharmaceuticals(10)(14B)

  Drug Discovery &
Development
    Senior Secured       September 2018      

Interest rate PRIME + 4.75%

or Floor rate of 10.00%

 

 

  $ 3,271       3,350       2,693  

Insmed, Incorporated(10)(14A)

  Drug Discovery &
Development
    Senior Secured       October 2020      

Interest rate PRIME + 4.75%

or Floor rate of 9.25%

 

 

  $ 55,000       54,695       54,559  

Mast Therapeutics, Inc.(14A)(15)

  Drug Discovery &
Development
    Senior Secured       January 2019      

Interest rate PRIME + 5.70%

or Floor rate of 8.95%

 

 

  $ 3,347       3,921       3,923  

Melinta Therapeutics(12)(14A)

  Drug Discovery &
Development
    Senior Secured       June 2018      

Interest rate PRIME + 3.75%

or Floor rate of 8.25%

 

 

  $ 24,502       25,001       24,945  

Merrimack Pharmaceuticals, Inc.(9)

  Drug Discovery &
Development
    Senior Secured       December 2022       Interest rate FIXED 11.50%     $ 25,000       25,000       25,000  

Metuchen Pharmaceuticals LLC(13)(14A)

  Drug Discovery &
Development
    Senior Secured       October 2020      

Interest rate PRIME + 7.25%

or Floor rate of 10.75%,

PIK Interest 1.35%

 

 

 

  $ 35,081       34,541       34,541  

 

See notes to consolidated financial statements.

 

F-110


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Maturity Date   Interest Rate and Floor   Principal
Amount
    Cost(2)     Value(3)  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(14A)(15)

  Drug Discovery &
Development
  Senior Secured   September 2020   Interest rate PRIME + 2.75%

or Floor rate of 8.50%

 

$

40,000

 

 

$

39,388

 

 

$

39,504

 

PhaseRx, Inc.(14B)(15)

  Drug Discovery &
Development
  Senior Secured   December 2019   Interest rate PRIME + 5.75%

or Floor rate of 9.25%

  $ 6,000       5,921       5,945  

Sorrento Therapeutics, Inc.(9)(14B)

  Drug Discovery &
Development
  Senior Secured   December 2020   Interest rate PRIME + 5.75%

or Floor rate of 9.25%

  $ 50,000       48,069       48,069  

uniQure B.V.(4)(9)(10)(14B)

  Drug Discovery &
Development
  Senior Secured   May 2020   Interest rate PRIME + 3.00%

or Floor rate of 8.25%

  $ 20,000       20,133       20,081  

XOMA Corporation(9)(14B)(15)

  Drug Discovery &
Development
  Senior Secured   September 2018   Interest rate PRIME + 2.15%

or Floor rate of 9.40%

  $ 16,380       16,970       16,901  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    411,233       407,441  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (52.53%)*

 

    417,728       413,936  
         

 

 

   

 

 

 

Electronics & Computer Hardware

 

   

1-5 Years Maturity

 

   

Persimmon Technologies(11)(13)(14B)

  Electronics & Computer
Hardware
  Senior Secured   June 2019   Interest rate PRIME + 7.50%

or Floor rate of 11.00%,

PIK Interest 1.50%

  $ 7,012       7,096       7,134  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    7,096       7,134  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.91%)*

 

    7,096       7,134  
         

 

 

   

 

 

 

Healthcare Services, Other

 

   

1-5 Years Maturity

 

   

InstaMed Communications, LLC(14B)(15)

  Healthcare Services, Other   Senior Secured   February 2019   Interest rate PRIME + 6.75%

or Floor rate of 10.00%

  $ 10,000       10,125       10,261  

PH Group Holdings

  Healthcare Services, Other   Senior Secured   September 2020   Interest rate PRIME + 7.45%

or Floor rate of 10.95%

  $ 20,000       19,802       19,802  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    29,927       30,063  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (3.82%)*

 

    29,927       30,063  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

   

1-5 Years Maturity

 

   

Aria Systems, Inc.(10)(13)

  Internet Consumer &

Business Services

  Senior Secured   June 2019   Interest rate PRIME + 3.20%

or Floor rate of 6.95%,

PIK Interest 1.95%

  $ 2,061       2,045       1,728  
  Internet Consumer & Business
Services
  Senior Secured   June 2019   Interest rate PRIME + 5.20%

or Floor rate of 8.95%,

PIK Interest 1.95%

  $ 18,463       18,307       15,467  
         

 

 

   

 

 

   

 

 

 

Total Aria Systems, Inc.

  $ 20,524       20,352       17,195  

CloudOne, Inc.(10)(14B)

  Internet Consumer &

Business Services

  Senior Secured   April 2019   Interest rate PRIME + 6.35%

or Floor rate of 9.85%

  $ 5,000       5,091       5,138  

Intent Media, Inc.(13)(14A)(15)

  Internet Consumer &

Business Services

  Senior Secured   December 2018   Interest rate PRIME + 5.25%

or Floor rate of 8.75%,

PIK Interest 1.00%

  $ 5,000       4,851       4,851  

LogicSource(14B)(15)

  Internet Consumer &

Business Services

  Senior Secured   October 2019   Interest rate PRIME + 6.25%

or Floor rate of 9.75%

  $ 8,500       8,533       8,649  

Snagajob.com, Inc.(12)(13)(14A)

  Internet Consumer &

Business Services

  Senior Secured   July 2020   Interest rate PRIME + 5.15%

or Floor rate of 9.15%,

PIK Interest 1.95%

  $ 35,293       34,517       35,067  

Tectura Corporation(7)(8)(13)

  Internet Consumer &

Business Services

  Senior Secured   June 2021   Interest rate FIXED 6.00%,

PIK Interest 3.00%

  $ 19,691       19,691       19,691  
  Internet Consumer &

Business Services

  Senior Secured   June 2021   PIK Interest 8.00%   $ 11,015       240       —    
         

 

 

   

 

 

   

 

 

 

Total Tectura Corporation

  $ 30,706       19,931       19,691  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    93,275       90,591  
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (11.50%)*

 

    93,275       90,591  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-111


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Maturity Date   Interest Rate and Floor   Principal
Amount
    Cost(2)     Value(3)  

Media/Content/Info

 

 

1-5 Years Maturity

 

 

FanDuel, Inc.(14B)

  Media/Content/Info   Senior Secured   November 2019   Interest rate PRIME + 7.25%

or Floor rate of 10.75%

  $ 20,000     $ 19,352     $ 19,352  

Machine Zone, Inc.(13)(16)

  Media/Content/Info   Senior Secured   May 2018   Interest rate PRIME + 2.50%

or Floor rate of 6.75%,

PIK Interest 3.00%

  $ 103,785       102,444       103,083  

WP Technology, Inc. (Wattpad, Inc.)(4)(9)(11)(14B)(17)

  Media/Content/Info   Senior Secured   April 2020   Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 5,000       5,029       5,099  
  Media/Content/Info   Senior Secured   April 2020   Interest rate PRIME + 4.75%

or Floor rate of 8.25%

  $ 2,500       2,471       2,510  
         

 

 

   

 

 

   

 

 

 

Total WP Technology, Inc. (Wattpad, Inc.)

  $ 7,500       7,500       7,609  
         

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    129,296       130,044  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (16.50%)*

 

    129,296       130,044  
         

 

 

   

 

 

 

Medical Devices & Equipment

 

 

Under 1 Year Maturity

 

 

InspireMD, Inc.(4)(9)(14B)

  Medical Devices & Equipment   Senior Secured   June 2017   Interest rate PRIME + 5.00%

or Floor rate of 10.50%

  $ 2,237       2,743       2,743  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    2,743       2,743  
         

 

 

   

 

 

 

1-5 Years Maturity

 

   

Amedica Corporation(8)(14B)(15)

  Medical Devices & Equipment   Senior Secured   January 2018   Interest rate PRIME + 7.70%

or Floor rate of 10.95%

  $ 7,417       8,816       8,715  

Aspire Bariatrics, Inc.(14B)(15)

  Medical Devices & Equipment   Senior Secured   October 2018   Interest rate PRIME + 4.00%

or Floor rate of 9.25%

  $ 5,295       5,400       5,368  

Avedro, Inc.(14A)(15)

  Medical Devices & Equipment   Senior Secured   June 2018   Interest rate PRIME + 6.00%

or Floor rate of 9.25%

  $ 9,777       9,975       9,982  

Flowonix Medical Incorporated(12)(14B)

  Medical Devices & Equipment   Senior Secured   May 2018   Interest rate PRIME + 4.75%

or Floor rate of 10.00%

  $ 10,905       11,340       11,275  
  Medical Devices & Equipment   Senior Secured   March 2019   Interest rate PRIME + 6.50%

or Floor rate of 10.00%

  $ 4,255       4,243       4,214  
         

 

 

   

 

 

   

 

 

 

Total Flowonix Medical Incorporated

  $ 15,160       15,583       15,489  

Gamma Medica, Inc.(10)(14B)

  Medical Devices & Equipment   Senior Secured   January 2018   Interest rate PRIME + 6.50%

or Floor rate of 9.75%

  $ 2,500       2,650       2,645  

IntegenX, Inc.(14B)(15)

  Medical Devices & Equipment   Senior Secured   June 2019   Interest rate PRIME + 6.05%

or Floor rate of 10.05%

  $ 15,000       15,068       15,168  
  Medical Devices & Equipment   Senior Secured   June 2019   Interest rate PRIME + 6.05%

or Floor rate of 10.05%

  $ 1,750       1,694       1,730  
         

 

 

   

 

 

   

 

 

 

Total IntegenX, Inc.

  $ 16,750       16,762       16,898  

Micell Technologies, Inc.(11)(14B)

  Medical Devices & Equipment   Senior Secured   August 2019   Interest rate PRIME + 7.25%

or Floor rate of 10.50%

  $ 8,277       8,255       8,321  

Quanta Fluid Solutions(4)(9)(10)(14B)

  Medical Devices & Equipment   Senior Secured   April 2020   Interest rate PRIME + 8.05%

or Floor rate of 11.55%

  $ 12,500       12,547       12,500  

Quanterix Corporation(10)(14A)

  Medical Devices & Equipment   Senior Secured   February 2018   Interest rate PRIME + 2.75%

or Floor rate of 8.00%

  $ 9,964       10,276       10,316  

SynergEyes, Inc.(14B)(15)

  Medical Devices & Equipment   Senior Secured   January 2018   Interest rate PRIME + 7.75%

or Floor rate of 11.00%

  $ 2,347       2,762       2,719  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    93,026       92,953  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (12.15%)*

 

    95,769       95,696  
         

 

 

   

 

 

 

Semiconductors

 

   

Under 1 Year Maturity

 

   

Achronix Semiconductor Corporation(14B)(15)(17)

  Semiconductors   Senior Secured   November 2017   Interest rate PRIME + 7.00%

or Floor rate of 10.50%

  $ 1,682       1,682       1,682  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    1,682       1,682  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-112


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Maturity Date   Interest Rate and Floor   Principal
Amount
    Cost(2)     Value(3)  

1-5 Years Maturity

 

   

Achronix Semiconductor Corporation(14B)(15)(17)

  Semiconductors   Senior Secured   July 2018   Interest rate PRIME + 8.25%

or Floor rate of 11.50%

  $ 3,341     $ 3,546     $ 3,530  

Avnera Corporation(10)(14A)

  Semiconductors   Senior Secured   April 2018   Interest rate PRIME + 5.25%

or Floor rate of 8.50%

  $ 5,577       5,699       5,816  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    9,245       9,346  
         

 

 

   

 

 

 

Subtotal: Semiconductors (1.40%)*

 

    10,927       11,028  
         

 

 

   

 

 

 

Software

             

Under 1 Year Maturity

             

JumpStart Games, Inc. (p.k.a Knowledge Holdings,
Inc.)(7)(13)(14C)(15)(18)

  Software   Senior Secured   October 2016   Interest rate FIXED 5.75%,

PIK Interest 10.75%

 

$

1,566

 

 

 

1,698

 

 

 

730

 

RedSeal Inc.(15)(17)

  Software   Senior Secured   June 2017   Interest rate PRIME + 3.25%

or Floor rate of 6.50%

  $ 2,635       2,635       2,635  
         

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    4,333       3,365  
         

 

 

   

 

 

 

1-5 Years Maturity

 

   

Actifio, Inc.(13)(14A)

  Software   Senior Secured   January 2019   Interest rate PRIME + 4.25%

or Floor rate of 8.25%,

PIK Interest 2.25%

  $ 30,961       30,830       30,918  
  Software   Senior Secured   January 2019   Interest rate PRIME + 4.75%

or Floor rate of 8.75%,

PIK Interest 2.50%

  $ 10,171       9,929       10,036  
         

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

  $ 41,132       40,759       40,954  

Clickfox, Inc.(12)(14C)

  Software   Senior Secured   May 2018   Interest rate PRIME + 8.00%

or Floor rate of 11.50%

  $ 12,000       12,261       12,273  

Cloud Technology Partners, Inc.(14A)

  Software   Senior Secured   June 2018   Interest rate PRIME + 3.05%

or Floor rate of 7.05%

  $ 3,000       2,966       2,966  
  Software   Senior Secured   December 2019   Interest rate PRIME + 5.75%

or Floor rate of 9.75%

  $ 10,000       9,863       9,863  
         

 

 

   

 

 

   

 

 

 

Total Cloud Technology Partners, Inc.

  $ 13,000       12,829       12,829  

Druva, Inc.(10)(12)(14B)(17)

  Software   Senior Secured   March 2018   Interest rate PRIME + 4.60%

or Floor rate of 7.85%

  $ 9,157       9,604       9,613  
  Software   Senior Secured   May 2018   Interest rate PRIME + 4.60%

or Floor rate of 7.85%

  $ 10,000       10,066       10,141  
         

 

 

   

 

 

   

 

 

 

Total Druva, Inc.

  $ 19,157       19,670       19,754  

Evernote Corporation(15)(17)

  Software   Senior Secured   October 2020   Interest rate PRIME + 5.45%

or Floor rate of 8.95%

  $ 6,000       5,961       5,961  

Lithium Technologies, Inc.(13)(14A)(15)(19)

  Software   Senior Secured   June 2020   Interest rate PRIME + 6.45%

or Floor rate of 9.95%,

PIK Interest 1.80%

  $ 25,019       24,999       24,999  

JumpStart Games, Inc. (p.k.a Knowledge Holdings, Inc.)(7)(13)(14A)(15)

  Software   Senior Secured   March 2018   Interest rate FIXED 5.75%,

PIK Interest 10.75%

 

$

13,000

 

 

 

12,747

 

 

 

5,477

 

Mattersight Corporation(11)(13)

  Software   Senior Secured   February 2020   Interest rate PRIME + 6.25%

or Floor rate of 9.75%,

PIK Interest 2.15%

  $ 22,664       22,023       22,280  

OneLogin, Inc.(13)(15)

  Software   Senior Secured   August 2019   Interest rate PRIME + 6.45%

or Floor rate of 9.95%,

PIK Interest 3.25%

  $ 15,369       15,249       15,488  

Quid, Inc.(13)(14A)(15)

  Software   Senior Secured   October 2019   Interest rate PRIME + 4.75%

or Floor rate of 8.25%,

PIK Interest 2.25%

  $ 8,116       8,126       8,220  

 

See notes to consolidated financial statements.

 

F-113


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Maturity Date   Interest Rate and Floor   Principal
Amount
    Cost(2)     Value(3)  

RedSeal Inc.(14A)(15)(17)

  Software   Senior Secured   June 2018   Interest rate PRIME + 7.75%

or Floor rate of 11.00%

  $ 5,000     $ 5,120     $ 5,107  
  Software   Senior Secured   January 2020   Interest rate PRIME + 7.75%

or Floor rate of 11.25%

  $ 5,000       4,880       4,880  
         

 

 

   

 

 

   

 

 

 

Total RedSeal Inc.

  $ 10,000       10,000       9,987  

Signpost, Inc.(13)(14A)(15)

  Software   Senior Secured   February 2020   Interest rate PRIME + 4.15%

or Floor rate of 8.15%,

PIK Interest 1.75%

  $ 15,237       15,022       15,190  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    199,646       193,412  
         

 

 

   

 

 

 

Subtotal: Software (24.97%)*

 

    203,979       196,777  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

             

1-5 Years Maturity

             

Alimera Sciences, Inc.(10)(13)(14A)

  Specialty Pharmaceuticals   Senior Secured   November 2020   Interest rate PRIME + 7.50%

or Floor rate of 11.00%,

PIK Interest 1.00%

  $ 35,041       34,606       34,798  

Jaguar Animal Health, Inc.(10)(14B)

  Specialty Pharmaceuticals   Senior Secured   August 2018   Interest rate PRIME + 5.65%

or Floor rate of 9.90%

  $ 3,511       3,803       3,725  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    38,409       38,523  
           

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (4.89%)*

 

    38,409       38,523  
         

 

 

   

 

 

 

Surgical Devices

             

1-5 Years Maturity

             

Transmedics, Inc.(12)(14B)

  Surgical Devices   Senior Secured   February 2020   Interest rate PRIME + 5.30%

or Floor rate of 9.55%

  $ 8,500       8,497       8,529  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    8,497       8,529  
           

 

 

   

 

 

 

Subtotal: Surgical Devices (1.08%)*

 

    8,497       8,529  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

           

Under 1 Year Maturity

             

American Superconductor Corporation(10)(14B)

  Sustainable and

Renewable Technology

  Senior Secured   June 2017   Interest rate PRIME + 7.25%

or Floor rate of 11.00%

  $ 1,500       1,550       1,550  

Modumetal, Inc.(11)(14C)(14D)

  Sustainable and

Renewable Technology

  Senior Secured   March 2017   Interest rate PRIME + 8.70%

or Floor rate of 11.95%

  $ 376       882       882  
  Sustainable and

Renewable Technology

  Senior Secured   October 2017   Interest rate PRIME + 6.00%

or Floor rate of 9.25%

  $ 3,370       4,115       4,115  
         

 

 

   

 

 

   

 

 

 

Total Modumetal, Inc.

  $ 3,746       4,997       4,997  

Stion Corporation(5)(14A)

  Sustainable and

Renewable Technology

  Senior Secured   February 2017   Interest rate PRIME + 8.75%

or Floor rate of 12.00%

  $ 333       333       333  

Sungevity, Inc.(12)(14D)

  Sustainable and

Renewable Technology

  Senior Secured   October 2017   Interest rate PRIME + 3.70%

or Floor rate of 6.95%

  $ 35,000       39,834       29,709  
  Sustainable and

Renewable Technology

  Senior Secured   October 2017   Interest rate PRIME + 3.70%

or Floor rate of 6.95%

  $ 20,000       20,000       14,917  
         

 

 

   

 

 

   

 

 

 

Total Sungevity, Inc.

  $ 55,000       59,834       44,626  
           

 

 

   

 

 

 

Subtotal: Under 1 Year Maturity

 

    66,714       51,506  
         

 

 

   

 

 

 

1-5 Years Maturity

             

FuelCell Energy, Inc.(11)(14B)

  Sustainable and

Renewable Technology

  Senior Secured   October 2018   Interest rate PRIME + 5.50%

or Floor rate of 9.50%

  $ 20,000       20,488       20,707  

Proterra, Inc.(10)(14A)(14B)

  Sustainable and

Renewable Technology

  Senior Secured   June 2019   Interest rate PRIME + 6.95%

or Floor rate of 10.20%

  $ 30,000       30,670       30,592  
  Sustainable and

Renewable Technology

  Senior Secured   June 2019   Interest rate PRIME + 5.75%

or Floor rate of 9.25%

  $ 10,000       9,921       9,916  
         

 

 

   

 

 

   

 

 

 

Total Proterra, Inc.

  $ 40,000       40,591       40,508  

 

See notes to consolidated financial statements.

 

F-114


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Maturity Date   Interest Rate and Floor   Principal
Amount
    Cost(2)     Value(3)  

Rive Technology, Inc.(14A)(15)

  Sustainable and

Renewable Technology

  Senior Secured   January 2019   Interest rate PRIME + 6.20%

or Floor rate of 9.45%

  $ 7,500     $ 7,586     $ 7,650  

Tendril Networks(11)(14B)

  Sustainable and

Renewable Technology

  Senior Secured   June 2019   Interest rate FIXED 7.25%   $ 15,000       15,405       15,324  

Verdezyne, Inc.(14B)(15)

  Sustainable and

Renewable Technology

  Senior Secured   April 2019   Interest rate PRIME + 8.25%

or Floor rate of 11.75%

  $ 15,000       15,084       15,098  
           

 

 

   

 

 

 

Subtotal: 1-5 Years Maturity

 

    99,154       99,287  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (19.14%)*

 

    165,868       150,793  
         

 

 

   

 

 

 

Total: Debt Investments (168.64%)*

 

    1,384,871       1,328,803  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-115


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry     Type of
Investment(1)
    Series     Shares     Cost(2)     Value(3)  

Equity Investments

 

 

Biotechnology Tools

 

 

NuGEN Technologies, Inc.(15)

    Biotechnology Tools       Equity       Preferred Series C       189,394     $ 500     $ 575  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.07%)*

 

    500       575  
         

 

 

   

 

 

 

Communications & Networking

 

   

Achilles Technology Management Co II, Inc.(6)(15)

   
Communications &
Networking
 
 
    Equity       Common Stock       100       4,000       3,396  

GlowPoint, Inc.(3)

   
Communications &
Networking
 
 
    Equity       Common Stock       114,192       101       31  

Peerless Network Holdings, Inc.

   
Communications &
Networking
 
 
    Equity       Preferred Series A       1,000,000       1,000       4,990  
         

 

 

   

 

 

 

Subtotal: Communications & Networking (1.07%)*

 

    5,101       8,417  
         

 

 

   

 

 

 

Consumer & Business Products

 

   

Market Force Information, Inc.

   
Consumer & Business
Products
 
 
    Equity       Common Stock       480,261       —         279  
   
Consumer & Business
Products
 
 
    Equity       Preferred Series B-1       187,970       500       273  
       

 

 

   

 

 

   

 

 

 

Total Market Force Information, Inc.

 

    668,231       500       552  
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.07%)*

 

    500       552  
         

 

 

   

 

 

 

Diagnostic

 

   

Singulex, Inc.

    Diagnostic       Equity       Common Stock       937,998       750       574  
         

 

 

   

 

 

 

Subtotal: Diagnostic (0.07%)*

 

    750       574  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(3)(9)

    Drug Delivery       Equity       Common Stock       54,240       108       141  

BioQ Pharma Incorporated(15)

    Drug Delivery       Equity       Preferred Series D       165,000       500       542  

Edge Therapeutics, Inc.(3)

    Drug Delivery       Equity       Common Stock       161,856       1,000       2,023  

Merrion Pharmaceuticals, Plc(4)(9)

    Drug Delivery       Equity       Common Stock       20,000       9       —    

Neos Therapeutics, Inc.(3)(15)

    Drug Delivery       Equity       Common Stock       125,000       1,500       731  

Revance Therapeutics, Inc.(3)

    Drug Delivery       Equity       Common Stock       22,765       557       472  
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.50%)*

 

    3,674       3,909  
         

 

 

   

 

 

 

Drug Discovery & Development

           

Aveo Pharmaceuticals, Inc.(3)(9)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       426,931       1,060       231  

Cerecor, Inc.(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       119,087       1,000       105  

Cerulean Pharma, Inc.(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       135,501       1,000       96  

Dicerna Pharmaceuticals, Inc.(3)(15)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       142,858       1,000       411  

Dynavax Technologies(3)(9)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       20,000       550       79  

Epirus Biopharmaceuticals, Inc.

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       200,000       1,000       —    

Genocea Biosciences, Inc.(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       223,463       2,000       921  

Inotek Pharmaceuticals Corporation(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       3,778       1,500       23  

Insmed, Incorporated(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       70,771       1,000       936  

Melinta Therapeutics

   
Drug Discovery &
Development
 
 
    Equity       Preferred Series 4       1,914,448       2,000       2,042  

 

See notes to consolidated financial statements.

 

F-116


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry     Type of
Investment(1)
    Series     Shares     Cost(2)     Value(3)  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(3)

   
Drug Discovery &
Development
 
 
    Equity       Common Stock       76,362     $ 2,743     $ 1,175  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development (0.76%)*

 

    14,853       6,019  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Identiv, Inc.(3)

   
Electronics &
Computer Hardware
 
 
    Equity       Common Stock       6,700       34       21  
         

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware (0.00%)*

 

    34       21  
         

 

 

   

 

 

 

Information Services

           

DocuSign, Inc.(15)

    Information Services       Equity       Common Stock       385,000       6,081       6,081  
         

 

 

   

 

 

 

Subtotal: Information Services (0.77%)*

 

    6,081       6,081  
         

 

 

   

 

 

 

Internet Consumer & Business Services

 

       
Blurb, Inc.(15)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series B       220,653       175       197  
Brigade Group, Inc. (p.k.a. Philotic, Inc.)    
Internet Consumer &
Business Services
 
 
    Equity       Common Stock       9,023       93       —    
Lightspeed POS, Inc.(4)(9)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series C       230,030       250       228  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series D       198,677       250       221  
       

 

 

   

 

 

   

 

 

 

Total Lightspeed POS, Inc.

 

    428,707       500       449  
OfferUp, Inc.(15)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A       286,080       1,663       1,663  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series A-1       108,710       632       632  
       

 

 

   

 

 

   

 

 

 

Total OfferUp, Inc.

 

    394,790       2,295       2,295  
Oportun (p.k.a. Progress Financial)    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series G       218,351       250       431  
   
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series H       87,802       250       249  
       

 

 

   

 

 

   

 

 

 

Total Oportun (p.k.a. Progress Financial)

 

    306,153       500       680  
RazorGator Interactive Group, Inc.    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series AA       34,783       15       34  
Tectura Corporation    
Internet Consumer &
Business Services
 
 
    Equity       Preferred Series BB       1,000,000       —         —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.46%)*

 

    3,578       3,655  
       

 

 

   

 

 

 

Media/Content/Info

 

       
Pinterest, Inc.     Media/Content/Info       Equity       Preferred Series Seed       620,000       4,085       4,085  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.52%)*

 

    4,085       4,085  
       

 

 

   

 

 

 

Medical Devices & Equipment

 

       
AtriCure, Inc.(3)(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       7,536       266       147  
Flowonix Medical Incorporated    
Medical Devices &
Equipment
 
 
    Equity       Preferred Series AA       221,893       1,500       359  
Gelesis, Inc.(15)    
Medical Devices &
Equipment
 
 
    Equity       Common Stock       198,202       —         634  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-1       191,210       425       687  
   
Medical Devices &
Equipment
 
 
    Equity       Preferred Series A-2       191,626       500       650  
       

 

 

   

 

 

   

 

 

 

Total Gelesis, Inc.

 

    581,038       925       1,971  

 

See notes to consolidated financial statements.

 

F-117


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  
Medrobotics Corporation(15)   Medical Devices &
Equipment
  Equity   Preferred Series E     136,798     $ 250     $ 216  
  Medical Devices &
Equipment
  Equity   Preferred Series F     73,971       155       188  
  Medical Devices &
Equipment
  Equity   Preferred Series G     163,934       500       514  
       

 

 

   

 

 

   

 

 

 

Total Medrobotics Corporation

    374,703       905       918  
Optiscan Biomedical, Corp.(5)(15)   Medical Devices &
Equipment
  Equity   Preferred Series B     6,185,567       3,000       292  
  Medical Devices &
Equipment
  Equity   Preferred Series C     1,927,309       655       85  
  Medical Devices &
Equipment
  Equity   Preferred Series D     55,103,923       5,257       3,014  
  Medical Devices &
Equipment
  Equity   Preferred Series E     13,573,546       1,136       1,138  
       

 

 

   

 

 

   

 

 

 

Total Optiscan Biomedical, Corp.

    76,790,345       10,048       4,529  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices &
Equipment
  Equity   Preferred Series B     232,061       527       548  
Quanterix Corporation   Medical Devices &
Equipment
  Equity   Preferred Series D     272,479       1,000       1,086  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (1.21%)*

 

    15,171       9,558  
       

 

 

   

 

 

 

Software

       
Box, Inc.(3)   Software   Equity   Common Stock     611,442       4,709       8,475  
CapLinked, Inc.   Software   Equity   Preferred Series A-3     53,614       51       86  
Druva, Inc.   Software   Equity   Preferred Series 2     458,841       1,000       1,288  
ForeScout Technologies, Inc.   Software   Equity   Preferred Series D     319,099       398       1,725  
  Software   Equity   Preferred Series E     80,587       131       440  
       

 

 

   

 

 

   

 

 

 

Total ForeScout Technologies, Inc.

    399,686       529       2,165  
HighRoads, Inc.   Software   Equity   Common Stock     190       307       —    
NewVoiceMedia Limited(4)(9)   Software   Equity   Preferred Series E     669,173       963       1,025  
Palantir Technologies   Software   Equity   Preferred Series E     727,696       5,431       5,431  
WildTangent, Inc.(15)   Software   Equity   Preferred Series 3     100,000       402       148  
         

 

 

   

 

 

 

Subtotal: Software (2.36%)*

 

    13,392       18,618  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

       
QuatRx Pharmaceuticals Company   Specialty
Pharmaceuticals
  Equity   Preferred Series E     241,829       750       —    
  Specialty
Pharmaceuticals
  Equity   Preferred Series E-1     26,955       —         —    
  Specialty
Pharmaceuticals
  Equity   Preferred Series G     4,667,636       —         —    
       

 

 

   

 

 

   

 

 

 

Total QuatRx Pharmaceuticals Company

    4,936,420       750       —    
       

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.00%)*

 

    750       —    
       

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Equity   Preferred Series B     219,298       250       37  
  Surgical Devices   Equity   Preferred Series C     656,538       282       52  
  Surgical Devices   Equity   Preferred Series D     1,991,157       712       671  
  Surgical Devices   Equity   Preferred Series E     2,786,367       429       450  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    5,653,360       1,673       1,210  

Transmedics, Inc.

  Surgical Devices   Equity   Preferred Series B     88,961       1,100       357  
  Surgical Devices   Equity   Preferred Series C     119,999       300       291  
  Surgical Devices   Equity   Preferred Series D     260,000       650       912  
  Surgical Devices   Equity   Preferred Series F     100,200       500       523  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    569,160       2,550       2,083  
       

 

 

   

 

 

 

Subtotal: Surgical Devices (0.42%)*

 

    4,223       3,293  
       

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-118


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

Sustainable and Renewable Technology

           

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Equity   Common Stock     19,250     $ 761     $ —    

Glori Energy, Inc.(3)

  Sustainable and
Renewable Technology
  Equity   Common Stock     18,208       165       1  

Modumetal, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series C     3,107,520       500       533  

Proterra, Inc.

  Sustainable and
Renewable Technology
  Equity   Preferred Series 5     99,280       500       512  

Sungevity, Inc.(15)

  Sustainable and
Renewable Technology
  Equity   Preferred Series D     68,807,339       6,750       —    

TPI Composites, Inc.(3)

  Sustainable and
Renewable Technology
  Equity   Common Stock     78,018       273       1,251  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.29%)*

 

    8,949       2,297  
       

 

 

   

 

 

 

Total: Equity Investments (8.59%)*

 

    81,641       67,654  
         

 

 

   

 

 

 

Warrant Investments

           

Biotechnology Tools

           

Exicure, Inc.

  Biotechnology Tools   Warrant   Preferred Series C     104,348       107       181  

Labcyte, Inc.(15)

  Biotechnology Tools   Warrant   Preferred Series C     1,127,624       323       409  
         

 

 

   

 

 

 

Subtotal: Biotechnology Tools (0.07%)*

 

    430       590  
         

 

 

   

 

 

 

Communications & Networking

           

Intelepeer, Inc.(15)

  Communications &
Networking
  Warrant   Common Stock     117,958       102       —    

OpenPeak, Inc.

  Communications &
Networking
  Warrant   Common Stock     108,982       149       —    

PeerApp, Inc.

  Communications &
Networking
  Warrant   Preferred Series B     298,779       61       14  

Peerless Network Holdings, Inc.

  Communications &
Networking
  Warrant   Preferred Series A     135,000       95       415  

SkyCross, Inc.(6)(15)

  Communications &
Networking
  Warrant   Preferred Series F     9,762,777       394       —    

Spring Mobile Solutions, Inc.

  Communications &
Networking
  Warrant   Common Stock     2,834,375       418       —    
         

 

 

   

 

 

 

Subtotal: Communications & Networking (0.05%)*

 

    1,219       429  
         

 

 

   

 

 

 

Consumer & Business Products

           

Antenna79 (p.k.a. Pong Research Corporation)(15)

  Consumer & Business
Products
  Warrant   Common Stock     1,662,441       228       —    

Intelligent Beauty, Inc.(15)

  Consumer & Business
Products
  Warrant   Preferred Series B     190,234       230       354  

IronPlanet, Inc.

  Consumer & Business
Products
  Warrant   Preferred Series D     1,155,821       1,076       5,574  

Nasty Gal(15)

  Consumer & Business
Products
  Warrant   Preferred Series C     845,194       23       —    

The Neat Company(15)

  Consumer & Business
Products
  Warrant   Preferred Series C-1     540,540       365       —    
         

 

 

   

 

 

 

Subtotal: Consumer & Business Products (0.75%)*

 

    1,922       5,928  
         

 

 

   

 

 

 

Drug Delivery

           

AcelRx Pharmaceuticals, Inc.(3)(9)(15)

  Drug Delivery   Warrant   Common Stock     176,730       785       92  

Agile Therapeutics, Inc.(3)

  Drug Delivery   Warrant   Common Stock     180,274       730       269  

Aprecia Pharmaceuticals Company

  Drug Delivery   Warrant   Preferred Series A-1     735,981       366       242  

BIND Therapeutics, Inc.(15)

  Drug Delivery   Warrant   Common Stock     152,586       488       —    

BioQ Pharma Incorporated

  Drug Delivery   Warrant   Common Stock     459,183       1       264  

Celsion Corporation(3)

  Drug Delivery   Warrant   Common Stock     194,986       428       —    

Dance Biopharm, Inc.(15)

  Drug Delivery   Warrant   Common Stock     110,882       74       —    

 

See notes to consolidated financial statements.

 

F-119


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

Edge Therapeutics, Inc.(3)

  Drug Delivery   Warrant   Common Stock     78,595     $ 390     $ 402  

Kaleo, Inc. (p.k.a. Intelliject, Inc.)

  Drug Delivery   Warrant   Preferred Series B     82,500       594       391  

Neos Therapeutics, Inc.(3)(15)

  Drug Delivery   Warrant   Common Stock     70,833       285       17  

Pulmatrix Inc.(3)

  Drug Delivery   Warrant   Common Stock     25,150       116       —    

ZP Opco, Inc (p.k.a. Zosano Pharma)(3)

  Drug Delivery   Warrant   Common Stock     72,379       266       —    
         

 

 

   

 

 

 

Subtotal: Drug Delivery (0.21%)*

 

    4,523       1,677  
         

 

 

   

 

 

 

Drug Discovery & Development

           

ADMA Biologics, Inc.(3)

  Drug Discovery &
Development
  Warrant   Common Stock     89,750       295       43  

Anthera Pharmaceuticals, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     40,178       984       —    

Auris Medical Holding, AG(3)(4)(9)

  Drug Discovery &
Development
  Warrant   Common Stock     156,726       249       51  

Aveo Pharmaceuticals, Inc.(3)(9)

  Drug Discovery &
Development
  Warrant   Common Stock     2,069,880       396       123  

Brickell Biotech, Inc.

  Drug Discovery &
Development
  Warrant   Preferred Series C     26,086       119       139  

Cerecor, Inc.(3)

  Drug Discovery &
Development
  Warrant   Common Stock     22,328       70       —    

Cerulean Pharma, Inc.(3)

  Drug Discovery &
Development
  Warrant   Common Stock     171,901       369       14  

Chroma Therapeutics, Ltd.(4)(9)

  Drug Discovery &
Development
  Warrant   Preferred Series D     325,261       490       —    

Cleveland BioLabs, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     7,813       105       —    

Concert Pharmaceuticals, Inc.(3)

  Drug Discovery &
Development
  Warrant   Common Stock     70,796       367       56  

CTI BioPharma Corp. (p.k.a. Cell Therapeutics, Inc.)(3)

  Drug Discovery &
Development
  Warrant   Common Stock     292,398       165       8  

CytRx Corporation(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     634,146       416       78  

Dicerna Pharmaceuticals, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     200       28       —    

Epirus Biopharmaceuticals, Inc.

  Drug Discovery &
Development
  Warrant   Common Stock     64,194       276       —    

Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.)(3)

  Drug Discovery &
Development
  Warrant   Common Stock     73,009       142       13  

Genocea Biosciences, Inc.(3)

  Drug Discovery &
Development
  Warrant   Common Stock     73,725       266       75  

Immune Pharmaceuticals(3)

  Drug Discovery &
Development
  Warrant   Common Stock     214,853       164       —    

Mast Therapeutics, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     2,272,724       203       85  

Melinta Therapeutics

  Drug Discovery &
Development
  Warrant   Preferred Series 3     1,382,323       626       295  

Nanotherapeutics, Inc.(15)

  Drug Discovery &
Development
  Warrant   Common Stock     171,389       838       767  

Neothetics, Inc. (p.k.a. Lithera, Inc)(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     46,838       266       29  

Neuralstem, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     75,187       77       1  

Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     69,840       152       157  

PhaseRx, Inc.(3)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     63,000       125       15  

Sorrento Therapeutics, Inc.(3)(9)

  Drug Discovery &
Development
  Warrant   Common Stock     306,748       890       632  

 

See notes to consolidated financial statements.

 

F-120


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

uniQure B.V.(3)(4)(9)

  Drug Discovery &
Development
  Warrant   Common Stock     37,174     $ 218     $ 8  

XOMA Corporation(3)(9)(15)

  Drug Discovery &
Development
  Warrant   Common Stock     9,063       279       6  
         

 

 

   

 

 

 

Subtotal: Drug Discovery & Development
(0.33%)*

 

    8,575       2,595  
         

 

 

   

 

 

 

Electronics & Computer Hardware

           

Clustrix, Inc.

  Electronics &
Computer Hardware
  Warrant   Common Stock     50,000       12       —    

Persimmon Technologies

  Electronics &
Computer Hardware
  Warrant   Preferred Series D     63,348       40       509  
       

 

 

   

 

 

 

Subtotal: Electronics & Computer Hardware
(0.06%)*

 

    52       509  
       

 

 

   

 

 

 

Healthcare Services, Other

     

Chromadex Corporation(3)(15)

  Healthcare Services,
Other
  Warrant   Common Stock     139,673       157       137  
         

 

 

   

 

 

 

Subtotal: Healthcare Services, Other (0.02%)*

 

    157       137  
       

 

 

   

 

 

 

Information Services

           

INMOBI Inc.(4)(9)

  Information Services   Warrant   Common Stock     46,874       82       —    

InXpo, Inc.(15)

  Information Services   Warrant   Preferred Series C     648,400       98       4  
  Information Services   Warrant   Preferred Series C-1     1,165,183       74       6  
       

 

 

   

 

 

   

 

 

 

Total InXpo, Inc.

    1,813,583       172       10  

RichRelevance, Inc.(15)

  Information Services   Warrant   Preferred Series E     112,612       98       —    
         

 

 

   

 

 

 

Subtotal: Information Services (0.00%)*

 

    352       10  
         

 

 

   

 

 

 

Internet Consumer & Business Services

           

Aria Systems, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series E     239,692       73       —    

Blurb, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     234,280       636       96  

CashStar, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C-2     727,272       130       24  

CloudOne, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series E     968,992       19       46  

Intent Media, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Common Stock     140,077       168       167  

Just Fabulous, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series B     206,184       1,102       1,093  

Lightspeed POS, Inc.(4)(9)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     245,610       20       31  

LogicSource(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     79,625       30       59  

Oportun (p.k.a. Progress Financial)

  Internet Consumer &
Business Services
  Warrant   Preferred Series G     174,562       78       190  

Prism Education Group, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series B     200,000       43       —    

ShareThis, Inc.(15)

  Internet Consumer &
Business Services
  Warrant   Preferred Series C     493,502       547       1  

Snagajob.com, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series A     1,575,000       640       1,075  

Tapjoy, Inc.

  Internet Consumer &
Business Services
  Warrant   Preferred Series D     748,670       316       19  

Tectura Corporation

  Internet Consumer &
Business Services
  Warrant   Preferred Series B-1     253,378       51       —    
         

 

 

   

 

 

 

Subtotal: Internet Consumer & Business Services (0.36%)*

 

    3,853       2,801  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-121


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

Media/Content/Info

           

FanDuel, Inc.

  Media/Content/Info   Warrant   Preferred Series E-1     4,648     $ 730     $ 682  

Machine Zone, Inc.(16)

  Media/Content/Info   Warrant   Common Stock     1,552,710       1,958       2,729  

Rhapsody International, Inc.(15)

  Media/Content/Info   Warrant   Common Stock     715,755       385       7  

WP Technology, Inc. (Wattpad, Inc.)(4) (9)

  Media/Content/Info   Warrant   Common Stock     127,909       1       6  

Zoom Media Group, Inc.

  Media/Content/Info   Warrant   Preferred Series A     1,204       348       14  
         

 

 

   

 

 

 

Subtotal: Media/Content/Info (0.44%)*

 

    3,422       3,438  
         

 

 

   

 

 

 

Medical Devices & Equipment

           

Amedica Corporation(3)(15)

  Medical Devices &
Equipment
  Warrant   Common Stock     103,225       459       14  

Aspire Bariatrics, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series D     395,000       455       217  

Avedro, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     300,000       401       254  

Flowonix Medical Incorporated

  Medical Devices &
Equipment
  Warrant   Preferred Series AA     155,325       362       21  

Gamma Medica, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series A     450,956       170       234  

Gelesis, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series A-1     74,784       78       153  

InspireMD, Inc.(3)(4)(9)

  Medical Devices &
Equipment
  Warrant   Common Stock     39,364       242       20  

IntegenX, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series C     547,752       15       35  

Medrobotics Corporation(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series E     455,539       370       292  

Micell Technologies, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series D-2     84,955       262       347  

NetBio, Inc.

  Medical Devices &
Equipment
  Warrant   Preferred Series A     7,841       408       158  

NinePoint Medical, Inc.(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series A-1     587,840       170       65  

Optiscan Biomedical, Corp.(5)(15)

  Medical Devices &
Equipment
  Warrant   Preferred Series D     10,535,275       1,252       170  

Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)

  Medical Devices &
Equipment
  Warrant   Preferred Series A     500,000       402       355  

Quanterix Corporation

  Medical Devices &
Equipment
  Warrant   Preferred Series C     173,428       180       104  

SonaCare Medical, LLC (p.k.a. US HIFU, LLC)

  Medical Devices &
Equipment
  Warrant   Preferred Series A     6,464       188       —    

Strata Skin Sciences, Inc. (p.k.a. MELA Sciences, Inc.)(3)

  Medical Devices &
Equipment
  Warrant   Common Stock     69,320       402       —    

ViewRay, Inc.(3)(15)

  Medical Devices &
Equipment
  Warrant   Common Stock     128,231       333       2  
         

 

 

   

 

 

 

Subtotal: Medical Devices & Equipment (0.31%)*

 

    6,149       2,441  
         

 

 

   

 

 

 

Semiconductors

           

Achronix Semiconductor Corporation(15)

  Semiconductors   Warrant   Preferred Series C     360,000       160       71  
  Semiconductors   Warrant   Preferred Series D-1     500,000       7       25  
       

 

 

   

 

 

   

 

 

 

Total Achronix Semiconductor Corporation

    860,000       167       96  

Aquantia Corp.

  Semiconductors   Warrant   Preferred Series G     196,831       4       88  

Avnera Corporation

  Semiconductors   Warrant   Preferred Series E     141,567       46       114  
         

 

 

   

 

 

 

Subtotal: Semiconductors (0.04%)*

 

    217       298  
         

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-122


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

Software

           

Actifio, Inc.

  Software   Warrant   Common Stock     73,584     $ 249     $ 83  
  Software   Warrant   Preferred Series F     31,673       343       54  
       

 

 

   

 

 

   

 

 

 

Total Actifio, Inc.

    105,257       592       137  

Braxton Technologies, LLC

  Software   Warrant   Preferred Series A     168,750       188       —    

CareCloud Corporation(15)

  Software   Warrant   Preferred Series B     413,433       258       488  

Clickfox, Inc.(15)

  Software   Warrant   Preferred Series B     1,038,563       330       63  
  Software   Warrant   Preferred Series C     592,019       730       76  
  Software   Warrant   Preferred Series C-A     2,218,214       230       1,604  
       

 

 

   

 

 

   

 

 

 

Total Clickfox, Inc.

    3,848,796       1,290       1,743  

Cloud Technology Partners, Inc.

  Software   Warrant   Preferred Series C     113,960       34       35  

Evernote Corporation(15)

  Software   Warrant   Common Stock     62,500       106       110  

JumpStart Games, Inc. (p.k.a Knowledge Holdings, Inc.)(15)

  Software   Warrant   Preferred Series E     614,333       16       —    

Mattersight Corporation(3)

  Software   Warrant   Common Stock     357,143       538       386  

Message Systems, Inc.(15)

  Software   Warrant   Preferred Series C     503,718       334       325  

Mobile Posse, Inc.(15)

  Software   Warrant   Preferred Series C     396,430       130       102  

Neos, Inc.(15)

  Software   Warrant   Common Stock     221,150       22       64  

NewVoiceMedia Limited(4)(9)

  Software   Warrant   Preferred Series E     225,586       33       45  

OneLogin, Inc.(15)

  Software   Warrant   Common Stock     228,972       150       188  

Poplicus, Inc.(15)

  Software   Warrant   Preferred Series C     2,595,230       —         6  

Quid, Inc.(15)

  Software   Warrant   Preferred Series D     71,576       1       8  

RedSeal Inc.(15)

  Software   Warrant   Preferred Series
C-Prime
    640,603       66       65  

Signpost, Inc.(15)

  Software   Warrant   Preferred Series C     324,005       314       167  

Soasta, Inc.(15)

  Software   Warrant   Preferred Series E     410,800       691       190  

Sonian, Inc.(15)

  Software   Warrant   Preferred Series C     185,949       106       105  
         

 

 

   

 

 

 

Subtotal: Software (0.53%)*

 

    4,869       4,164  
         

 

 

   

 

 

 

Specialty Pharmaceuticals

           

Alimera Sciences, Inc.(3)

  Specialty
Pharmaceuticals
  Warrant   Common Stock     1,717,709       860       421  

QuatRx Pharmaceuticals Company

  Specialty
Pharmaceuticals
  Warrant   Preferred Series E     155,324       308       —    
         

 

 

   

 

 

 

Subtotal: Specialty Pharmaceuticals (0.05%)*

 

    1,168       421  
         

 

 

   

 

 

 

Surgical Devices

           

Gynesonics, Inc.(15)

  Surgical Devices   Warrant   Preferred Series C     180,480       75       14  
  Surgical Devices   Warrant   Preferred Series D     1,575,965       320       240  
       

 

 

   

 

 

   

 

 

 

Total Gynesonics, Inc.

    1,756,445       395       254  

Transmedics, Inc.

  Surgical Devices   Warrant   Preferred Series B     40,436       225       16  
  Surgical Devices   Warrant   Preferred Series D     175,000       100       405  
  Surgical Devices   Warrant   Preferred Series F     50,544       38       56  
       

 

 

   

 

 

   

 

 

 

Total Transmedics, Inc.

    265,980       363       477  
         

 

 

   

 

 

 

Subtotal: Surgical Devices (0.09%)*

 

    758       731  
         

 

 

   

 

 

 

Sustainable and Renewable Technology

     

Agrivida, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     471,327       120       99  

Alphabet Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series A     86,329       82       —    

American Superconductor Corporation(3)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     58,823       39       85  

Beamreach Solar (p.k.a. Solexel, Inc.)(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     1,171,625       1,162       —    

Brightsource Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 1     116,666       104       —    

 

See notes to consolidated financial statements.

 

F-123


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

Portfolio Company

  Sub-Industry   Type of
Investment(1)
  Series   Shares     Cost(2)     Value(3)  

Calera, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     44,529     $ 513     $ —    

EcoMotors, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series B     437,500       308       30  

Fluidic, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D     61,804       102       20  

Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

  Sustainable and
Renewable Technology
  Warrant   Common Stock     530,811       181       —    
  Sustainable and
Renewable Technology
  Warrant   Preferred Series 2-A     6,229       50       —    
       

 

 

   

 

 

   

 

 

 

Total Flywheel Building Intelligence, Inc. (p.k.a. SCIEnergy, Inc.)

    537,040       231       —    

Fulcrum Bioenergy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C-1     280,897       275       201  

GreatPoint Energy, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series D-1     393,212       548       —    

Polyera Corporation(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     311,609       338       —    

Proterra, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 4     477,517       41       457  

Rive Technology, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series E     234,477       12       3  

Stion Corporation(5)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series Seed     2,154       1,378       —    

Sungevity, Inc.

  Sustainable and
Renewable Technology
  Warrant   Common Stock     20,000,000       543       —    
  Sustainable and
Renewable Technology
  Warrant   Preferred Series C     32,472,222       902       —    
       

 

 

   

 

 

   

 

 

 

Total Sungevity, Inc.

    52,472,222       1,445       —    

TAS Energy, Inc.

  Sustainable and
Renewable Technology
  Warrant   Preferred Series AA     428,571       299       —    

Tendril Networks

  Sustainable and
Renewable Technology
  Warrant   Preferred Series 3-A     1,019,793       189       219  

Trilliant, Inc.(15)

  Sustainable and
Renewable Technology
  Warrant   Preferred Series A     320,000       162       202  
         

 

 

   

 

 

 

Subtotal: Sustainable and Renewable Technology (0.17%)*

 

    7,348       1,316  
         

 

 

   

 

 

 

Total: Warrant Investments (3.49%)*

 

    45,014       27,485  
         

 

 

   

 

 

 

Total Investments (180.72%)*

 

  $ 1,511,526     $ 1,423,942  
         

 

 

   

 

 

 

 

*

Value as a percent of net assets

(1)

Preferred and common stock, warrants, and equity interests are generally non-income producing.

(2)

Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $24.7 million, $114.5 million and $89.8 million respectively. The tax cost of investments is $1.5 billion.

(3)

Except for warrants in 37 publicly traded companies and common stock in 19 publicly traded companies, all investments are restricted at December 31, 2016 and were valued at fair value 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.

(4)

Non-U.S. company or the company’s principal place of business is outside the United States.

(5)

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.

(6)

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.

(7)

Debt is on non-accrual status at December 31, 2016, and is therefore considered non-income producing. Note that at December 31, 2016, only the $11.0 million PIK loan is on non-accrual for the Company’s debt investment in Tectura Corporation.

 

See notes to consolidated financial statements.

 

F-124


Table of Contents
Index to Financial Statements

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

(dollars in thousands)

 

(8)

Denotes that all or a portion of the debt investment is convertible debt.

(9)

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.

(10)

Denotes that all or a portion of the debt investment secures the notes offered in the Debt Securitization (as defined in Note 4).

(11)

Denotes that all or a portion of the debt investment is pledged as collateral under the Wells Facility (as defined in Note 4).

(12)

Denotes that all or a portion of the debt investment is pledged as collateral under the Union Bank Facility (as defined in Note 4).

(13)

Denotes that all or a portion of the debt investment principal includes accumulated PIK interest and is net of repayments.

(14)

Denotes that all or a portion of the debt investment includes an exit fee receivable.

A. This fee ranges from 1.0% to 5.0% of the total debt commitment based on the contractual terms of our loan servicing agreements.

B. This fee ranges from 5.0% to 10.0% of the total debt commitment based on the contractual terms of our loan servicing agreements.

C. This fee ranges from 10.0% to 15.0% of the total debt commitment based on the contractual terms of our loan servicing agreements.

D. This fee is greater than 15.0% of the total debt commitment based on the contractual terms of our loan servicing agreements.

(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, 2016.

(17)

Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at December 31, 2016. Refer to Note 10.

(18)

Repayment of debt investment is delinquent of the contractual maturity date as of December 31, 2016.

(19)

The stated PIK interest rate may be reduced to 1.45% subject to achievement of a milestone by the portfolio company.

 

See notes to consolidated financial statements.

 

F-125


Table of Contents
Index to Financial Statements

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, 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 Internal Revenue Code of 1986, as amended (the “Code”). Effective January 1, 2006, the Company elected to be treated for tax purposes as a regulated investment company, or 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 Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification, as amended (“ASC”).

Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“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. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they 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, or (“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 II and HT III hold approximately $111.8 million and $284.0 million in assets, respectively, and they accounted for approximately 5.4% and 13.8% of the Company’s total assets, respectively, prior to consolidation at December 31, 2017.

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. generally accepted accounting principles (“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.

The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIE. All significant inter-company accounts and transactions have been eliminated in consolidation. In accordance with Articles 6 and 10 of Regulation S-X, the Company does not consolidate portfolio company investments. It is not appropriate for an investment company to consolidate a portfolio company that is not an investment company or that provides services to the Company. Rather, an investment company’s interest in portfolio companies that are not investment companies should be measured at fair value in accordance with ASC Topic 946.

 

F-126


Table of Contents
Index to Financial Statements

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.

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 2021 Asset-Backed Notes (as defined herein). See “Note 4 – Borrowings.”

Revision of Previously Issued Financial Statements

It was determined that there was a misclassification in the previously issued consolidated financial statements of $15.3 million, and $8.0 million in the distributions for the years ended December 31, 2015 and 2016 respectively. The amounts had been categorized as distributions of net investment income rather than distributions of realized gains and the components of net assets have been revised in the respective years to reflect the correct classification. In addition, the financial highlights in note 9 have been updated to reclassify $0.22 and $0.11 per share from distributions of net investment income to distributions of realized gains for the years ended December 31, 2015 and 2016 respectively. The amounts reclassified are not material individually, or in the aggregate, and there is no impact on previously reported net assets, total distributions, and earnings per share for the years ended December 2015 and 2016. The Company plans to reflect the revised amounts in its quarterly consolidated financial statements in future filings containing such information.

 

F-127


Table of Contents
Index to Financial Statements

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, 2017, approximately 93.2% 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 Company’s 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, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.

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 Company’s Board of Directors is 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 Company’s Board of Directors has 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.

 

F-128


Table of Contents
Index to Financial Statements

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, 2017 and December 31, 2016. The Company transfers investments in and out of Level 1, 2 and 3 as of the beginning balance sheet date, 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, 2017, there were no transfers between Levels 1 or 2.

 

(in thousands)

Description

   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)
 

Senior Secured Debt

   $ 1,415,984      $ —        $ —        $ 1,415,984  

Preferred Stock

     40,683        —          —          40,683  

Common Stock

     48,678        22,825        —          25,853  

Warrants

     36,869        —          5,664        31,205  

Escrow Receivable

     752        —          —          752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,542,966      $ 22,825      $ 5,664      $ 1,514,477  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(in thousands)

Description

   Balance
December 31,
2016
     Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior Secured Debt

   $ 1,328,803      $ —        $ 4,825      $ 1,323,978  

Preferred Stock

     39,418        —          —          39,418  

Common Stock

     28,236        17,271        —          10,965  

Warrants

     27,485        —          3,239        24,246  

Escrow Receivable

     1,382        —          —          1,382  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,425,324      $ 17,271      $ 8,064      $ 1,399,989  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-129


Table of Contents
Index to Financial Statements

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, 2017 and December 31, 2016.

 

(in thousands)

  Balance
January 1,
2017
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(3)
    Gross
Transfers
out of
Level 3(3)
    Balance
December 31,
2017
 

Senior Debt

  $ 1,323,978     $ (24,684   $ 29,610     $ 776,648     $ —       $ (626,897   $ —       $ (62,671   $ 1,415,984  

Preferred Stock

    39,418       (7,531     11,955       2,683       (468     —         —         (5,374     40,683  

Common Stock

    10,965       (487     (49,462     3,748       (1,582     —         62,671       —         25,853  

Warrants

    24,246       727       8,450       5,449       (7,303     —         —         (364     31,205  

Escrow Receivable

    1,382       261       —         3,127       (4,018     —         —         —         752  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,399,989     $ (31,714   $ 553     $ 791,655     $ (13,371   $ (626,897   $ 62,671     $ (68,409   $ 1,514,477  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(in thousands)

  Balance
January 1,
2016
    Net
Realized

Gains
(Losses)(1)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Purchases(5)     Sales     Repayments(6)     Gross
Transfers
into
Level 3(4)
    Gross
Transfers
out of
Level 3(4)
    Balance
December 31,
2016
 

Senior Debt

  $ 1,102,396     $ (6,968   $ (12,675   $ 687,353     $ —       $ (441,567   $ —       $ (4,561   $ 1,323,978  

Preferred Stock

    35,245       (334     (7,864     13,873       (1,367     —         626       (761     39,418  

Common Stock

    1,527       —         (1,404     6,081       —         —         4,761       —         10,965  

Warrants

    18,565       (116     3,465       4,082       (1,186     —         —         (564     24,246  

Escrow Receivable

    2,967       (6     —         2,009       (3,588     —         —         —         1,382  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,160,700     $ (7,424   $ (18,478   $ 713,398     $ (6,141   $ (441,567   $ 5,387     $ (5,886   $ 1,399,989  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in net realized gains or losses in the accompanying Consolidated Statement of Operations.

(2)

Included in net change in unrealized appreciation (depreciation) in the accompanying Consolidated Statement of Operations.

(3)

Transfers out of Level 3 during the year ended December 31, 2017 relate to the conversion of the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s 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 the Company’s 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 the Company’s debt investment in Sungevity, Inc. and a portion of the Company’s debt investment in Gamma Medica, Inc. to common stock through bankruptcy transactions.

(4)

Transfers out of Level 3 during the year ended December 31, 2016 relate to the exercise of warrants in TPI Composites, Inc. and Touchcommerce, Inc. to common stock in an initial public offering, or IPO, and acquisition, respectively; the exercise of warrants in Ping Identity Corporation to preferred stock; the conversion of debt to equity in Optiscan Biomedical Corp and Achilles Technology Management Co II, Inc. and the conversion of the Company’s preferred shares to common shares in SCIEnergy, Inc. Transfers into of Level 3 during the year ended December 31, 2016 relate to the acquisition of preferred stock as a result of the exercise of warrants in Ping Identity Corporation, the conversion of debt to equity in Optiscan Biomedical Corp and Achilles Technology Management Co II, Inc. and the conversion of the Company’s preferred shares to common shares in SCIEnergy, Inc.

(5)

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.

(6)

Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures.

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.

For the year ended December 31, 2016, approximately $9.1 million and $1.4 million in net unrealized depreciation was recorded for preferred stock and common stock Level 3 investments, respectively, relating to

 

F-130


Table of Contents
Index to Financial Statements

assets still held at the reporting date. For the same period, approximately $25.7 million in net unrealized depreciation and $2.8 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, 2017 and December 31, 2016. 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

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input (1)

  Range   Weighted
Average (2)
 

Pharmaceuticals

  $ 44,301    

Originated Within 6 Months

 

Origination Yield

  10.71% - 12.61%     11.89%  
    379,841     Market Comparable Companies   Hypothetical Market Yield   10.14% - 16.14%     12.94%  
     

Premium/(Discount)

  (0.25%) - 0.75%  
    2,257     Liquidation(3)  

Probability weighting of

alternative outcomes

  100.00%  

Technology

    158,916    

Originated Within 6 Months

 

Origination Yield

  9.4% - 25.11%     11.68%  
    290,561     Market Comparable Companies   Hypothetical Market Yield Premium/(Discount)   9.47% - 19.21%
(0.25%) - 1.00%
    13.55%  
    22,020     Liquidation(3)   Probability weighting of alternative outcomes   5.00% - 100.00%  

Sustainable and Renewable

Technology

   
33,020
49,647
 
 
  Originated Within 6 Months Market Comparable Companies  

Origination Yield

Hypothetical Market Yield Premium/(Discount)

  11.97% - 20.06%
11.15% - 14.16%
0.00% - 0.25%
   
15.31%
12.13%
 
 
Medical Devices    
17,013
89,869
 
 
  Originated Within 6 Months Market Comparable Companies  

Origination Yield

Hypothetical Market Yield

Premium/(Discount)

  13.49% 9.66% -
 17.57% 0.00% -
 0.50%
   
13.49%
12.28%
 
 
Lower Middle Market     97,291     Originated Within 6 Months  

Origination Yield

  8.29% - 12.68%     12.01%  
    19,219     Liquidation(3)   Probability weighting of alternative outcomes   10.00% - 100.00%  
   

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.

 

F-131


Table of Contents
Index to Financial Statements
   

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)

The weighted averages are calculated based on the fair market value of each investment.

 

(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

(4)

Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

 

Investment Type -Level

Three Debt Investments

  Fair Value at
December 31, 2016
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input (1)

  Range     Weighted
Average (2)
 

Pharmaceuticals

  $ 102,412    

Originated Within 6 Months

 

Origination Yield

    12.24% - 14.59%       13.64%  
    434,718     Market Comparable Companies   Hypothetical Market Yield     9.07% - 15.62%       12.44%  
     

Premium/(Discount)

    (0.25%) - 0.75%    
    2,693     Liquidation(3)   Probability weighting of alternative outcomes     25.00% - 100.00%    

Technology

    93,674    

Originated Within 6 Months

 

Origination Yield

    7.29% - 16.53%       13.69%  
    325,553     Market Comparable Companies   Hypothetical Market Yield     10.14% - 21.66%       12.69%  
      Premium/(Discount)     (0.50%) - 0.50%    
    24,706     Liquidation(3)   Probability weighting of alternative outcomes     20.00% - 100.00%    

Sustainable and Renewable

    99,286     Market Comparable Companies   Hypothetical Market Yield     11.77% - 16.84%       13.45%  

Technology

    44,626    

Liquidation(3)

  Premium/(Discount) Probability weighting of alternative outcomes    
0.00% - 0.25%
10.00% - 40.00%
 
 
 

Medical Devices

    88,983     Market Comparable Companies   Hypothetical Market Yield     10.25% - 18.60%       14.01%  
      Premium/(Discount)     (0.25%) - 0.75%    
Lower Middle Market     25,017     Market Comparable Companies  

Hypothetical Market Yield

    8.85% - 15.79%       10.10%  
      Premium/(Discount)     0.00% - 0.25%    
    13,148    

Liquidation(3)

  Probability weighting of alternative outcomes     100.00%    
   

Debt Investments Where Fair Value Approximates Cost

   
    25,000     Imminent Payoffs(4)      
    44,162     Debt Investments Maturing in Less than One Year    
 

 

 

         
  $ 1,323,978     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)

The weighted averages are calculated based on the fair market value of each investment.

 

(3)

The significant unobservable input used in the fair value measurement of impaired debt securities is the probability weighting of alternative outcomes.

 

(4)

Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

 

F-132


Table of Contents
Index to Financial Statements

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
December 31, 2017
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input (1)

  Range     Weighted
Average (6)

Equity Investments

  $ 7,684    

Market Comparable Companies

 

EBITDA Multiple(2)

    5.1x - 40.2x     13.2x
     

Revenue Multiple(2)

    0.5x - 6.2x     2.9x
     

Discount for Lack of Marketability(3)

    7.49% - 12.97%     8.77%
     

Average Industry Volatility (4)

    27.8% - 77.3%     53.35%
     

Risk-Free Interest Rate

    1.40% - 1.90%     1.47%
     

Estimated Time to Exit (in months)

    3 - 10     5
    19,323     Market Adjusted OPM Backsolve   Market Equity Adjustment (5)     (16.43%) - 29.4%     11.79%
     

Average Industry Volatility (4)

    33.17% - 78.77%     68.99%
     

Risk-Free Interest Rate

    0.84% - 1.51%     1.42%
     

Estimated Time to Exit (in months)

    5 - 26     13
    39,529    

Other (7)

     

Warrant Investments

    19,310    

Market Comparable Companies

 

EBITDA Multiple (2)

    5x - 40.2x     14.6x
     

Revenue Multiple (2)

    0.5x - 6.4x     2.6x
     

Discount for Lack of Marketability (3)

    5.16% - 27.41%     13.57%
     

Average Industry Volatility (4)

    27.8% - 102.77%     55.15%
     

Risk-Free Interest Rate

    1.31% - 2.09%     1.66%
     

Estimated Time to Exit (in months)

    2 - 48     13
    6,713     Market Adjusted OPM Backsolve  

Market Equity Adjustment (5)

    (68.52%) - 154.5%     11.76%
     

Average Industry Volatility (4)

    33.17% - 110.32%     66.97%
     

Risk-Free Interest Rate

    0.96% - 2.09%     1.59%
     

Estimated Time to Exit (in months)

    5 - 48     20
    5,182     Other (7)      
 

 

 

         
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 Black Scholes option pricing model (“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.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Represents the range of changes in industry valuations since the portfolio company’s last external valuation event.

(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.

 

F-133


Table of Contents
Index to Financial Statements

Investment Type - Level Three

Equity and Warrant Investments

  Fair Value at
December 31, 2016
(in thousands)
   

Valuation Techniques/

Methodologies

 

Unobservable Input(1)

  Range     Weighted
Average(5)

Equity Investments

  $ 9,258    

Market Comparable Companies

 

EBITDA Multiple(2)

    0.0x - 38.7x     12.3x
     

Revenue Multiple(2)

    0.9x - 8.7x     3.1x
     

Discount for Lack of  Marketability(3)

    13.75% - 25.97%     16.73%
     

Average Industry Volatility(4)

    45.54% - 113.16%     61.06%
     

Risk-Free Interest Rate

    0.79% - 1.50%     0.91%
     

Estimated Time to Exit (in months)

    10 - 38   15
    19,836     Market Adjusted OPM Backsolve   Average Industry Volatility(4)     29.93% - 109.95%     73.49%
     

Risk-Free Interest Rate

    0.65% - 1.44%     0.92%
     

Estimated Time to Exit (in months)

    10 - 34     15
    21,289     Other(6)      

Warrant Investments

    8,959    

Market Comparable Companies

 

EBITDA Multiple(2)

    2.6x - 51.4x     13.8x
     

Revenue Multiple(2)

    0.4x - 6.1x     2.5x
     

Discount for Lack of  Marketability(3)

    11.74% - 27.25%     19.02%
     

Average Industry Volatility(4)

    38.58% - 111.15%     62.03%
     

Risk-Free Interest Rate

    0.68% - 1.68%     1.04%
     

Estimated Time to Exit (in months)

    7 - 47     20
    9,713     Market Adjusted OPM Backsolve  

Average Industry Volatility(4)

    29.93% - 116.29%     67.20%
     

Risk-Free Interest Rate

    0.45% - 1.84%     0.99%
     

Estimated Time to Exit (in months)

    3 - 47     20
    5,574     Other(6)      
 

 

 

         
Total Level Three Warrant
and Equity Investments
  $ 74,629          
 

 

 

         

 

(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 Black Scholes 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.

(2)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)

Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)

Represents the range of industry volatility used by market participants when pricing the investment.

(5)

Weighted averages are calculated based on the fair market value of each investment.

(6)

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

 

F-134


Table of Contents
Index to Financial Statements

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/assess market based movements.

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.

 

F-135


Table of Contents
Index to Financial Statements

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, 2017 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.

 

F-136


Table of Contents
Index to Financial Statements

The following table summarizes the Company’s realized gain and loss and changes in the Company’s unrealized appreciation and depreciation on control and affiliate investments for the years ended December 31, 2017 and 2016, and affiliate investments for the year ended December 2015. The Company did not hold any control investments at December 31, 2015.

 

(in thousands)                Year Ended December 31, 2017  

Portfolio Company

   Type     Fair Value at
December 31,
2017
    Investment
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Unrealized

Appreciation/
(Depreciation)(1)
    Realized
Gain/(Loss)
 

Control Investments

            

Achilles Technology Management Co II, Inc.

     Control     $ 242     $ 155     $ (2,254   $ —       $ (486

HercGamma, Inc.

     Control       —         —         (523     523       (487

SkyCross, Inc.

     Control       —         —         1,842       15,452       (15,452

Tectura Corporation

     Control       19,219       1,827       (1,079     51       (51

Second Time Around (Simplify Holdings, LLC)

     Control       —         —         140       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

     $ 19,461     $ 1,982     $ (1,874   $ 16,026     $ (16,476
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

            

Optiscan BioMedical, Corp.

     Affiliate     $ 6,291     $ —       $ 1,419     $ —       $ —    

Stion Corporation

     Affiliate       —         2       —         —         —    

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

     Affiliate       25,004       842       (50,102     —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

     $ 31,295     $ 844     $ (48,683   $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

     $ 50,756     $ 2,826     $ (50,557   $ 16,026     $ (16,476
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)                Year Ended December 31, 2016  

Portfolio Company

   Type     Fair Value at
December 31,
2016
    Investment
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Unrealized

Appreciation/
(Depreciation)(1)
    Realized
Gain/(Loss)
 

Control Investments

            

SkyCross, Inc.

     Control     $ —       $ —       $ (3,421   $ —       $ —    

Achilles Technology Management Co II, Inc.

     Control       4,700       84       (604     —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

     $ 4,700     $ 84     $ (4,025   $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

            

Optiscan BioMedical, Corp.

     Affiliate     $ 4,699     $ 12     $ (3,409   $ —       $ —    

Stion Corporation

     Affiliate       333       148       539       648       —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

     $ 5,032     $ 160     $ (2,870   $ 648     $ —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control & Affiliate Investments

     $ 9,732     $ 244     $ (6,895   $ 648     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)                Year Ended December 31, 2015  

Portfolio Company

   Type     Fair Value at
December 31,
2015
    Investment
Income
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Unrealized

Appreciation/
(Depreciation)(1)
    Realized
Gain/(Loss)
 

Optiscan BioMedical, Corp.

     Affiliate     $ 6,973     $ —       $ 901     $ —       $ —    

Stion Corporation

     Affiliate       1,013       348       206       —         —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 7,986     $ 348     $ 1,107     $ —       $ —    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents reversals of prior period net unrealized depreciation upon being realized as a loss due to write off or reversals of prior period collateral based impairments.

 

F-137


Table of Contents
Index to Financial Statements

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 this investment became classified as a control investment as of September 30, 2017.

In June 2017, the Company acquired 100% ownership of the equity in HercGamma, Inc. and classified it as a control investment in accordance with the requirements of the 1940 Act. In June 2017, HercGamma, Inc. acquired the assets of a medical device company that develops advanced digital imaging to detect breast cancer, as part of an article 9 consensual foreclosure and public auction for consideration with an estimated fair value of $1.2 million. In September 2017, the Company reduced the cost basis of its equity position by $646,000 with net proceeds from an asset sale and by $36,000 from a final distribution in October 2017. Subsequent to the distributions, 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, 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 June 2016, the Company’s investments in SkyCross, Inc. became classified as a control investment as a result of obtaining more than 50% representation on the portfolio company’s board. In September 2017, the Company’s investments were deemed wholly worthless and written off for a realized loss.

In June 2016, the Company also 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 June 2016, Achilles Technology Management Co II, Inc. acquired the assets of a global antenna company that produces radio frequency system solutions as part of an article 9 consensual foreclosure and public auction for total consideration in the amount of $4.0 million. In September and November 2016, the Company made a $1.0 million and $250,000 debt investment, respectively, in Achilles Technology Management II, Inc. to provide working capital under the terms of a loan servicing agreement.

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. The remaining equity investment in Achilles Technology Management II, Inc. is carried on the consolidated statement of assets and liabilities at fair value.

 

F-138


Table of Contents
Index to Financial Statements

The following table shows the fair value of the Company’s portfolio of investments by asset class as of December 31, 2017 and December 31, 2016:

 

     December 31, 2017     December 31, 2016  

(in thousands)

   Investments at
Fair Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior Secured Debt with Warrants

   $ 880,115        57.1   $ 1,078,779        75.7

Senior Secured Debt

     572,738        37.1     277,509        19.5

Preferred Stock

     40,683        2.6     39,418        2.8

Common Stock

     48,678        3.2     28,236        2.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,542,214        100.0   $ 1,423,942        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.

A summary of the Company’s investment portfolio, at value, by geographic location as of December 31, 2017 and December 31, 2016 is shown as follows:

 

     December 31, 2017     December 31, 2016  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 1,404,235        91.1   $ 1,362,223        95.6

United Kingdom

     91,105        5.9     18,395        1.3

Netherlands

     20,783        1.3     20,089        1.4

Cayman Islands

     14,954        1.0     —          0.0

Switzerland

     10,581        0.7     12,377        0.9

Canada

     556        0.0     8,095        0.6

Israel

     —          0.0     2,763        0.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,542,214        100.0   $ 1,423,942        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the fair value of the Company’s portfolio by industry sector at December 31, 2017 and December 31, 2016:

 

     December 31, 2017     December 31, 2016  

(in thousands)

   Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Drug Discovery & Development

   $ 369,173        23.9   $ 422,550        29.7

Software

     360,123        23.4     219,559        15.4

Internet Consumer & Business Services

     154,909        10.0     97,047        6.8

Media/Content/Info

     152,998        9.9     137,567        9.7

Sustainable and Renewable Technology

     118,432        7.7     154,406        10.9

Medical Devices & Equipment

     94,595        6.1     107,695        7.6

Drug Delivery

     91,214        5.9     109,834        7.7

Healthcare Services, Other

     72,337        4.7     30,200        2.1

Specialty Pharmaceuticals

     37,501        2.4     38,944        2.7

Information Services

     24,618        1.6     6,091        0.4

Consumer & Business Products

     19,792        1.3     42,713        3.0

Surgical Devices

     13,161        0.9     12,553        0.9

Semiconductors

     10,406        0.7     11,326        0.8

Electronics & Computer Hardware

     9,982        0.6     7,664        0.5

Communications & Networking

     6,649        0.4     18,019        1.3

Biotechnology Tools

     5,604        0.4     7,200        0.5

Diagnostic

     720        0.1     574        0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,542,214        100.0   $ 1,423,942        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of December 31, 2017 or December 31, 2016.

 

F-139


Table of Contents
Index to Financial Statements

Portfolio Activity

During the year ended December 31, 2017, the Company funded and or restructured investments in debt and equity securities totaling approximately $754.8 million and $10.0 million, respectively. During the year ended December 31, 2017, the Company converted approximately $62.7 million of debt to equity at cost in two portfolio companies. During the year ended December 31, 2017, the Company converted approximately $1.7 million of warrants to equity in two portfolio companies.

During the year ended December 31, 2016, the Company funded and or restructured investments in debt and equity securities totaling approximately $660.5 million and $20.2 million, respectively. During the year ended December 31, 2016, the Company converted approximately $4.6 million of debt to equity in two portfolio companies. During the year ended December 31, 2016, the Company converted approximately $512,000 of warrants to equity in two portfolio companies.

During the year ended December 31, 2017, the Company 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 the Company’s debt investments in five portfolio companies and the Company’s 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, the Company 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 the Company’s warrant and equity investments in eight portfolio companies and the Company’s debt investments in five portfolio companies, including the settlement of the Company’s outstanding debt investment in one portfolio company.

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, 2017, approximately 79.9% of the Company’s debt investments were in a senior secured first lien position, with 45.1% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property and 34.8% 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. Another 19.8% of the Company’s debt investments were secured by a second priority security interest in all of the portfolio company’s assets, other than intellectual property and 0.3% of the Company’s debt investments were unsecured as a result of the terms of the acquisition of one of our portfolio companies during the period. At December 31, 2017 the Company had no equipment only liens on material investments in the Company’s portfolio companies.

Cash and Cash Equivalents

Cash and cash equivalents consists 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.

Other Assets

Other assets generally consists of prepaid expenses, deferred financing costs net of accumulated amortization, fixed assets net of accumulated depreciation, deferred revenues and deposits and other assets,

 

F-140


Table of Contents
Index to Financial Statements

including escrow receivable. The escrow receivable balance as of December 31, 2017 and December 31, 2016 was approximately $752,000 and $1.4 million, 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, 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. At December 31, 2016, the Company had five debt investments on non-accrual with a cumulative investment cost and fair value of approximately $43.9 million and $6.2 million, respectively. The decrease in the cumulative cost and fair value of debt investments on non-accrual between December 31, 2017 and December 31, 2016 is the result of the liquidation of two debt investments that were on non-accrual at December 31, 2016, offset by placing two new debt investments on non-accrual during the period. For the year ended December 31, 2017, the Company recognized a realized loss of approximately $24.2 million on the write off of two debt investments that were on non-accrual at December 31, 2016 and one investment placed on non-accrual and written-off during 2017.

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 $33.3 million of unamortized fees at December 31, 2017, of which approximately $29.3 million was included as an offset to the cost basis of its current debt investments and approximately $4.0 million was deferred contingent upon the occurrence of a funding or milestone. At December 31, 2016, the Company had approximately $38.2 million of unamortized fees, of which approximately $35.8 million was included an offset to the cost basis of the Company’s current debt investments and approximately $2.5 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 $8.5 million and $4.4 million in one-time fee income during the years ended December 31, 2017 and December 31, 2016, 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, 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 its current debt investments and

 

F-141


Table of Contents
Index to Financial Statements

approximately $3.6 million was deferred related to expired commitments. At December 31, 2016, the Company had approximately $32.8 million in exit fees receivable, of which approximately $30.3 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $2.5 million was deferred related to expired commitments.

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 the 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 $10.0 million and $7.8 million in PIK income in the years ended December 31, 2017 and 2016, 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, 2017 and December 31, 2016.

Other Income (Loss)

Other income (loss) generally consists of income or losses generated from sources other than the Company’s investment portfolio. There was no other income (loss) for the year ended December 31, 2017. For the year ended December 31, 2016, it consisted of litigation settlement proceeds and for the year ended December 31, 2015, it consisted of loss on extinguishment of debt. Other income (loss) is classified as a component of net investment income in the Company’s Consolidated Statement of Operations.

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 additional stock options and restricted stock to employees under the Company’s 2004 Equity Incentive Plan and to Board members under the Company’s 2006 Equity Incentive Plan prior to its expiration on June 21, 2017. Management follows the guidelines set forth under ASC Topic 718, (“Compensation – Stock Compensation”) to account for stock options and restricted stocks 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

 

F-142


Table of Contents
Index to Financial Statements

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 sum of (1) 98% of the Company’s ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of the Company’s 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 (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 its spillover earnings from ordinary income for the taxable year ended December 31, 2017 to the Company’s stockholders during 2018. The Company distributed 100% of its spillover earnings, which consisted of ordinary income and long-term capital gains, from its taxable year ended December 31, 2016 to the Company’s stockholders during 2017.

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.

 

F-143


Table of Contents
Index to Financial Statements

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 2017, 2016, or 2015. 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 2017, 2016, and 2015, the Company issued 163,584, 144,308, and 199,894 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 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 does not believe that ASU 2016-01 will have a material impact on its consolidated financial statements and disclosures.

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.

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which, among other things, simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,

 

F-144


Table of Contents
Index to Financial Statements

classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2016. The Company has adopted this standard for the year ended December 31, 2017 and determined that the adoption did not have a material impact on its consolidated financial statements and disclosures.

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 does not believe that ASU 2016-15 will have a material impact on its consolidated financial statements and disclosures.

In October 2016, the SEC adopted new rules and forms and amended other rules to enhance the reporting and disclosure of information by registered investment companies. As part of these changes, the SEC amended Regulation S-X to standardize and enhance disclosures in investment company financial statements. Implementation of the new or amended rules is required for reporting periods ending after August 1, 2017. The Company has reviewed the requirements and adopted the amendments to Regulation S-X 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 amendment should be adopted retrospectively. The Company does not believe that ASU 2016-18 will have a material impact on its consolidated financial statements and disclosures.

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, 2017, the 2022 Notes, 2021 Asset-Backed Notes and 2022 Convertible Notes were quoted for 1.014, 1.001 and 1.028 per dollar at par value, respectively. At December 31, 2017, the 2024 Notes were trading on the NYSE for $25.62 per unit at par value. The par value at underwriting for the 2024 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 $198.0 million, compared to the principal outstanding amount of $190.2 million as of December 31, 2017.

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.

 

F-145


Table of Contents
Index to Financial Statements

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, 2017 and December 31, 2016:

 

(in thousands)

Description(1)

   December 31, 2017      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

2021 Asset-Backed Notes

   $ 49,199      $ —        $ 49,199      $ —    

2022 Convertible Notes

     236,470        —          236,470        —    

2022 Notes

     152,091        —          152,091        —    

2024 Notes

     188,061        —          188,061        —    

SBA Debentures

     198,038        —          —          198,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 823,859      $ —        $ 625,821      $ 198,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

Description

   December 31, 2016      Identical Assets
(Level 1)
     Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Wells Facility

   $ 5,016      $ —        $ —        $ 5,016  

2021 Asset-Backed Notes

     109,376        —          109,376        —    

April 2019 Notes(2)

     65,909        —          65,909        —    

September 2019 Notes(2)

     46,920        —          46,920        —    

2024 Notes

     256,919        —          256,919        —    

SBA Debentures

     202,364        —          —          202,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 686,504      $ —        $ 479,124      $ 207,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

As of December 31, 2017, there were no borrowings outstanding on both the Well Facility and Union Facility.

(2)

The 2019 Notes were redeemed in full on February 24, 2017.

4. Borrowings

Outstanding Borrowings

At December 31, 2017 and December 31, 2016, the Company had the following available and outstanding borrowings:

 

     December 31, 2017      December 31, 2016  

(in thousands)

   Total Available      Principal      Carrying Value(1)      Total Available      Principal      Carrying Value(1)  

SBA Debentures(2)

   $ 190,200      $ 190,200      $ 188,141      $ 190,200      $ 190,200      $ 187,501  

2019 Notes(3)

     —          —          —          110,364        110,364        108,818  

2022 Notes

     150,000        150,000        147,572        —          —          —    

2024 Notes

     183,510        183,510        179,001        252,873        252,873        245,490  

2021 Asset-Backed Notes

     49,153        49,153        48,650        109,205        109,205        107,972  

2022 Convertible Notes

     230,000        230,000        223,488        —          —          —    

Wells Facility(4)

     120,000        —          —          120,000        5,016        5,016  

Union Bank Facility(4)

     75,000        —          —          75,000        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 997,863      $ 802,863      $ 786,852      $ 857,642      $ 667,658      $ 654,797  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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.

(2)

At both December 31, 2017 and December 31, 2016, 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.

(3)

The 2019 Notes were redeemed in full on February 24, 2017.

(4)

Availability subject to the Company meeting the borrowing base requirements.

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

 

F-146


Table of Contents
Index to Financial Statements

debt issuance costs associated with line-of-credit arrangements. Debt issuance costs, net of accumulated amortization, as of December 31, 2017 and December 31, 2016 were as follows:

 

(in thousands)

   December 31, 2017      December 31, 2016  

SBA Debentures

   $ 2,059      $ 2,699  

2019 Notes(1)

     —          1,546  

2022 Notes

     1,633        —    

2024 Notes

     4,591        7,482  

2021 Asset-Backed Notes

     503        1,233  

2022 Convertible Notes

     3,715        —    

Wells Facility(2)

     227        501  

Union Bank Facility(2)

     379        768  
  

 

 

    

 

 

 

Total

   $ 13,107      $ 14,229  
  

 

 

    

 

 

 

 

(1)

The 2019 Notes were redeemed in full on February 24, 2017.

(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 is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. With the Company’s net investment of $44.0 million in HT II as of December 31, 2017, HT II has the capacity to issue a total of $41.2 million of SBA guaranteed debentures, subject to SBA approval, of which $41.2 million was outstanding as of December 31, 2017. As of December 31, 2017, HT II has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2017, the Company held investments in HT II in 34 companies with a fair value of approximately $90.3 million, accounting for approximately 5.8% of the Company’s total investment portfolio. HT II held approximately $111.8 million in assets and accounted for approximately 5.4% of the Company’s total assets prior to consolidation at December 31, 2017.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to 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, 2017, 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, 2017. As of December 31, 2017, 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, 2017, the Company held investments in HT III in 48 companies with a fair value of approximately $229.1 million, accounting for approximately 14.9% of the Company’s total portfolio. HT III held approximately $284.0 million in assets and accounted for approximately 13.8% of the Company’s total assets prior to consolidation at December 31, 2017.

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

 

F-147


Table of Contents
Index to Financial Statements

subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their 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 II and HT III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2017 as a result of having sufficient capital as defined under the SBA regulations.

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 March 2009, the initial maturity of SBA debentures will occur in March 2019. 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 II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees on other debentures have been set at 0.906%. 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 SBA debentures range from 3.05% to 5.53% when including these annual fees.

The average amount of debentures outstanding for the year ended December 31, 2017 for HT II was approximately $41.2 million with an average interest rate of approximately 4.49%. The average amount of debentures outstanding for the year ended December 31, 2017 for HT III was approximately $149.0 million with an average interest rate of approximately 3.41%.

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the SBA debentures are as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ 6,969      $ 6,988      $ 6,969  

Amortization of debt issuance cost (loan fees)

     640        671        667  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 7,609      $ 7,659      $ 7,636  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 6,942      $ 6,961      $ 6,942  

In aggregate, at December 31, 2017, with the Company’s net investment of $118.5 million, HT II and HT III have the capacity to issue a total of $190.2 million of SBA-guaranteed debentures, subject to SBA approval. At December 31, 2017, the Company has issued $190.2 million in SBA-guaranteed debentures in the Company’s SBIC subsidiaries.

 

F-148


Table of Contents
Index to Financial Statements

The Company reported the following SBA debentures outstanding principal balances as of December 31, 2017 and 2016:

 

(in thousands) Issuance/Pooling Date

   Maturity Date      Interest Rate(1)     December 31,
2017
     December 31,
2016
 

March 25, 2009

     March 1, 2019        5.53   $ 18,400      $ 18,400  

September 23, 2009

     September 1, 2019        4.64     3,400        3,400  

September 22, 2010

     September 1, 2020        3.62     6,500        6,500  

September 22, 2010

     September 1, 2020        3.50     22,900        22,900  

March 29, 2011

     March 1, 2021        4.37     28,750        28,750  

September 21, 2011

     September 1, 2021        3.16     25,000        25,000  

March 21, 2012

     March 1, 2022        3.28     25,000        25,000  

March 21, 2012

     March 1, 2022        3.05     11,250        11,250  

September 19, 2012

     September 1, 2022        3.05     24,250        24,250  

March 27, 2013

     March 1, 2023        3.16     24,750        24,750  
       

 

 

    

 

 

 

Total SBA Debentures

        $ 190,200      $ 190,200  
       

 

 

    

 

 

 

 

(1)

Interest rate includes annual charge

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.

As of December 31, 2016, the 2019 Notes payable outstanding principal balance consisted of:

 

(in thousands)

   December 31,
2016
 

April 2019 Notes

   $ 64,490  

September 2019 Notes

     45,874  
  

 

 

 

Total 2019 Notes principal outstanding

   $ 110,364  
  

 

 

 

The April 2019 Notes bore interest at a rate of 7.00% per year and traded on the NYSE under the trading symbol “HTGZ.” The September 2019 Notes bore interest at a rate of 7.00% per year and traded on the NYSE under the trading symbol “HTGY.” For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the 2019 Notes are as follows:

 

     Year Ended December 31,  

(in thousands)

   2017      2016      2015  

Interest expense

   $ 1,159      $ 7,725      $ 10,899  

Amortization of debt issuance cost (loan fees)

     1,546        639        2,167  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 2,705      $ 8,364      $ 13,066  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 1,911      $ 7,726      $ 11,132  

 

F-149


Table of Contents
Index to Financial Statements

2022 Notes

On October 23, 2017, the Company issued $150.0 million in aggregate principal amount of 4.625% Notes due 2022 (the “2022 Notes”). The 2022 Notes were issued pursuant to an Indenture, dated September 7, 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 $147.5 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 $1.7 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, 2017, the Company was in compliance with the terms of the 2022 Notes Indenture.

As of December 31, 2017, the components of the carrying value of the 2022 Notes were as follows:

 

(in thousands)

   December 31, 2017  

Principal amount of debt

   $ 150,000  

Unamortized debt issuance cost

     (1,633

Original issue discount, net of accretion

     (795
  

 

 

 

Carrying value of 2022 Notes

   $ 147,572  
  

 

 

 

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the 2022 Notes are as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ 1,305      $ —        $ —    

Amortization of debt issuance cost (loan fees)

     49        —          —    

Accretion of original issue discount

     31        —          —    
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 1,385      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ —        $ —    

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

 

F-150


Table of Contents
Index to Financial Statements

aggregate principal amount of 6.25% unsecured notes due 2024 (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 of 1933, as amended (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, 2017, the Company sold 225,457 notes for approximately $5.6 million in aggregate principal amount. During the year ended December 31, 2016, the Company sold 317,125 notes for approximately $7.9 million in aggregate principal amount. As of December 31, 2017, 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.”

On October 24, 2017, the Board of Directors approved a redemption of $75.0 million of outstanding aggregate principal amount of the 2024 Notes. The Company redeemed this portion of the 2024 Notes on November 23, 2017. See “Note 14—Subsequent Events.”

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

 

F-151


Table of Contents
Index to Financial Statements

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, 2017, the Company was in compliance with the terms of the Base Indenture as supplemented by the Third Supplemental Indenture.

As of December 31, 2017 and December 31, 2016, the components of the carrying value of the 2024 Notes were as follows:

 

(in thousands)

   December 31, 2017     December 31, 2016  

Principal amount of debt

   $ 183,510     $ 252,873  

Unamortized debt issuance cost

     (4,591     (7,482

Original issue premium, net of amortization

     82       99  
  

 

 

   

 

 

 

Carrying value of 2024 Notes

   $ 179,001     $ 245,490  
  

 

 

   

 

 

 

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows:

 

     Year Ended December 31,     

 

 

(in thousands)

       2017              2016              2015      

Interest expense

   $ 15,610      $ 11,775      $ 6,437  

Amortization of debt issuance cost (loan fees)

     3,050        686        333  

Amortization of original issue premium

     (56      3        —    
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 18,604      $ 12,464      $ 6,770  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 16,370      $ 10,873      $ 6,437  

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 fixed-rate asset-backed notes (the “2021 Asset-Backed Notes”), which were rated A(sf) by Kroll Bond Rating Agency, Inc. 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

 

F-152


Table of Contents
Index to Financial Statements

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.

As part of this transaction, the Company entered into a sale and contribution agreement with the 2014 Trust Depositor under which the Company has agreed to sell or have contributed to the 2014 Trust Depositor certain senior loans made to certain of the Company’s portfolio companies (the “2014 Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the 2014 Loans as of the date of their transfer to the 2014 Trust Depositor.

In connection with the issuance and sale of the 2021 Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The 2021 Asset-Backed Notes are secured obligations of the 2014 Securitization Issuer and are non-recourse to the Company. The 2014 Securitization Issuer also entered into an indenture governing the 2021 Asset-Backed Notes, which includes customary representations, warranties and covenants. The 2021 Asset-Backed Notes were sold without being registered under the Securities Act (A) in the United States to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rules 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” as defined in Section 2(a)(51)(A) of the 1940 Act and pursuant to an exemption under the Securities Act and (B) to non-U.S. purchasers acquiring interest in the 2021 Asset-Backed Notes outside the United States in accordance with Regulation S under the Securities Act. The 2014 Securitization Issuer is not registered under the 1940 Act in reliance on an exemption provided by Section 3(c)(7) thereof and Rule 3a-7 thereunder. In addition, the 2014 Trust Depositor entered into an amended and restated trust agreement in respect of the 2014 Securitization Issuer, which includes customary representation, warranties and covenants.

The 2014 Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the 2014 Loans. The Company is entitled to receive a monthly fee from the 2014 Securitization Issuer for servicing the 2014 Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including October 5, 2014 through and including December 5, 2014 over 360) of 2.00% and the aggregate outstanding principal balance of the 2014 Loans plus collections on deposit in the 2014 Securitization Issuer’s collections account, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including October 5, 2014, to the close of business on December 5, 2014). The Company also serves as administrator to the 2014 Securitization Issuer under an administration agreement, which includes customary representations, warranties and covenants.

At December 31, 2017 and December 31, 2016, the 2021 Asset-Backed Notes had an outstanding principal balance of $49.2 million and $109.2 million, respectively.

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the 2021 Asset-Backed Notes are as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ 2,830      $ 4,366      $ 4,557  

Amortization of debt issuance cost (loan fees)

     731        1,071        902  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 3,561      $ 5,437      $ 5,459  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 3,036      $ 4,396      $ 4,557  

 

F-153


Table of Contents
Index to Financial Statements

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. There was approximately $3.7 million and $8.3 million of restricted cash as of December 31, 2017 and December 31, 2016, respectively, funded through interest collections.

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, 2017, 2016 and 2015, the components of interest expense, fees and cash paid for interest expense for the 2016 Convertible Notes were as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ —        $ 352      $ 1,007  

Amortization of debt issuance cost (loan fees)

     —          44        131  

Accretion of original issue discount

     —          82        246  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ —        $ 478      $ 1,384  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ —        $ 440      $ 1,057  

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.

2022 Convertible Notes

On January 25, 2017, the Company issued $230.0 million in aggregate principal amount of 4.375% Convertible Notes due 2022 (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

 

F-154


Table of Contents
Index to Financial Statements

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, 2017, 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,

 

F-155


Table of Contents
Index to Financial Statements

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%.

As of December 31, 2017, the components of the carrying value of the 2022 Convertible Notes were as follows:

 

(in thousands)

   December 31,
2017
 

Principal amount of debt

   $ 230,000  

Unamortized debt issuance cost

     (3,715

Original issue discount, net of accretion

     (2,797
  

 

 

 

Carrying value of 2022 Convertible Notes

   $ 223,488  
  

 

 

 

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense, fees and cash paid for interest expense for the 2022 Convertible Notes were as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ 9,392      $ —        $ —    

Amortization of debt issuance cost (loan fees)

     781        —          —    

Accretion of original issue discount

     615        —          —    
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 10,788      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 5,199      $ —        $ —    

The estimated effective interest of the debt component of the 2022 Convertible Notes, equal to the stated interest rate of 4.375% plus the accretion of the original issue discount, was approximately 4.76% for the year ended December 31, 2017. As of December 31, 2017, the Company was in compliance with the terms of the indentures governing the 2022 Convertible Notes.

Credit Facilities

As of December 31, 2017and December 31, 2016, the Company has two available secured 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 (the “Wells Facility”) 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.

The Wells Facility matures on August 2, 2019, unless terminated sooner in accordance with its terms.

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. 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

 

F-156


Table of Contents
Index to Financial Statements

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, 2017 and 2016, this non-use fee was approximately $604,000 and $483,000, 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.

As of December 31, 2017, the minimum tangible net worth covenant has increased to $737.0 million as a result of the March 2015 follow-on public offering of 7.6 million shares of common stock for total gross proceeds of approximately $100.4 million, the issuance of 7.3 million shares of common stock issued under an At-The-Market (“ATM”) equity distribution agreement (the “Prior Equity Distribution Agreement”) with JMP Securities (“JMP”) for gross proceeds of $95.0 million during the year ended December 31, 2016 and the issuance of 4.9 million shares of common stock issued under the Prior Equity Distribution Agreement and a new ATM equity distribution agreement in September 2017 (the “Equity Distribution Agreement”) with JMP for gross proceeds of $67.9 million during the year ended December 31, 2017. 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, the Company paid an additional $750,000 in structuring fees and in connection with the amendment in December 2015, the Company paid an additional $188,000 in structuring fees. These fees are being amortized through the end of the term of the Wells Facility.

The Company had aggregate draws of $8.5 million on the available facility during the year ended December 31, 2017 offset by repayments of $13.5 million. There were no borrowings outstanding on the facility as of December 31, 2017 and $5.0 million of borrowings outstanding on this facility at December 31, 2016.

For the years ended December 31, 2017, 2016 and 2015, the components of interest expense and related fees and cash paid for interest expense for the Wells Facility are as follows:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ 2      $ 539      $ 578  

Amortization of debt issuance cost (loan fees)

     324        492        361  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 326      $ 1,031      $ 939  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 41      $ 577      $ 402  

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 credit facility (the “Union Bank Facility”) with MUFG 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 company’s credit facility (the “Prior Union Bank

 

F-157


Table of Contents
Index to Financial Statements

Facility”) entered into on August 14, 2014 (as amended and restated from time to time) with MUFG Union Bank, as the arranger and administrative agent, and the lenders party to the Prior Union Bank Facility 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 July 18, 2016, the Company entered into the First Amendment to the Loan and Security Agreement, dated as of May 5, 2016 with MUFG Union Bank, N.A. 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.

Under the Union Bank Facility, MUFG Union Bank made commitments of $75.0 million. 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 MUFG 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 MUFG 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. Although the Company did not incur any non-use fees under the Union Bank Facility prior to May 5, 2016, for the years ended December 31, 2017 and 2016, the Company incurred non-use fees under the Union Bank Facility and Prior Union Bank Facility of approximately $380,000 and $356,000, 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 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.

As of December 31, 2017, the minimum tangible net worth covenant increased to $783.9 million as a result of the March 2015 follow-on public offering of 7.6 million shares of common stock for total net proceeds of approximately $100.1 million, the issuance of 7.3 million shares of common stock issued under the Prior Equity Distribution Agreement for net proceeds of $92.8 million during the year ended December 31, 2016, and the issuance of 4.9 million shares of common stock issued under the Prior Equity Distribution Agreement and the Equity Distribution Agreement for net proceeds of $66.9 million during the year ended December 31, 2017. 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

 

F-158


Table of Contents
Index to Financial Statements

MUFG 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 did not make any draws or repayments on the available facility during the year ended December 31, 2017. The Company had aggregate draws of $90.0 million during the year ended December 31, 2016 offset by repayments of $90.0 million. At December 31, 2017 and 2016, there were no borrowings outstanding on the Union Bank Facility.

For the years ended December 31, 2017, 2016 and 2015, 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:

 

     Year Ended December 31,  

(in thousands)

       2017              2016              2015      

Interest expense

   $ —        $ 189      $ —    

Amortization of debt issuance cost (loan fees)

     388        356        61  
  

 

 

    

 

 

    

 

 

 

Total interest expense and fees

   $ 388      $ 545      $ 61  
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 80      $ 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.

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.

 

F-159


Table of Contents
Index to Financial Statements

During the year ended December 31, 2017 and 2016, 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:

 

     Year Ended December 31,  

(in thousands)

       2017              2016      

Undistributed net investment income (distributions in excess of investment income)

   $ 1,347      $ 1,644  

Accumulated realized gains

     6,916        5,034  

Additional paid-in capital

     (8,263      (7,020

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, 2017 was ordinary income in the amount of $89.3 million and long-term capital gains in the amount of $13.2 million. The tax character of distributions paid for the year ended December 31, 2016 was ordinary income in the amount of $91.1 million.

The aggregate gross unrealized appreciation of the Company’s investments over cost for U.S. federal income tax purposes was $32.5 million and $24.7 million as of December 31, 2017 and 2016, respectively. The aggregate gross unrealized depreciation of the Company’s investments under cost for U.S. federal income tax purposes was $119.7 million and $114.5 million as of December 31, 2017 and 2016, respectively. The net unrealized depreciation over cost for U.S. federal income tax purposes was $87.2 million and $89.8 million as December 31, 2017 and 2016, respectively. The aggregate cost of securities for U.S. federal income tax purposes was $1.6 billion and $1.5 billion as of December 31, 2017 and 2016, respectively.

At December 31, 2017 and 2016, 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/tax differences primarily arising from the treatment of loan related yield enhancements.

 

     Year Ended December 31,  

(in thousands)

       2017              2016      

Accumulated Capital Gains

   $ (4,435    $ 14,893  

Other Temporary Differences

     (563      1,306  

Undistributed Ordinary Income

     23,010        19,283  

Unrealized Depreciation

     (85,631      (87,275
  

 

 

    

 

 

 

Components of Distributable Earnings

   $ (67,619    $ (51,793
  

 

 

    

 

 

 

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.

 

F-160


Table of Contents
Index to Financial Statements

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 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, 2017, the Company paid approximately $1.1 million of income tax and had no accrued but unpaid income tax as of the balance sheet. For the year ended December 31, 2016, the Company paid approximately $184,000 of income tax and had approximately $652,000 of 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 2014- 2016 federal tax years for the Company remain subject to examination by the Internal Revenue Service. The 2013-2016 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 with JMP. 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, 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. During the year ended December 31, 2016, the Company sold 7.3 million shares of common stock under the Prior Equity Distribution Agreement for total accumulated net proceeds of approximately $92.8 million, including $2.2 million of offering expenses.

 

F-161


Table of Contents
Index to Financial Statements

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, 2017, approximately 10.4 million shares remain available for issuance and sale under the Equity Distribution Agreement. See “Note 14 – Subsequent Events.”

On August 27, 2015, the Company’s Board of Directors authorized a stock repurchase plan permitting the Company to repurchase up to $50.0 million of its common stock until August 23, 2016, after which the plan expired. In January 2016, the Company repurchased 449,588 shares of its common stock at an average price per share of $10.64 per share and a total cost of approximately $4.8 million. The Company did not make any repurchases in subsequent months during 2016.

The Company has issued stock options for common stock subject to future issuance, of which 590,525 and 668,171 were outstanding at December 31, 2017 and December 31, 2016, respectively.

7. Equity Incentive Plan

The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 12.0 million shares of common stock.

The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) 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. In the future, we may adopt a Non-Employee Director Plan that, among other things, provides for the issuance of restricted stock to directors. Under the 2006 Plan, the Company is authorized to issue 1.0 million shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007.

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.

 

F-162


Table of Contents
Index to Financial Statements

On December 29, 2016, the Company’s Board of Directors approved a further 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.

In 2017, 2016, and 2015, the Company granted approximately 10,111, 555,547 and 676,340 shares, respectively, of restricted stock awards pursuant to the Plans. The Company determined that the fair value of restricted stock awards granted under the 2006 and 2004 Plans during the years ended December 31, 2017, 2016, and 2015 were approximately $150,000, $6.7 million and $9.2 million. As of December 31, 2017, there was approximately $2.6 million of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 0.94 years.

The following table summarizes the activities for the Company’s unvested restricted stock awards for each of the three periods ended, December 31, 2017, 2016, and 2015:

 

     Unvested Restricted Stock Awards  
     Restricted
Stock Awards
    Weighted
Average
Grant Date
Fair Value
 

Unvested at December 31, 2014

     1,302,780     $ 13.23  

Granted

     676,340     $ 13.67  

Vested

     (816,484   $ 13.26  

Forfeited

     (312,564   $ 13.16  
  

 

 

   

Unvested at December 31, 2015

     850,072     $ 13.59  

Granted

     555,547     $ 12.02  

Vested

     (569,118   $ 13.58  

Forfeited

     (36,943   $ 12.70  
  

 

 

   

Unvested at December 31, 2016

     799,558     $ 12.54  

Granted

     10,111     $ 14.83  

Vested

     (511,749   $ 12.69  

Forfeited

     (36,675   $ 11.91  
  

 

 

   

Unvested at December 31, 2017

     261,245     $ 12.43  
  

 

 

   

In 2017, the Company granted approximately 600,461 shares of restricted stock units pursuant to the amended 2004 Plan. The Company determined that the fair value of restricted stock units granted under the 2004 Plan during the years ended December 31, 2017 was approximately $13.0 million. As of December 31, 2017, there was approximately $5.3 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 2.07 years.

 

F-163


Table of Contents
Index to Financial Statements

The following table summarizes the activities for the Company’s unvested restricted stock units for the year ended December 31, 2017:

 

     Unvested Restricted Stock Units  
     Restricted
Stock Units
    Weighted
Average
Grant Date
Fair Value
 

Unvested at December 31, 2016

     —       $ —    

Granted

     600,461     $ 14.21  

Distribution Equivalent Unit Granted

     54,674     $ 13.02  

Vested

     —       $ —    

Forfeited

     (60,813   $ 13.40  
  

 

 

   

Unvested at December 31, 2017

     594,322     $ 12.99  
  

 

 

   

During the years ended December 31, 2017, 2016, and 2015 the Company expensed approximately $7.2 million, $7.0 million and $9.2 million of compensation expense related to restricted stock awards and restricted stock units, respectively.

The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of the Company’s stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make a cash payment at the time of option exercise or to pay taxes on restricted stock.

The following table summarizes the common stock options activities under the Company’s 2006 and 2004 Plans for each of the three periods ended December 31, 2017, 2016, and 2015:

 

     Common Stock
Options
    Weighted
Average
Exercise
Price
 

Shares Outstanding at December 31, 2014

     695,672     $ 14.58  

Granted

     163,500     $ 12.68  

Exercised

     (36,331   $ 10.81  

Forfeited

     (190,006   $ 14.83  

Expired

     (10,664   $ 13.21  
  

 

 

   

Shares Outstanding at December 31, 2015

     622,171     $ 14.25  
  

 

 

   

Granted

     230,000     $ 12.16  

Exercised

     (36,500   $ 11.05  

Forfeited

     (82,895   $ 13.41  

Expired

     (64,605   $ 15.05  
  

 

 

   

Shares Outstanding at December 31, 2016

     668,171     $ 13.73  
  

 

 

   

Granted

     115,000     $ 14.24  

Exercised

     (29,921   $ 11.31  

Forfeited

     (39,394   $ 13.98  

Expired

     (123,331   $ 15.36  
  

 

 

   

Shares Outstanding at December 31, 2017

     590,525     $ 13.60  
  

 

 

   

Shares Expected to Vest at December 31, 2017

     201,590     $ 13.60  

 

F-164


Table of Contents
Index to Financial Statements

The following table summarizes stock options outstanding and exercisable at December 31, 2017:

 

(Dollars in thousands,

except exercise price)

  Options outstanding     Options exercisable  

Range of exercise prices

  Number of
shares
    Weighted
Average
Remaining
Contractual
Life
    Aggregate
Intrinsic
Value
    Weighted
Average
Exercise
Price
    Number
of
shares
    Weighted
Average
Remaining
Contractual
Life
    Aggregate
Intrinsic
Value
    Weighted
Average
Exercise
Price
 

$9.25 - $14.02

    330,941       5.49     $ 343,435     $ 12.22       180,351       4.92     $ 240,957     $ 11.90  

$14.56 - $16.34

    259,584       4.11       —       $ 15.35       208,584       3.61       —       $ 15.50  
 

 

 

     

 

 

     

 

 

     

 

 

   

$9.25 - $16.34

    590,525       4.88     $ 343,435     $ 13.60       388,935       4.22     $ 240,957     $ 13.83  
 

 

 

     

 

 

     

 

 

     

 

 

   

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, 2017, options for approximately 388,935 shares were exercisable at a weighted average exercise price of approximately $13.83 per share with weighted average of remaining contractual term of 4.22 years.

The Company determined that the fair value of options granted under the 2006 and 2004 Plans during the years ended December 31, 2017, 2016, and 2015 was approximately $79,000, $837,000 and $57,000, respectively. During the years ended December 31, 2017, 2016, and 2015, approximately $73,000, $169,000 and $265,000 of share-based cost due to stock option grants was expensed, respectively. As of December 31, 2017, there was approximately $99,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.92 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, 2017, 2016, and 2015 is as follows:

 

     Year Ended December 31,  
     2017     2016     2015  

Expected Volatility

     23.07     23.73     18.94

Expected Dividends

     10     10     10

Expected term (in years)

     4.5       4.5       4.5  

Risk-free rate

     1.57% - 2.20     0.87% - 1.98     1.08% - 1.70

 

F-165


Table of Contents
Index to Financial Statements

8. Earnings Per Share

Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

 

     Year Ended December 31,  

(in thousands, except per share data)

   2017     2016     2015  

Numerator

      

Net increase in net assets resulting from operations

   $ 78,998     $ 68,703     $ 42,916  

Less: Distributions declared-common and restricted shares

     (103,087     (92,333     (87,438
  

 

 

   

 

 

   

 

 

 

Undistributed earnings

     (24,089     (23,630     (44,522
  

 

 

   

 

 

   

 

 

 

Undistributed earnings-common shares

     (24,089     (23,630     (44,522

Add: Distributions declared-common shares

     102,516       91,065       85,959  
  

 

 

   

 

 

   

 

 

 

Numerator for basic and diluted change in net assets per common share

   $ 78,427     $ 67,435     $ 41,437  
  

 

 

   

 

 

   

 

 

 

Denominator

      

Basic weighted average common shares outstanding

     82,519       73,753       69,479  

Common shares issuable

     121       22       184  
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding assuming dilution

     82,640       73,775       69,663  

Change in net assets per common share

      

Basic

   $ 0.95     $ 0.91     $ 0.60  

Diluted

   $ 0.95     $ 0.91     $ 0.59  

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 included in the denominator for the purpose of calculating diluted earnings per share. For the year ended December 31, 2017, the effect of the 2022 Convertible Notes under the treasury stock method is anti-dilutive and, accordingly, is 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, 2017, 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 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 years ended 2016 and 2015, the number of anti-dilutive shares related to unvested common stock options was 676,133 shares and 627,483 shares, respectively.

At December 31, 2017 and 2016, 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.

 

F-166


Table of Contents
Index to Financial Statements

9. Financial Highlights

Following is a schedule of financial highlights for the three years ended December 31, 2017, 2016 and 2015:

 

     Year Ended December 31,  
     2017     2016     2015  

Per share data(1):

      

Net asset value at beginning of period

   $ 9.90     $ 9.94     $ 10.18  

Net investment income

     1.17       1.36       1.06  

Net realized gain (loss) on investments

     (0.32     0.06       0.07  

Net unrealized appreciation (depreciation) on investments

     0.11       (0.49     (0.51
  

 

 

   

 

 

   

 

 

 

Total from investment operations

     0.96       0.93       0.62  

Net increase in net assets from capital share transactions(1)

     0.26       0.18       0.26  

Distributions of net investment income(6)(7)

     (1.07     (1.14     (1.04

Distributions of capital gains(6)(7)

     (0.18     (0.11     (0.22

Stock-based compensation expense included in investment income(2)

     0.09       0.10       0.14  
  

 

 

   

 

 

   

 

 

 

Net asset value at end of period

   $ 9.96     $ 9.90     $ 9.94  
  

 

 

   

 

 

   

 

 

 

Ratios and supplemental data:

      

Per share market value at end of period

   $ 13.12     $ 14.11     $ 12.19  

Total return(3)

     1.47     26.87     (9.70 %) 

Shares outstanding at end of period

     84,424       79,555       72,118  

Weighted average number of common shares outstanding

     82,519       73,753       69,479  

Net assets at end of period

   $ 840,967     $ 787,944     $ 717,134  

Ratio of total expense to average net assets(4)

     11.37     11.25     11.55

Ratio of net investment income before investment gains and losses to average net assets(4)

     11.61     13.65     10.15

Portfolio turnover rate(5)

     49.03     36.22     46.34

Weighted average debt outstanding

   $ 784,455     $ 635,365     $ 615,198  

Weighted average debt per common share

   $ 9.51     $ 8.61     $ 8.85  

 

(1)

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.

(2)

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.

(3)

The total return for the years ended December 31, 2017, 2016 and 2015 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.

(4)

All ratios are calculated based on weighted average net assets for the relevant period.

(5)

The portfolio turnover rate for the years ended December 31, 2017, 2016 and 2015 equals the lesser of investment portfolio purchases or sales during the period, divided by the average investment portfolio value during the period.

(6)

Includes distributions on unvested shares.

(7)

The Company reclassified $8.0 million and $15.3 million of distributions from net investment income into distributions from realized gains as of December 31, 2016 and 2015 respectively. See “Note 2—Summary of Significant Accounting Policies.”

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, 2017 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, 2017, the Company had approximately $73.6 million of unfunded commitments, including undrawn revolving facilities, which were available at the request of the portfolio company and unencumbered by milestones.

 

F-167


Table of Contents
Index to Financial Statements

The Company also had approximately $122.0 million of non-binding term sheets outstanding at December 31, 2017. 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, 2017, 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

   Unfunded
Commitments(1)
 

Myovant Sciences

   $ 15,000  

Chemocentryx, Inc.

     10,000  

Evernote Corporation

     10,000  

Proterra, Inc.

     10,000  

Verastem, Inc.

     10,000  

Impact Radius Holdings, Inc.

     7,500  

Wrike, Inc.

     5,000  

MDX Medical, Inc.

     4,500  

Lithium Technologies, Inc.

     878  

Achronix Semiconductor Corporation

     726  
  

 

 

 

Total

   $ 73,604  
  

 

 

 

 

(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.

Certain premises are leased under agreements which expire at various dates through June 2027. Total rent expense amounted to approximately $1.8 million, $1.7 million and $1.7 million, during the years ended December 31, 2017, 2016, and 2015, respectively. The Company’s contractual obligations as of December 31, 2017 include:

 

     Payments due by period (in thousands)  

Contractual Obligations(1)

   Total      Less than 1 year      1 - 3 years      3 - 5 years      After 5 years  

Borrowings(2)(3)(5)

   $ 802,863      $ 149,153      $ 51,200      $ 494,250      $ 108,260  

Operating Lease Obligations(4)

     17,869        1,997        5,195        5,871        4,806  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 820,732      $ 151,150      $ 56,395      $ 500,121      $ 113,066  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Excludes commitments to extend credit to the Company’s portfolio companies.

(2)

Includes $190.2 million in principal outstanding under the SBA debentures, $183.5 million of the 2024 Notes, $230.0 million of the 2022 Convertible Notes, $49.2 million of the 2021 Asset-Backed Notes, and $150.0 million of the 2022 Notes. There are no outstanding borrowings on the Wells Facility or Union Facility as of December 31, 2017.

(3)

Amounts represent future principal repayments and not the carrying value of each liability. See Note 4 to the Company’s consolidated financial statements.

(4)

Facility leases and licenses.

(5)

Reflects announced redemption of a portion of the 2024 Notes in April 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

 

F-168


Table of Contents
Index to Financial Statements

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 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, 2017 and December 31, 2016, the Company’s ten largest portfolio companies represented approximately 34.6% and 34.0% of the total fair value of the Company’s investments in portfolio companies, respectively. At both December 31, 2017 and December 31, 2016, the Company had seven that represented 5% or more of the Company’s net assets. At December 31, 2017, the Company had nine equity investments representing 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 the Company’s equity investments. At December 31, 2016, the Company had seven equity investments which represented approximately 54.7% 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.

 

F-169


Table of Contents
Index to Financial Statements

13. Selected Quarterly Data (Unaudited)

The following tables set forth certain quarterly financial information for each of the last eight quarters ended December 31, 2017. 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)

  March 31, 2017     June 30, 2017     September 30, 2017     December 31, 2017  

Total investment income

  $ 46,365     $ 48,452     $ 45,865     $ 50,198  

Net investment income

    22,678       25,275       23,973       24,518  

Net increase (decrease) in net assets resulting from operations

    (5,588     33,149       33,072       18,365  

Change in net assets resulting from operations per common share (basic)

  $ (0.07   $ 0.40     $ 0.40     $ 0.22  
    Quarter Ended  
    March 31, 2016     June 30, 2016     September 30, 2016     December 31, 2016  

Total investment income

  $ 38,939     $ 43,538     $ 45,102     $ 47,472  

Net investment income

    20,097       23,354       23,776       33,117  

Net increase in net assets resulting from operations

    14,295       9,475       30,812       14,121  

Change in net assets resulting from operations per common share (basic)

  $ 0.20     $ 0.13     $ 0.41     $ 0.18  

14. Subsequent Events

Distribution Declaration

On February 14, 2018 the Company’s Board of Directors declared a cash distribution of $0.31 per share to be paid on March 12, 2018 to shareholders of record as of March 5, 2018. This distribution represents the Company’s fiftieth consecutive distribution since the Company’s initial public offering, bringing the total cumulative distribution to date to $14.02 per share.

Restricted Stock Unit Grants

In January 2018, the Company granted 746,684 restricted stock units pursuant to the amended 2004 Plan.

ATM Equity Program Issuances

Subsequent to December 31, 2017 and as of February 16, 2018, the Company sold 478,000 shares of common stock for total accumulated net proceeds of approximately $6.2 million, including $56,000 of offering expenses, under the Equity Distribution Agreement with JMP. As of February 16, 2018 approximately 9.9 million shares remain available for issuance and sale under the equity distribution agreement.

Redemption of 2024 Notes

On February 9, 2018, the Company’s Board of Directors approved a redemption of $100.0 million of outstanding aggregate principal amount of the 2024 Notes, and notice for such redemption has been provided. The Company has publicly announced its intention to redeem this portion of the 2024 Notes on April 2, 2018.

Portfolio Company Developments

As of February 16, 2018, the Company held warrants or equity positions in two companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. Both companies filed confidentially under the Jumpstart Our Business Startups Act of 2012. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition,

 

F-170


Table of Contents
Index to Financial Statements

subsequent to December 31, 2017, the Company’s portfolio companies announced or completed the following events:

 

  1.

In September 2017, the Company’s portfolio company Inotek Pharmaceuticals Corporation announced they had entered into a definitive merger agreement with Rocket Pharmaceuticals Ltd. The deal was completed on January 4, 2018. The combined company will be named Rocket Pharmaceuticals, Inc. and is now listed on the NASDAQ Global Market under the symbol “RCKT” and began trading on January 5, 2018.

 

  2.

In October 2017, the Company’s portfolio company Neothetics, Inc. announced they have entered into a definitive agreement under which privately-held Evofem Biosciences will merge with a wholly-owned subsidiary of Neothetics in an all-stock transaction. In January 2018, Evofem Biosciences completed the reverse merger acquisition of Neothetics and its stock began trading on the NASDAQ Capital Market under the ticker symbol “EVFM.”

 

F-171


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of and for the year ended December 31, 2017

(in thousands)

 

Portfolio Company

  Investment(1)   Amount of
Interest
Credited to
Income(2)
    Realized
Gain (Loss)
    As of
December 31,
2016
Fair Value
    Gross
Additions(3)
    Gross
Reductions(4)
    Net Change in
Unrealized
Appreciation/
(Depreciation)
    As of
December 31,
2017
Fair Value
 

Control Investments

               

Majority Owned Control Investments

               

Achilles Technology Management Co II, Inc.(5)

  Senior Debt   $ 144     $ (486   $ 1,304     $ 74     $ (1,378   $ —       $ —    
  Common Stock     —         —         3,396       —         (900     (2,254     242  

HercGamma, Inc.(6)

  Common Stock     —         (487     —         1,169       (1,169     —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Majority Owned Control Investments

    $ 144     $ (973   $ 4,700     $ 1,243     $ (3,447   $ (2,254   $ 242  

Other Control Investments

               

SkyCross, Inc.(5)

  Senior Debt   $ —       $ (15,058   $ —       $ —       $ (16,900   $ 16,900     $ —    
  Preferred Warrants     —         (394     —         —         (394     394       —    

Tectura Corporation(5)

  Senior Debt     1,827       —         —         20,538       (240     (1,079     19,219  
  Preferred Warrants     —         (51     —         51       (102     51       —    

Second Time Around (Simplify Holdings, LLC)(8)

  Senior Debt     —         —         —         1,781       (1,921     140       —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Control Investments

    $ 1,827     $ (15,503   $ —       $ 22,370     $ (19,557   $ 16,406     $ 19,219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 1,971     $ (16,476   $ 4,700     $ 23,613     $ (23,004   $ 14,152     $ 19,461  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

               

Optiscan BioMedical, Corp.

  Preferred Stock   $ —       $ —       $ 4,529     $ 173     $ —       $ 1,503     $ 6,205  
  Preferred Warrants     —         —         170       —         —         (84     86  

Stion Corporation

  Senior Debt     2       —         333       —         (333     —         —    

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)(7)

  Senior Debt     799       —         —         14,698       (1,094     —         13,604  
  Common Stock     —         —         —         61,502       —         (50,102     11,400  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 801     $ —       $ 5,032     $ 76,373     $ (1,427   $ (48,683   $ 31,295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control and Affiliate Investments

    $ 2,772     $ (16,476   $ 9,732     $ 99,986     $ (24,431   $ (34,531   $ 50,756  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

(6)

As of June 30, 2017, the Company’s wholly owned subsidiary HercGamma, Inc. became classified as a control investment as a result of an investment in a portfolio company whereby the subsidiary obtained a controlling financial interest.

(7)

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.

(8)

As of September 30, 2017, the Company’s investment in Second Time Around (Simplify Holdings, LLC) became classified as a control investment as a result of obtaining a controlling financial interest.

 

F-172


Table of Contents
Index to Financial Statements

Schedule 12-14

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of and for the year ended December 31, 2017

(in thousands)

 

Portfolio Company

 

Industry

  Type of
Investment(1)
    Maturity
Date
    Interest Rate
and Floor
    Principal
or Shares
    Cost     Value(2)  

Control Investments

             

Majority Owned Control Investments

             

Achilles Technology Management Co II, Inc.

  Communications & Networking     Common Stock           100     $ 3,100     $ 242  
           

 

 

   

 

 

 

Total Majority Owned Control Investments (0.03%)*

              3,100       242  

Other Control Investments

             

Tectura Corporation

 

Internet Consumer & Business Services

    Senior Secured Debt       June 2021      

Interest rate FIXED
6.00%,

PIK Interest 3.00%

 
 

 

  $ 20,298       20,298       19,219  
 

Internet Consumer & Business Services

    Senior Secured Debt       June 2021       PIK Interest 8.00%     $ 11,015       240       —    
 

Internet Consumer & Business Services

   
Preferred Series BB
Equity
 
 
        1,000,000       —         —    
           

 

 

   

 

 

 

Total Tectura Corporation

              20,538       19,219  

Second Time Around (Simplify Holdings, LLC)

 

Consumer & Business Products

    Senior Secured Debt       February 2019      


Interest rate
PRIME + 7.25%

or Floor rate of
10.75%,

4.75% Exit Fee

 
 

 
 

 

    1,746       1,781       —    
           

 

 

   

 

 

 

Total Other Control Investments (2.29%)*

              22,319       19,219  
 

 

 

   

 

 

 

Total Control Investments (2.31%)*

            $ 25,419     $ 19,461  
 

 

 

   

 

 

 

Affiliate Investments

             

Optiscan BioMedical, Corp.

 

Medical Devices & Equipment

   
Preferred Series B
Equity
 
 
        6,185,567     $ 3,000     $ 402  
 

Medical Devices & Equipment

   
Preferred Series C
Equity
 
 
        1,927,309       655       114  
 

Medical Devices & Equipment

   
Preferred Series D
Equity
 
 
        55,103,923       5,257       4,232  
 

Medical Devices & Equipment

   
Preferred Series E
Equity
 
 
        15,638,888       1,307       1,457  
 

Medical Devices & Equipment

   
Preferred Series D
Warrants
 
 
        10,535,275       1,252       86  
           

 

 

   

 

 

 

Total Optiscan BioMedical, Corp.

              11,471       6,291  

Stion Corporation

  Sustainable & Renewable Energy Technology    
Preferred Series
Seed Warrants
 
 
        2,154       1,378       —    

Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

  Sustainable & Renewable Energy Technology     Senior Secured Debt       August 2019      


Interest rate
PRIME + 8.70%

or Floor rate of
12.95%,

4.50% Exit Fee

 
 

 
 

 

  $ 15,000       13,604       13,604  
 

Sustainable & Renewable Energy Technology

    Common Stock           288       61,502       11,400  
           

 

 

   

 

 

 

Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)

              75,106       25,004  
 

 

 

   

 

 

 

Total Affiliate Investments (3.72%)*

            $ 87,955     $ 31,295  
 

 

 

   

 

 

 

Total Control and Affiliate Investments (6.04%)*

            $ 113,374     $ 50,756  
 

 

 

   

 

 

 

 

*

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.

 

F-173


Table of Contents
Index to Financial Statements

Hercules Capital, Inc.

$40,000,000

6.25% Notes due 2033

 

 

PROSPECTUS SUPPLEMENT

 

 

Joint Book-Running Managers

 

 

Keefe, Bruyette & Woods,

A Stifel Company

 

 

  Morgan Stanley     UBS Investment Bank  

Lead Manager

Janney Montgomery Scott

Co-Managers

BB&T Capital Markets   B. Riley FBR   Ladenburg Thalmann   Compass Point   Wedbush Securities

The date of this prospectus supplement is September 19, 2018