HTGC 10-Q Quarter ended Sept. 30, 2020

☒

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

74-3113410

(State or Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification Number)

400 Hamilton Ave., Suite 310

Palo Alto, California

(Address of Principal Executive Offices)

94301

(Zip Code)

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $0.001 per share

HTGC

New York Stock Exchange

5.25% Notes due 2025

HCXZ

New York Stock Exchange

6.25% Notes due 2033

HCXY

New York Stock Exchange

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 Statements of Assets and Liabilities as of September 30, 2020 and December 31, 2019 (unaudited)

3

Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

5

Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 and 2019 (unaudited)

6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

7

Consolidated Schedule of Investments as of September 30, 2020 (unaudited)

9

Consolidated Schedule of Investments as of December 31, 2019 (unaudited)

20

Notes to Consolidated Financial Statements (unaudited)

30

Item 2.

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

64

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

83

Item 4.

Controls and Procedures

84

PART II. OTHER INFORMATION

85

Item 1.

Legal Proceedings

85

Item 1A.

Risk Factors

85

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

87

Item 3.

Defaults Upon Senior Securities

87

Item 4.

Mine Safety Disclosures

87

Item 5.

Other Information

87

Item 6.

Exhibits and Financial Statement Schedules

88

SIGNATURES

91

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

December 31, 2019

Assets

Investments:

Non-control/Non-affiliate investments (cost of $2,352,003 and $2,248,524, respectively)

$

2,355,935

$

2,232,972

Control investments (cost of $65,242 and $65,333, respectively)

55,092

59,746

Affiliate investments (cost of $88,584 and $88,175, respectively)

9,800

21,808

Total investments in securities, at value (cost of $2,505,829 and $2,402,032, respectively)

2,420,827

2,314,526

Cash and cash equivalents

27,554

64,393

Restricted cash

20,507

50,603

Interest receivable

19,506

20,207

Right of use asset

9,884

11,659

Other assets

5,723

580

Total assets

$

2,504,001

$

2,461,968

Liabilities

Accounts payable and accrued liabilities

$

28,782

$

30,306

Operating lease liability

9,753

11,538

SBA Debentures, net (principal of $99,000 and $149,000, respectively) ⁽¹⁾

98,668

148,165

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

148,907

148,514

July 2024 Notes, net (principal of $105,000 and $105,000, respectively) ⁽¹⁾

103,869

103,685

February 2025 Notes, net (principal of $50,000 and $0, respectively) ⁽¹⁾

49,493

—

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

73,256

72,970

June 2025 Notes, net (principal of $70,000 and $0, respectively) ⁽¹⁾

69,233

—

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

38,582

38,501

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) ⁽¹⁾

197,521

197,312

2028 Asset-Backed Notes, net (principal of $250,000 and $250,000, respectively) ⁽¹⁾

247,579

247,395

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

227,786

226,614

Credit Facilities

37,492

103,919

Total liabilities

$

1,330,921

$

1,328,919

Net assets consist of:

Common stock, par value

115

108

Capital in excess of par value

1,225,823

1,145,106

Total distributable earnings (loss)

(52,858

)

(12,165

)

Total net assets

$

1,173,080

$

1,133,049

Total liabilities and net assets

$

2,504,001

$

2,461,968

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

114,317

107,364

Net asset value per share

$

10.26

$

10.55

(1)

The Company’s SBA debentures, 2022 Notes, July 2024 Notes, February 2025 Notes, June 2025 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 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”.

(Dollars in thousands)

September 30, 2020

December 31, 2019

Assets

Restricted Cash

20,507

$

50,603

2027 Asset-Backed Notes, investments in securities, at value (cost of $300,671 and $283,891, respectively)

300,402

283,658

2028 Asset-Backed Notes, investments in securities, at value (cost of $364,022 and $347,295, respectively)

364,948

347,929

Total assets

$

685,857

$

682,190

Liabilities

2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) ⁽¹⁾

$

197,521

$

197,312

2028 Asset-Backed Notes, net (principal of $250,000 and $250,000, respectively) ⁽¹⁾

247,579

247,395

Total liabilities

$

445,100

$

444,707

(1)

The Company’s 2027 Asset-Backed Notes and the 2028 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,

2020

2019

2020

2019

Investment income:

Interest income

Non-control/Non-affiliate investments

$

64,403

$

62,696

$

192,408

$

176,568

Control investments

740

1,055

2,117

3,119

Affiliate investments

232

493

609

1,740

Total interest income

65,375

64,244

195,134

181,427

Fee income

Commitment, facility and loan fee income

Non-control/Non-affiliate investments

2,985

3,591

10,692

11,069

Control investments

5

5

15

13

Affiliate investments

—

26

—

186

Total commitment, facility and loan fee income

2,990

3,622

10,707

11,268

One-time fee income

Non-control/Non-affiliate investments

1,974

1,372

6,085

4,602

Total one-time fee income

1,974

1,372

6,085

4,602

Total fee income

4,964

4,994

16,792

15,870

Total investment income

70,339

69,238

211,926

197,297

Operating expenses:

Interest

14,807

13,857

44,415

39,927

Loan fees

1,824

1,138

5,268

5,793

General and administrative

Legal expenses

673

1,586

2,563

4,212

Tax expenses

994

815

3,028

1,706

Other expenses

3,624

3,967

11,622

10,398

Total general and administrative

5,291

6,368

17,213

16,316

Employee compensation

Compensation and benefits

7,181

7,559

22,575

23,372

Stock-based compensation

2,522

1,443

7,477

8,716

Total employee compensation

9,703

9,002

30,052

32,088

Total operating expenses

31,625

30,365

96,948

94,124

Net investment income

38,714

38,873

114,978

103,173

Net realized gain (loss) on investments

Non-control/Non-affiliate investments

(48,501

)

4,807

(41,393

)

13,633

Total net realized gain (loss) on investments

(48,501

)

4,807

(41,393

)

13,633

Net change in unrealized appreciation (depreciation) on investments

Non-control/Non-affiliate investments

54,299

(26,351

)

19,483

15,533

Control investments

646

2,489

(4,563

)

421

Affiliate investments

(2,111

)

(547

)

(12,416

)

(3,773

)

Total net unrealized appreciation (depreciation) on investments

52,834

(24,409

)

2,504

12,181

Total net realized and unrealized gain (loss)

4,333

(19,602

)

(38,889

)

25,814

Net increase (decrease) in net assets resulting from operations

$

43,047

$

19,271

$

76,089

$

128,987

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

Basic

$

0.34

$

0.37

$

1.03

$

1.03

Change in net assets resulting from operations per common share:

Basic

$

0.38

$

0.18

$

0.68

$

1.29

Diluted

$

0.38

$

0.18

$

0.67

$

1.29

Weighted average shares outstanding

Basic

113,489

104,314

111,342

99,615

Diluted

113,744

104,655

111,590

100,043

Distributions paid per common share:

Basic

$

0.32

$

0.34

$

1.04

$

0.98

Capital in

Distributable

Common Stock

excess

Earnings

Net

For the Three Months Ended September 30, 2020

Shares

Par Value

of par value

(loss)

Assets

Balance at June 30, 2020

114,230

$

115

$

1,223,263

$

(59,348

)

$

1,164,030

Net increase (decrease) in net assets resulting from operations

—

—

—

43,047

43,047

Public offering, net of offering expenses

—

—

(96

)

—

(96

)

Issuance of common stock under restricted stock plan

34

—

—

—

—

Retired shares for restricted stock vesting

(24

)

—

(391

)

—

(391

)

Distributions reinvested in common stock

77

—

923

—

923

Distributions

—

—

—

(36,557

)

(36,557

)

Stock-based compensation ⁽¹⁾

—

—

2,124

—

2,124

Balance at September 30, 2020

114,317

$

115

$

1,225,823

$

(52,858

)

$

1,173,080

For the Nine Months Ended September 30, 2020

Balance at December 31, 2019

107,364

$

108

$

1,145,106

$

(12,165

)

$

1,133,049

Net increase (decrease) in net assets resulting from operations

—

—

—

76,089

76,089

Public offering, net of offering expenses

5,966

6

73,560

—

73,566

Issuance of common stock due to stock option exercises

29

—

362

—

362

Retired shares from net issuance

(24

)

—

(376

)

—

(376

)

Issuance of common stock under restricted stock plan

835

1

(1

)

—

—

Retired shares for restricted stock vesting

(51

)

—

(1,553

)

—

(1,553

)

Distributions reinvested in common stock

198

—

2,393

—

2,393

Distributions

—

—

—

(116,782

)

(116,782

)

Stock-based compensation ⁽¹⁾

—

—

6,332

—

6,332

Balance at September 30, 2020

114,317

$

115

$

1,225,823

$

(52,858

)

$

1,173,080

(1)

Stock-based compensation includes $31 and $76 of restricted stock and option expense related to director compensation for the three and nine months ended September 30, 2020, respectively.

Capital in

Distributable

Common Stock

excess

Earnings

Treasury

Net

For the Three Months Ended September 30, 2019

Shares

Par Value

of par value

(loss) ⁽²⁾

Stock

Assets

Balance at June 30, 2019

104,282

$

104

$

1,149,774

$

(45,194

)

$

—

$

1,104,684

Net increase (decrease) in net assets resulting from operations

—

—

—

19,271

—

19,271

Public offering, net of offering expenses

—

—

(331

)

—

—

(331

)

Issuance of common stock due to stock option exercises

23

—

300

—

—

300

Issuance of common stock under restricted stock plan

770

1

(1

)

—

—

—

Retired shares for restricted stock vesting

(482

)

—

(4,471

)

—

—

(4,471

)

Distributions reinvested in common stock

43

—

544

—

—

544

Distributions

—

—

—

(35,555

)

—

(35,555

)

Stock-based compensation ⁽²⁾

—

—

1,239

—

—

1,239

Balance at September 30, 2019

104,636

$

105

$

1,147,054

$

(61,478

)

$

—

$

1,085,681

For the Nine Months Ended September 30, 2019

Balance at December 31, 2018

96,501

$

96

$

1,052,269

$

(92,859

)

$

(4,062

)

$

955,444

Net increase (decrease) in net assets resulting from operations

—

—

—

128,987

—

128,987

Public offering, net of offering expenses

7,700

8

95,084

—

—

95,092

Issuance of common stock due to stock option exercises

37

—

461

—

—

461

Retired shares from net issuance

(12

)

—

(166

)

—

—

(166

)

Issuance of common stock under restricted stock plan

828

1

(1

)

—

—

—

Retirement of common stock under repurchase plan

—

—

(4,062

)

—

4,062

—

Retired shares for restricted stock vesting

(550

)

—

(5,358

)

—

—

(5,358

)

Distributions reinvested in common stock

132

—

1,733

—

—

1,733

Distributions

—

—

—

(97,606

)

—

(97,606

)

Stock-based compensation ⁽²⁾

—

—

7,094

—

—

7,094

Balance at September 30, 2019

104,636

$

105

$

1,147,054

$

(61,478

)

$

—

$

1,085,681

(2)

Stock-based compensation includes $25 and $56 of restricted stock and option expense related to director compensation for the three and nine months ended September 30, 2019, respectively.

For the Nine Months Ended September 30,

2020

2019

Cash flows from operating activities:

Net increase (decrease) in net assets resulting from operations

$

76,089

$

128,987

Adjustments to reconcile net increase in net assets resulting from

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

Purchase of investments

(631,431

)

(784,858

)

Principal and fee payments received on investments

480,709

424,479

Proceeds from the sale of investments

22,057

31,664

Net unrealized depreciation (appreciation) on investments

(2,504

)

(12,181

)

Net realized loss (gain) on investments

41,393

(13,633

)

Accretion of paid-in-kind principal

(6,481

)

(6,571

)

Accretion of loan discounts

(3,028

)

(2,435

)

Accretion of loan discount on convertible notes

504

504

Accretion of loan exit fees

(19,178

)

(17,598

)

Change in deferred loan origination revenue

11,986

13,617

Unearned fees related to unfunded commitments

30

1,896

Amortization of debt fees and issuance costs

3,640

4,714

Depreciation

319

175

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

6,332

7,094

Change in operating assets and liabilities:

Interest and fees receivable

701

(2,887

)

Prepaid expenses and other assets

(1,844

)

(12,286

)

Accounts payable

(17

)

(196

)

Accrued liabilities

(3,292

)

12,763

Net cash used in operating activities

(24,015

)

(226,752

)

Cash flows from investing activities:

Purchases of capital equipment

(115

)

(484

)

Net cash used in investing activities

(115

)

(484

)

Cash flows from financing activities:

Issuance of common stock, net

73,566

95,091

Retirement of employee shares

(1,567

)

(5,063

)

Distributions paid

(114,389

)

(95,873

)

Issuance of July 2024 Notes

—

105,000

Issuance of 2028 Asset-Backed Notes

—

250,000

Issuance of February 2025 Notes

50,000

—

Issuance of June 2025 Notes

70,000

Repayments of 2024 Notes

—

(83,510

)

Repayments of Long-Term SBA Debentures

(50,000

)

—

Borrowings of credit facilities

494,082

480,834

Repayments of credit facilities

(560,509

)

(522,205

)

Cash paid for debt issuance costs

(1,419

)

(4,131

)

Fees paid for credit facilities and debentures

(2,569

)

(2,833

)

Net cash (used in) provided by financing activities

(42,805

)

217,310

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

(66,935

)

(9,926

)

Cash, cash equivalents, and restricted cash at beginning of period

114,996

45,857

Cash, cash equivalents, and restricted cash at end of period

$

48,061

$

35,931

Supplemental disclosures of cash flow information and non-cash investing and financing activities:

Interest paid

$

46,209

$

40,984

Income tax, including excise tax, paid

$

2,478

$

1,371

Distributions reinvested

$

2,393

$

1,733

(1)

Stock-based compensation includes $76 and $56 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2020 and 2019, respectively.

For the Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

Cash and cash equivalents

$

27,554

$

21,045

Restricted cash

20,507

14,886

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

$

48,061

$

35,931

Portfolio Company

Sub-Industry

Type of

Investment ⁽¹⁾

Maturity

Date

Interest Rate and Floor ⁽²⁾

Principal

Amount

Cost ⁽³⁾

Value ⁽⁴⁾

Debt investments

Communications & Networking

1-5 Years Maturity

Cytracom Holdings LLC ^(11)(17)(18)

Communications & Networking

Senior Secured

February 2025

Interest rate 3-month LIBOR + 9.25% or Floor rate of 10.25%

$

7,000

$

6,810

$

6,805

Subtotal: 1-5 Years Maturity

6,810

6,805

Subtotal: Communications & Networking (0.58%)*

6,810

6,805

Diversified Financial Services

1-5 Years Maturity