HTGC 10-Q Quarter ended Sept. 30, 2018

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Maryland

743113410

(State or Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

94301

(Zip Code)

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

PART I. FINANCIAL INFORMATION

3

Item 1.

Consolidated Financial Statements

3

Consolidated Statement of Assets and Liabilities as of September 30, 2018 and December 31, 2017 (unaudited)

3

Consolidated Statement of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)

5

Consolidated Statement of Changes in Net Assets for the nine months ended September 30, 2018 and 2017 (unaudited)

6

Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

7

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

9

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

24

Notes to Consolidated Financial Statements (unaudited)

39

Item 2.

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

74

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

94

Item 4.

Controls and Procedures

95

PART II. OTHER INFORMATION

96

Item 1.

Legal Proceedings

96

Item 1A.

Risk Factors

96

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

99

Item 3.

Defaults Upon Senior Securities

99

Item 4.

Mine Safety Disclosures

99

Item 5.

Other Information

99

Item 6.

Exhibits and Financial Statement Schedules

100

SIGNATURES

103

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

December 31, 2017

Assets

Investments:

Non-control/Non-affiliate investments (cost of $1,663,658 and $1,506,454, respectively)

$

1,670,034

$

1,491,458

Control investments (cost of $64,630 and $25,419, respectively)

62,387

19,461

Affiliate investments (cost of $84,821 and $87,956, respectively)

28,095

31,295

Total investments in securities, at value (cost of $1,813,109 and $1,619,829, respectively)

1,760,516

1,542,214

Cash and cash equivalents

43,212

91,309

Restricted cash

2,429

3,686

Interest receivable

15,722

12,262

Other assets

1,175

5,244

Total assets

$

1,823,054

$

1,654,715

Liabilities

Accounts payable and accrued liabilities

$

21,473

$

26,896

SBA Debentures, net (principal of $149,000 and $190,200, respectively) ⁽¹⁾

147,527

188,141

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

147,859

147,572

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

81,791

179,001

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

72,495

—

2033 Notes, net (principal of $40,000 and $0, respectively) ⁽¹⁾

38,752

—

2021 Asset-Backed Notes, net (principal of $3,515 and $49,153, respectively) ⁽¹⁾

3,423

48,650

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

224,660

223,488

Credit Facilities

80,894

—

Total liabilities

$

818,874

$

813,748

Net assets consist of:

Common stock, par value

96

85

Capital in excess of par value

1,060,875

908,501

Unrealized appreciation (depreciation) on investments ⁽²⁾

(53,784

)

(79,760

)

Accumulated undistributed realized gains (losses) on investments

(30,855

)

(20,374

)

Undistributed net investment income

27,848

32,515

Total net assets

$

1,004,180

$

840,967

Total liabilities and net assets

$

1,823,054

$

1,654,715

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

96,751

84,424

Net asset value per share

$

10.38

$

9.96

(1)

The Company’s SBA Debentures, 2022 Notes, 2024 Notes, 2025 Notes, 2033 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 $1.2 million and $2.1 million in net unrealized depreciation on other assets and accrued liabilities, including escrow receivables, and estimated taxes payable as of September 30, 2018 and December 31, 2017, respectively.

(Dollars in thousands)

September 30, 2018

December 31, 2017

Assets

Restricted Cash

$

2,429

$

3,686

Total investments in securities, at value (cost of $86,070 and $146,208, respectively)

85,965

144,513

Total assets

$

88,394

$

148,199

Liabilities

2021 Asset-Backed Notes, net (principal of $3,515 and $49,153, respectively) ⁽¹⁾

$

3,423

$

48,650

Total liabilities

$

3,423

$

48,650

(1)

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

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

Investment income:

Interest income

Non-control/Non-affiliate investments

$

47,662

$

41,725

$

134,031

$

124,049

Control investments

921

464

2,348

1,505

Affiliate investments

509

246

1,570

248

Total interest income

49,092

42,435

137,949

125,802

Fee income

Commitment, facility and loan fee income:

Non-control/Non-affiliate investments

1,858

2,239

6,228

7,613

Control investments

1

1

1

11

Affiliate investments

71

2

263

2

Total commitment, facility and loan fee income

1,930

2,242

6,492

7,626

One-time fee income:

Non-control/Non-affiliate investments

1,580

1,188

6,423

7,254

Total one-time fee income

1,580

1,188

6,423

7,254

Total fee income

3,510

3,430

12,915

14,880

Total investment income

52,602

45,865

150,864

140,682

Operating expenses:

Interest

9,451

9,185

28,715

28,046

Loan fees

1,502

1,314

6,039

5,500

General and administrative

Legal Expenses

677

925

1,889

3,792

Other Expenses

3,044

2,623

9,515

8,570

Total general and administrative

3,721

3,548

11,404

12,362

Employee compensation:

Compensation and benefits

5,294

6,014

18,069

17,276

Stock-based compensation

3,332

1,831

8,498

5,573

Total employee compensation

8,626

7,845

26,567

22,849

Total operating expenses

23,300

21,892

72,725

68,757

Net investment income

29,302

23,973

78,139

71,925

Net realized gain (loss) on investments

Non-control/Non-affiliate investments

3,350

(8,911

)

(4,115

)

(10,940

)

Control investments

—

(15,543

)

(4,308

)

(15,989

)

Affiliate investments

—

—

(2,058

)

—

Total net realized gain (loss) on investments

3,350

(24,454

)

(10,481

)

(26,929

)

Net change in unrealized appreciation (depreciation) on investments

Non-control/Non-affiliate investments

3,967

11,320

22,327

45,420

Control investments

378

17,624

3,715

17,703

Affiliate investments

(1,368

)

4,609

(66

)

(47,486

)

Total net unrealized appreciation (depreciation) on investments

2,977

33,553

25,976

15,637

Total net realized and unrealized gain (loss)

6,327

9,099

15,495

(11,292

)

Net increase (decrease) in net assets resulting from operations

$

35,629

$

33,072

$

93,634

$

60,633

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

Basic

$

0.31

$

0.29

$

0.87

$

0.87

Change in net assets resulting from operations per common share:

Basic

$

0.37

$

0.40

$

1.04

$

0.73

Diluted

$

0.37

$

0.40

$

1.04

$

0.73

Weighted average shares outstanding

Basic

95,460

82,496

89,100

82,073

Diluted

95,671

82,607

89,212

82,173

Distributions declared per common share:

Basic

$

0.31

$

0.31

$

0.93

$

0.93

Accumulated

Unrealized

Undistributed

Capital in

Appreciation

Realized

Undistributed

Common Stock

excess

(Depreciation)

Gains (Losses)

Net Investment

Net

Shares

Par Value

of par value

on Investments

on Investments

Income

Assets

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

—

—

—

15,637

(26,929

)

71,925

60,633

Public offering, net of offering expenses

4,077

4

56,330

—

—

—

56,334

Issuance of common stock due to stock option exercises

46

—

213

—

—

—

213

Retired shares from net issuance

(18

)

—

(172

)

—

—

—

(172

)

Issuance of common stock under restricted stock plan

10

—

—

—

—

—

—

Retired shares for restricted stock vesting

(187

)

—

(2,483

)

—

—

—

(2,483

)

Distributions reinvested in common stock

132

—

1,780

—

—

—

1,780

Issuance of Convertible Notes

—

—

3,413

—

—

—

3,413

Distributions

—

—

—

—

(14,893

)

(62,104

)

(76,997

)

Stock-based compensation ⁽¹⁾

—

—

5,619

—

—

—

5,619

Balance at September 30, 2017

83,615

$

84

$

904,357

$

(73,388

)

$

(27,508

)

$

32,739

$

836,284

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

—

—

—

25,976

(10,481

)

78,139

93,634

Public offering, net of offering expenses

11,953

11

143,787

—

—

—

143,798

Issuance of common stock due to stock option exercises

63

—

704

—

—

—

704

Retired shares from net issuance

(57

)

—

(718

)

—

—

—

(718

)

Issuance of common stock under restricted stock plan

336

—

—

—

—

—

—

Retired shares for restricted stock vesting

(76

)

—

(937

)

—

—

—

(937

)

Distributions reinvested in common stock

108

—

1,372

—

—

—

1,372

Distributions

—

—

—

—

—

(82,806

)

(82,806

)

Stock-based compensation ⁽¹⁾

—

—

8,166

—

—

—

8,166

Balance at September 30, 2018

96,751

$

96

$

1,060,875

$

(53,784

)

$

(30,855

)

$

27,848

$

1,004,180

(1)

Stock-based compensation includes $33 and $46 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2018 and 2017, respectively.

For the Nine Months Ended September 30,

2018

2017

Cash flows from operating activities:

Net increase (decrease) in net assets resulting from operations

$

93,634

$

60,633

Adjustments to reconcile net increase in net assets resulting from

operations to net cash provided by (used in) operating activities:

Purchase of investments

(706,113

)

(487,321

)

Principal and fee payments received on investments

503,971

486,985

Proceeds from the sale of investments

17,521

21,945

Net unrealized depreciation (appreciation) on investments

(25,976

)

(15,637

)

Net realized loss (gain) on investments

10,481

26,929

Accretion of paid-in-kind principal

(7,040

)

(7,078

)

Accretion of loan discounts

(2,961

)

(5,242

)

Accretion of loan discount on Convertible Notes

504

448

Accretion of loan exit fees

(12,482

)

(14,413

)

Change in deferred loan origination revenue

3,472

1,083

Unearned fees related to unfunded commitments

1,908

441

Amortization of debt fees and issuance costs

5,197

4,534

Depreciation

147

153

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

8,166

5,619

Change in operating assets and liabilities:

Interest and fees receivable

(3,460

)

1,107

Prepaid expenses and other assets

2,141

(1,100

)

Accounts payable

(187

)

—

Accrued liabilities

(4,282

)

(2,457

)

Net cash provided by (used in) operating activities

(115,359

)

76,629

Cash flows from investing activities:

Purchases of capital equipment

(325

)

(127

)

Net cash provided by (used in) investing activities

(325

)

(127

)

Cash flows from financing activities:

Issuance of common stock, net

143,498

56,334

Retirement of employee shares

(651

)

(2,442

)

Distributions paid

(81,434

)

(75,217

)

Issuance of 2022 Convertible Notes

—

230,000

Issuance of 2024 Notes

—

5,637

Issuance of 2025 Notes

75,000

—

Issuance of 2033 Notes

40,000

—

Repayments of 2019 Notes

—

(110,364

)

Repayments of 2024 Notes

(100,000

)

—

Repayments of 2021 Asset-Backed Notes

(45,637

)

(43,729

)

Repayments of Long-Term SBA Debentures

(41,200

)

—

Borrowings of credit facilities

216,109

8,497

Repayments of credit facilities

(135,216

)

(13,513

)

Cash paid for debt issuance costs

(3,978

)

(4,662

)

Fees paid for credit facilities and debentures

(161

)

(28

)

Net cash provided by (used in) financing activities

66,330

50,513

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

(49,354

)

127,015

Cash, cash equivalents and restricted cash at beginning of period

94,995

21,366

Cash, cash equivalents and restricted cash at end of period

$

45,641

$

148,381

Supplemental non-cash investing and financing activities:

Distributions reinvested

1,372

1,780

(1)

Stock-based compensation includes $33 and $46 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2018 and 2017, respectively.

For the Nine Months Ended September 30,

(Dollars in thousands)

2018

2017

Cash and cash equivalents

$

43,212

$

140,568

Restricted cash

2,429

7,813

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

$

45,641

$

148,381

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

Under 1 Year 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

$

5,171

$

5,171

Subtotal: Under 1 Year Maturity

5,171

5,171

Subtotal: Biotechnology Tools (0.51%)*

5,171

5,171

Consumer & Business Products

1-5 Years Maturity

WHOOP, INC. ⁽¹²⁾

Consumer & Business Products

Senior Secured

July 2021

Interest rate PRIME + 3.75%

or Floor rate of 8.50%, 6.95% Exit Fee

$

6,000

5,970

5,970

Subtotal: 1-5 Years Maturity

5,970

5,970

Subtotal: Consumer & Business Products (0.59%)*

5,970

5,970

Diversified Financial Services

1-5 Years Maturity

Gibraltar Business Capital, LLC ⁽⁷⁾

Diversified Financial Services

Unsecured

March 2023

Interest rate FIXED 14.50%

$

15,000

14,718

14,865

Subtotal: 1-5 Years Maturity

14,718

14,865

Subtotal: Diversified Financial Services (1.48%)*

14,718

14,865

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

$

5,939

6,523

6,523

Subtotal: Under 1 Year Maturity

6,523

6,523

1-5 Years Maturity

AcelRx Pharmaceuticals, Inc. ⁽¹¹⁾

Drug Delivery

Senior Secured

March 2020

Interest rate PRIME + 6.05%

or Floor rate of 9.55%, 11.69% Exit Fee

$

12,943

13,786

13,733

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

25,233

25,304

Subtotal: 1-5 Years Maturity

39,019

39,037

Subtotal: Drug Delivery (4.54%)*

45,542

45,560

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

$

1,527

$

2,209

$

2,209

Brickell Biotech, Inc. ⁽¹²⁾

Drug Discovery & Development

Senior Secured

September 2019

Interest rate PRIME + 5.70%

or Floor rate of 9.20%, 7.82% Exit Fee

$

5,581

5,996

5,996

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

65

Subtotal: Under 1 Year Maturity