UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, DC 20549 

 

FORM 10-Q 

 

(Mark One) 

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

For The Quarterly Period Ended September 30, 2019

OR 

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

Commission File Number: 814-00702

 

HERCULES CAPITAL, INC. 

(Exact Name of Registrant as Specified in its Charter) 

 

 

| 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)                     |
|                                                                                                  |

(650) 289-3060 

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

| 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                   |

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

| Large accelerated filer                                                                                                                                                                                                                                |   | ☒ |    | Accelerated filer              |   | ☐ |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------------|-------------------------------------|--------|---------|
|                                                                                                                                                                                                                                                             |   |    |         |
| Non-accelerated filer                                                                                                                                                                                                                                            |   | ☐ |    | Smaller reporting company |   | ☐ |
|  

Emerging growth company                                                                                                                                                                                                                                  |   | ☐ |         |                                |   |    |
|  

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

On October 25, 2019, there were104,633,262 shares outstanding of the Registrant’s common stock, $0.001 par value. 

 

 

----

 

HERCULES CAPITAL, INC. 

FORM 10-Q TABLE OF CONTENTS 

 

| PART I. FINANCIAL INFORMATION      |    | 3                                                                                                                                   |
|------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
|  

Item 1.               |         |  

Consolidated Financial Statements                                                                                           |    | 3 |
|                               |         |  

Consolidated Statement of Assets and Liabilities as of September 30, 2019 and December 31, 2018 (unaudited)                 |    | 3 |
|                               |         |  

Consolidated Statement of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)            |    | 5 |
|                               |         |  

Consolidated Statement of Changes in Net Assets for the three and nine months ended September 30, 2019 and 2018 (unaudited) |    | 6 |
|                               |         |  

Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)                      |    | 8 |
|                               |         |  

Consolidated Schedule of Investments as of September 30, 2019 (unaudited)                                                   |    | 10 |
|                               |         |  

Consolidated Schedule of Investments as of December 31, 2018 (unaudited)                                                    |    | 20 |
|                               |         |  

Notes to Consolidated Financial Statements (unaudited)                                                                      |    | 36 |
| Item 2.                       |         |  

Management’s Discussion and Analysis of Financial Condition and Results of Operations                                 |    | 68 |
| Item 3.                       |         |  

Quantitative and Qualitative Disclosures About Market Risk                                                                  |    | 84 |
| Item 4.                       |         |  

Controls and Procedures                                                                                                     |    | 85 |
|  

PART II. OTHER INFORMATION |    | 86                                                                                                                                  |
|  

Item 1.               |         | Legal Proceedings                                                                                                                   |    | 86 |
| Item 1A.                      |         |  

Risk Factors                                                                                                                |   | 86 |
| Item 2.                       |         |  

Unregistered Sales of Equity Securities and Use of Proceeds                                                                 |    | 89 |
| Item 3.                       |         | Defaults Upon Senior Securities                                                                                                     |    | 89 |
| Item 4.                       |         |  

Mine Safety Disclosures                                                                                                     |    | 89 |
| Item 5.                       |         |  

Other Information                                                                                                           |    | 89 |
| Item 6.                       |         |  

Exhibits and Financial Statement Schedules                                                                                  |    | 90 |
|  

SIGNATURES                 |    | 93                                                                                                                                  |

 

 

 

 

2

----

 

PART I: FINANCIAL INFORMATION 

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts on or after February 25, 2016 and “Hercules Technology Growth Capital, Inc.” and its wholly owned subsidiaries and its affiliated securitization trusts prior to February 25, 2016, unless the context otherwise requires.

 

| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
|--------------|-----------------------------------|

HERCULES CAPITAL, INC. 

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES 

(unaudited) 

(in thousands, except per share data) 

 

|                                                                                                   |   | September 30, 2019 |      |   | December 31, 2018 |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------|-------------------|--------|
| Assets                                                                                                 |   |               |      |   |              |   |   |   |
| Investments:                                                                                           |   |               |      |   |              |   |   |   |
| Non-control/Non-affiliate investments (cost of $2,182,777 and $1,830,725, respectively)                |   | $                  | 2,167,682 |   |              | $      | 1,801,258 |   |
| Control investments (cost of $65,319 and $64,799, respectively)                                        |   |               | 58,560    |   |              |   | 57,619 |   |
| Affiliate investments (cost of $88,238 and $85,000, respectively)                                      |   |               | 20,964    |   |              |   | 21,496 |   |
| Total investments in securities, at value (cost of $2,336,334 and $1,980,524, respectively)            |   |               | 2,247,206 |   |              |   | 1,880,373 |   |
| Cash and cash equivalents                                                                              |   |               | 21,045    |   |              |   | 34,212 |   |
| Restricted cash                                                                                        |   |               | 14,886    |   |              |   | 11,645 |   |
| Interest receivable                                                                                    |   |               | 19,847    |   |              |   | 16,959 |   |
| Right of use asset (1)                                                                                 |   |               | 12,218    |   |              |   | — |   |
| Other assets                                                                                           |   |               | 1,727     |   |              |   | 2,002 |   |
| Total assets                                                                                           |   | $                  | 2,316,929 |   |              | $      | 1,945,191 |   |
|                                                                                                   |   |               |      |   |              |   |   |   |
| Liabilities                                                                                            |   |               |      |   |              |   |   |   |
| Accounts payable and accrued liabilities                                                               |   | $                  | 25,451    |   |              | $      | 25,961 |   |
| Operating lease liability (1)                                                                          |   |               | 11,922    |   |              |   | — |   |
| SBA Debentures, net (principal of $149,000 and $149,000, respectively) (2)                             |   |               | 148,038   |   |              |   | 147,655 |   |
| 2022 Notes, net (principal of $150,000 and $150,000, respectively) (2)                                 |   |               | 148,383   |   |              |   | 147,990 |   |
| 2024 Notes, net (principal of $0 and $83,510, respectively) (2)                                        |   |               | —   |   |              |   | 81,852 |   |
| July 2024 Notes, net (principal of $105,000 and $0, respectively) (2)                                  |   |               | 103,723   |   |              |   | — |   |
| 2025 Notes, net (principal of $75,000 and $75,000, respectively) (2)                                   |   |               | 72,875    |   |              |   | 72,590 |   |
| 2033 Notes, net (principal of $40,000 and $40,000, respectively) (2)                                   |   |               | 38,474    |   |              |   | 38,427 |   |
| 2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (2)                    |   |               | 197,241   |   |              |   | 197,265 |   |
| 2028 Asset-Backed Notes, net (principal of $250,000 and $0, respectively) (2)                          |   |               | 247,333   |   |              |   | — |   |
| 2022 Convertible Notes, net (principal of $230,000 and $230,000, respectively) (2)                     |   |               | 226,223   |   |              |   | 225,051 |   |
| Credit Facilities                                                                                      |   |               | 11,585    |   |              |   | 52,956 |   |
| Total liabilities                                                                                      |   | $                  | 1,231,248 |   |              | $      | 989,747 |   |
|                                                                                                   |   |               |      |   |              |   |   |   |
| Net assets consist of:                                                                                 |   |               |      |   |              |   |   |   |
| Common stock, par value                                                                                |   |               | 105       |   |              |   | 96 |   |
| Capital in excess of par value                                                                         |   |               | 1,147,054 |   |              |   | 1,052,269 |   |
| Total distributable earnings (loss) (3)                                                                |   |               | (61,478   | )      |              |   | (92,859 | ) |
| Treasury Stock, at cost, no shares as of September 30, 2019 and 376,466 shares as of December 31, 2018 |   |               | —   |   |              |   | (4,062 | ) |
| Total net assets                                                                                       |   | $                  | 1,085,681 |   |              | $      | 955,444 |   |
| Total liabilities and net assets                                                                       |   | $                  | 2,316,929 |   |              | $      | 1,945,191 |   |
|                                                                                                   |   |               |      |   |              |   |   |   |
| Shares of common stock outstanding ($0.001 par value and 200,000,000 authorized)                       |   |               | 104,636   |   |              |   | 96,501 |   |
| Net asset value per share                                                                              |   | $                  | 10.38     |   |              | $      | 9.90 |   |

  

| (1) | See “Note 2 – Summary of Significant Accounting Policies” for a description of Right of use asset and Operating lease liability. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The Company’s SBA debentures, 2022 Notes, 2024 Notes, July 2024 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”. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See Note 11. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

See notes to consolidated financial statements

3

----

 

The following table presents the assets and liabilities of our consolidated securitization trusts for the 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes (see Note 4), which are variable interest entities, or VIEs. The assets of our securitization VIEs can only be used to settle obligations of our consolidated securitization VIEs, these liabilities are only the obligations of our consolidated securitization VIEs, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statement of Assets and Liabilities above. 

 

| (Dollars in thousands)                                                                                     |   | September 30, 2019 |    |   | December 31, 2018 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Assets                                                                                                     |   |               |    |   |              |   |   |   |
| Restricted Cash                                                                                            |   | $                  | 14,886  |   |              | $      | 11,645 |   |
| 2027 Asset-Backed Notes, investments in securities, at value (cost of $296,240 and $279,373, respectively) |   |               | 288,524 |   |              |   | 277,781 |   |
| 2028 Asset-Backed Notes, investments in securities, at value (cost of $365,607 and $0, respectively)       |   |               | 366,033 |   |              |   | — |   |
| Total assets                                                                                               |   | $                  | 669,443 |   |              | $      | 289,426 |   |
|                                                                                                       |   |               |    |   |              |   |   |   |
| Liabilities                                                                                                |   |               |    |   |              |   |   |   |
| 2027 Asset-Backed Notes, net (principal of $200,000 and $200,000, respectively) (1)                        |   | $                  | 197,241 |   |              | $      | 197,265 |   |
| 2028 Asset-Backed Notes, net (principal of $250,000 and $0, respectively) (1)                              |   |               | 247,333 |   |              |   | — |   |
| Total liabilities                                                                                          |   | $                  | 444,574 |   |              | $      | 197,265 |   |

 

| (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”. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

See notes to consolidated financial statements

4

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HERCULES CAPITAL, INC. 

CONSOLIDATED STATEMENT OF OPERATIONS 

(unaudited) 

(in thousands, except per share data) 

 

|                                                                       |   | Three Months Ended September 30, |    |   | Nine Months Ended September 30, |   |
|----------------------------------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|
|                                                                       |   | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Investment income:                                                         |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                            |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Non-control/Non-affiliate investments                                      |   | $                                | 62,696  |   |                            | $      | 47,662 |   |   | $ | 176,568 |   |   | $ | 134,031 |   |
| Control investments                                                        |   |                             | 1,055   |   |                            |   | 921 |   |   |   | 3,119 |   |   |   | 2,348 |   |
| Affiliate investments                                                      |   |                             | 493     |   |                            |   | 509 |   |   |   | 1,740 |   |   |   | 1,570 |   |
| Total interest income                                                      |   |                             | 64,244  |   |                            |   | 49,092 |   |   |   | 181,427 |   |   |   | 137,949 |   |
| Fee income                                                                 |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Commitment, facility and loan fee income                                   |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Non-control/Non-affiliate investments                                      |   |                             | 3,591   |   |                            |   | 1,858 |   |   |   | 11,069 |   |   |   | 6,228 |   |
| Control investments                                                        |   |                             | 5       |   |                            |   | 1 |   |   |   | 13 |   |   |   | 1 |   |
| Affiliate investments                                                      |   |                             | 26      |   |                            |   | 71 |   |   |   | 186 |   |   |   | 263 |   |
| Total commitment, facility and loan fee income                             |   |                             | 3,622   |   |                            |   | 1,930 |   |   |   | 11,268 |   |   |   | 6,492 |   |
| One-time fee income                                                        |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Non-control/Non-affiliate investments                                      |   |                             | 1,372   |   |                            |   | 1,580 |   |   |   | 4,602 |   |   |   | 6,423 |   |
| Total one-time fee income                                                  |   |                             | 1,372   |   |                            |   | 1,580 |   |   |   | 4,602 |   |   |   | 6,423 |   |
| Total fee income                                                           |   |                             | 4,994   |   |                            |   | 3,510 |   |   |   | 15,870 |   |   |   | 12,915 |   |
| Total investment income                                                    |   |                             | 69,238  |   |                            |   | 52,602 |   |   |   | 197,297 |   |   |   | 150,864 |   |
| Operating expenses:                                                        |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Interest                                                                   |   |                             | 13,857  |   |                            |   | 9,451 |   |   |   | 39,927 |   |   |   | 28,715 |   |
| Loan fees                                                                  |   |                             | 1,138   |   |                            |   | 1,502 |   |   |   | 5,793 |   |   |   | 6,039 |   |
| General and administrative                                                 |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Legal expenses                                                             |   |                             | 1,586   |   |                            |   | 677 |   |   |   | 4,212 |   |   |   | 1,889 |   |
| Tax expenses                                                               |   |                             | 815     |   |                            |   | 117 |   |   |   | 1,706 |   |   |   | 689 |   |
| Other expenses                                                             |   |                             | 3,967   |   |                            |   | 2,927 |   |   |   | 10,398 |   |   |   | 8,826 |   |
| Total general and administrative                                           |   |                             | 6,368   |   |                            |   | 3,721 |   |   |   | 16,316 |   |   |   | 11,404 |   |
| Employee compensation                                                      |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and benefits                                                  |   |                             | 7,559   |   |                            |   | 5,294 |   |   |   | 23,372 |   |   |   | 18,069 |   |
| Stock-based compensation                                                   |   |                             | 1,443   |   |                            |   | 3,332 |   |   |   | 8,716 |   |   |   | 8,498 |   |
| Total employee compensation                                                |   |                             | 9,002   |   |                            |   | 8,626 |   |   |   | 32,088 |   |   |   | 26,567 |   |
| Total operating expenses                                                   |   |                             | 30,365  |   |                            |   | 23,300 |   |   |   | 94,124 |   |   |   | 72,725 |   |
| Net investment income                                                      |   |                             | 38,873  |   |                            |   | 29,302 |   |   |   | 103,173 |   |   |   | 78,139 |   |
| Net realized gain (loss) on investments                                    |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Non-control/Non-affiliate investments                                      |   |                             | 4,807   |   |                            |   | 3,350 |   |   |   | 13,633 |   |   |   | (4,115 | ) |
| Control investments                                                        |   |                             | — |   |                            |   | — |   |   |   | — |   |   |   | (4,308 | ) |
| Affiliate investments                                                      |   |                             | — |   |                            |   | — |   |   |   | — |   |   |   | (2,058 | ) |
| Total net realized gain (loss) on investments                              |   |                             | 4,807   |   |                            |   | 3,350 |   |   |   | 13,633 |   |   |   | (10,481 | ) |
| Net change in unrealized appreciation (depreciation) on investments        |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Non-control/Non-affiliate investments                                      |   |                             | (26,351 | )      |                            |   | 3,967 |   |   |   | 15,533 |   |   |   | 22,327 |   |
| Control investments                                                        |   |                             | 2,489   |   |                            |   | 378 |   |   |   | 421 |   |   |   | 3,715 |   |
| Affiliate investments                                                      |   |                             | (547    | )      |                            |   | (1,368 | ) |   |   | (3,773 | ) |   |   | (66 | ) |
| Total net unrealized appreciation (depreciation) on investments            |   |                             | (24,409 | )      |                            |   | 2,977 |   |   |   | 12,181 |   |   |   | 25,976 |   |
| Total net realized and unrealized gain (loss)                              |   |                             | (19,602 | )      |                            |   | 6,327 |   |   |   | 25,814 |   |   |   | 15,495 |   |
| Net increase (decrease) in net assets resulting from operations            |   | $                                | 19,271  |   |                            | $      | 35,629 |   |   | $ | 128,987 |   |   | $ | 93,634 |   |
|                                                                       |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Net investment income before investment gains and losses per common share: |   |
| Basic                                                                      |   | $                                | 0.37    |   |                            | $      | 0.31 |   |   | $ | 1.03 |   |   | $ | 0.87 |   |
| Change in net assets resulting from operations per common share:           |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                      |   | $                                | 0.18    |   |                            | $      | 0.37 |   |   | $ | 1.29 |   |   | $ | 1.04 |   |
| Diluted                                                                    |   | $                                | 0.18    |   |                            | $      | 0.37 |   |   | $ | 1.29 |   |   | $ | 1.04 |   |
| Weighted average shares outstanding                                        |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                      |   |                             | 104,314 |   |                            |   | 95,460 |   |   |   | 99,615 |   |   |   | 89,100 |   |
| Diluted                                                                    |   |                             | 104,655 |   |                            |   | 95,671 |   |   |   | 100,043 |   |   |   | 89,212 |   |
| Distributions paid per common share:                                       |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                      |   | $                                | 0.34    |   |                            | $      | 0.31 |   |   | $ | 0.98 |   |   | $ | 0.93 |   |

 

See notes to consolidated financial statements

5

----

 

HERCULES CAPITAL, INC. 

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS 

(unaudited) 

(dollars and shares in thousands) 

|                                                            |         |    |   |           |   |    |                   |   |       |       |   |          |   |    |   |   |   |    |   |   |   |      |   |
|-----------------------------------------------------------------|--------------|---------|--------|----------------|--------|---------|------------------------|--------|------------|------------|--------|---------------|--------|---------|--------|--------|--------|---------|--------|--------|--------|-----------|--------|
|                                                            |         |    |   |           |   |    |                   |   |       |       |   |          |   |    |   |   |   |    |   |   |   |      |   |
|                                                            |         |    |   |           |   |    |                   |   | 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       |   |
| Retired shares from net issuance                                |         | — |   |           |   | — |                   |   |       | —    |   |          |   | — |   |   |   | — |   |   |   | —   |   |
| 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 (1)                                    |         | — |   |           |   | — |                   |   |       | 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 (1)                                    |         | — |   |           |   | — |                   |   |       | 7,094      |   |          |   | — |   |   |   | — |   |   |   | 7,094     |   |
| Balance at September 30, 2019                                   |         | 104,636 |   |           | $      | 105     |                   |   | $          | 1,147,054  |   |          | $      | (61,478 | )      |   | $      | — |   |   | $      | 1,085,681 |   |

 

| (1) | 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. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See Note 11. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

6

----

 

HERCULES CAPITAL, INC. 

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS 

(unaudited) 

(dollars and shares in thousands) 

|                                                            |   |         |    |   |           |   |    |                   |   |       |      |   |          |   |    |   |   |   |      |   |
|-----------------------------------------------------------------|--------|--------------|---------|--------|----------------|--------|---------|------------------------|--------|------------|-----------|--------|---------------|--------|---------|--------|--------|--------|-----------|--------|
|                                                            |   |         |    |   |           |   |    |                   |   |       |      |   |          |   |    |   |   |   |      |   |
|                                                            |   |         |    |   |           |   |    |                   |   | Capital in |      |   | Distributable |   |    |   |   |   |
|                                                            |   | Common Stock |    |   | excess         |   |    | Earnings               |   |       | Net       |   |
| For the Three Months Ended September 30, 2018                   |   | Shares       |    |   | Par Value |   |    | of par value |   |       | (loss)(2) |   |          | Assets |    |
| Balance at June 30, 2018                                        |   |         | 94,260  |   |           | $      | 94      |                   |   | $          | 1,026,313 |   |          | $      | (62,710 | )      |   | $      | 963,697   |   |
| Net increase (decrease) in net assets resulting from operations |   |         | — |   |           |   | — |                   |   |       | —   |   |          |   | 35,629  |   |   |   | 35,629    |   |
| Public offering, net of offering expenses                       |   |         | 2,467   |   |           |   | 2       |                   |   |       | 31,170    |   |          |   | — |   |   |   | 31,172    |   |
| Issuance of common stock due to stock option exercises          |   |         | 25      |   |           |   | — |                   |   |       | 271       |   |          |   | — |   |   |   | 271       |   |
| Retired shares from net issuance                                |   |         | (21     | )      |           |   | — |                   |   |       | (271      | )      |          |   | — |   |   |   | (271      | )      |
| Issuance of common stock under restricted stock plan            |   |         | — |   |           |   | — |                   |   |       | —   |   |          |   | — |   |   |   | —   |   |
| Retired shares for restricted stock vesting                     |   |         | (19     | )      |           |   | — |                   |   |       | (249      | )      |          |   | — |   |   |   | (249      | )      |
| Distributions reinvested in common stock                        |   |         | 39      |   |           |   | — |                   |   |       | 518       |   |          |   | — |   |   |   | 518       |   |
| Distributions                                                   |   |         | — |   |           |   | — |                   |   |       | —   |   |          |   | (29,710 | )      |   |   | (29,710   | )      |
| Stock-based compensation (1)                                    |   |         | — |   |           |   | — |                   |   |       | 3,123     |   |          |   | — |   |   |   | 3,123     |   |
| Balance at September 30, 2018                                   |   |         | 96,751  |   |           | $      | 96      |                   |   | $          | 1,060,875 |   |          | $      | (56,791 | )      |   | $      | 1,004,180 |   |
|                                                            |   |         |    |   |           |   |    |                   |   |       |      |   |          |   |    |   |   |   |      |   |
| For the Nine Months Ended September 30, 2018                    |   |         |    |   |           |   |    |                   |   |       |      |   |          |   |    |   |   |   |      |   |
| Balance at December 31, 2017                                    |   |         | 84,424  |   |           | $      | 85      |                   |   | $          | 908,501   |   |          | $      | (67,619 | )      |   | $      | 840,967   |   |
| Net increase (decrease) in net assets resulting from operations |   |         | — |   |           |   | — |                   |   |       | —   |   |          |   | 93,634  |   |   |   | 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 |   |          | $      | (56,791 | )      |   | $      | 1,004,180 |   |

 

| (1) | Stock-based compensation includes $13 and $33 of restricted stock and option expense related to director compensation for the three and nine months ended September 30, 2018, respectively. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Certain prior year numbers have been adjusted to conform with the SEC final rules on disclosure updates and simplification effective November 5, 2018. See Note 11. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

See notes to consolidated financial statements

7

----

 

HERCULES CAPITAL, INC. 

CONSOLIDATED STATEMENT OF CASH FLOWS 

(unaudited) 

(dollars in thousands)

 

|                                                                                                                                   | For the Nine Months Ended September 30, |     |
|----------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|----------|
|                                                                                                                                   | 2019                                    |     |   | 2018 |   |
| Cash flows from operating activities:                                                                                                  |                                    |     |   |   |   |   |   |
| Net increase (decrease) in net assets resulting from operations                                                                        | $                                       | 128,987  |   |   | $ | 93,634 |   |
| Adjustments to reconcile net increase in net assets resulting from

operations to net cash provided by (used in) operating activities: |                                    |     |   |   |   |   |   |
| Purchase of investments                                                                                                                |                                    | (784,858 | ) |   |   | (706,113 | ) |
| Principal and fee payments received on investments                                                                                     |                                    | 424,479  |   |   |   | 503,971 |   |
| Proceeds from the sale of investments                                                                                                  |                                    | 31,664   |   |   |   | 17,521 |   |
| Net unrealized depreciation (appreciation) on investments                                                                              |                                    | (12,181  | ) |   |   | (25,976 | ) |
| Net realized loss (gain) on investments                                                                                                |                                    | (13,633  | ) |   |   | 10,481 |   |
| Accretion of paid-in-kind principal                                                                                                    |                                    | (6,571   | ) |   |   | (7,040 | ) |
| Accretion of loan discounts                                                                                                            |                                    | (2,435   | ) |   |   | (2,961 | ) |
| Accretion of loan discount on convertible notes                                                                                        |                                    | 504      |   |   |   | 504 |   |
| Accretion of loan exit fees                                                                                                            |                                    | (17,598  | ) |   |   | (12,482 | ) |
| Change in deferred loan origination revenue                                                                                            |                                    | 13,617   |   |   |   | 3,472 |   |
| Unearned fees related to unfunded commitments                                                                                          |                                    | 1,896    |   |   |   | 1,908 |   |
| Amortization of debt fees and issuance costs                                                                                           |                                    | 4,714    |   |   |   | 5,197 |   |
| Depreciation                                                                                                                           |                                    | 175      |   |   |   | 147 |   |
| Stock-based compensation and amortization of restricted stock grants (1)                                                               |                                    | 7,094    |   |   |   | 8,166 |   |
| Change in operating assets and liabilities:                                                                                            |                                    |     |   |   |   |   |   |
| Interest and fees receivable                                                                                                           |                                    | (2,887   | ) |   |   | (3,460 | ) |
| Prepaid expenses and other assets                                                                                                      |                                    | (12,286  | ) |   |   | 2,141 |   |
| Accounts payable                                                                                                                       |                                    | (196     | ) |   |   | (187 | ) |
| Accrued liabilities                                                                                                                    |                                    | 12,763   |   |   |   | (4,282 | ) |
| Net cash provided by (used in) operating activities                                                                                    |                                    | (226,752 | ) |   |   | (115,359 | ) |
|                                                                                                                                   |                                    |     |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                  |                                    |     |   |   |   |   |   |
| Purchases of capital equipment                                                                                                         |                                    | (484     | ) |   |   | (325 | ) |
| Net cash provided by (used in) investing activities                                                                                    |                                    | (484     | ) |   |   | (325 | ) |
|                                                                                                                                   |                                    |     |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                  |                                    |     |   |   |   |   |   |
| Issuance of common stock, net                                                                                                          |                                    | 95,091   |   |   |   | 143,498 |   |
| Retirement of employee shares                                                                                                          |                                    | (5,063   | ) |   |   | (651 | ) |
| Distributions paid                                                                                                                     |                                    | (95,873  | ) |   |   | (81,434 | ) |
| Issuance of July 2024 Notes                                                                                                            |                                    | 105,000  |   |   |   | — |   |
| Issuance of 2025 Notes                                                                                                                 |                                    | —  |   |   |   | 75,000 |   |
| Issuance of 2033 Notes                                                                                                                 |                                    | —  |   |   |   | 40,000 |   |
| Issuance of 2028 Asset-Backed Notes                                                                                                    |                                    | 250,000  |   |   |   | — |   |
| Repayments of 2024 Notes                                                                                                               |                                    | (83,510  | ) |   |   | (100,000 | ) |
| Repayments of 2021 Asset-Backed Notes                                                                                                  |                                    | —  |   |   |   | (45,637 | ) |
| Repayments of Long-Term SBA Debentures                                                                                                 |                                    | —  |   |   |   | (41,200 | ) |
| Borrowings of credit facilities                                                                                                        |                                    | 480,834  |   |   |   | 216,109 |   |
| Repayments of credit facilities                                                                                                        |                                    | (522,205 | ) |   |   | (135,216 | ) |
| Cash paid for debt issuance costs                                                                                                      |                                    | (4,131   | ) |   |   | (3,978 | ) |
| Fees paid for credit facilities and debentures                                                                                         |                                    | (2,833   | ) |   |   | (161 | ) |
| Net cash provided by (used in) financing activities                                                                                    |                                    | 217,310  |   |   |   | 66,330 |   |
| Net increase (decrease) in cash, cash equivalents and restricted cash                                                                  |                                    | (9,926   | ) |   |   | (49,354 | ) |
| Cash, cash equivalents and restricted cash at beginning of period                                                                      |                                    | 45,857   |   |   |   | 94,995 |   |
| Cash, cash equivalents and restricted cash at end of period                                                                            | $                                       | 35,931   |   |   | $ | 45,641 |   |
|                                                                                                                                   |                                    |     |   |   |   |   |   |
| Supplemental non-cash investing and financing activities:                                                                              |                                    |     |   |   |   |   |   |
| Distributions reinvested                                                                                                               |                                    | 1,733    |   |   |   | 1,372 |   |

 

| (1) | Stock-based compensation includes $56 and $33 of restricted stock and option expense related to director compensation for the nine months ended September 30, 2019 and 2018, respectively. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

See notes to consolidated financial statements

8

----

 

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 Nine Months Ended September 30, |   |
|---------------------------------------------------------------------------------------------------------|-----------------------------------------|--------|
| (Dollars in thousands)                                                                                  | 2019                                    |   |   | 2018 |   |
| Cash and cash equivalents                                                                               | $                                       | 21,045 |   |   | $ | 43,212 |   |
| Restricted cash                                                                                         |                                    | 14,886 |   |   |   | 2,429 |   |
| Total cash, cash equivalents and restricted cash presented in the Consolidated Statements of Cash Flows | $                                       | 35,931 |   |   | $ | 45,641 |   |

See “Note 2 – Summary of Significant Accounting Policies” for a description of restricted cash and cash equivalents. 

 

See notes to consolidated financial statements

9

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(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                                                    |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| Under 1 Year Maturity                                                  |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| Exicure, Inc. (11)                                                     | Biotechnology Tools              | Senior Secured          | March 2020     | Interest rate PRIME + 6.45% or Floor rate of 9.95%, 5.52% Exit Fee                      | $                 | 4,999  |     | $      | 5,020     |   | $ | 5,020 |   |
| Subtotal: Under 1 Year Maturity                                        |                             |                    |           |                                                                                    |              |   |     |   | 5,020     |   |   | 5,020 |   |
| Subtotal: Biotechnology Tools (0.46%)*                                 |                             |                    |           |                                                                                    |              | 5,020  |     |   | 5,020     |   |
| 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 9.25%, 6.95% Exit Fee                      | $                 | 6,000  |     |   | 6,187     |   |   | 6,184 |   |
| Subtotal: 1-5 Years Maturity                                           |                             |                    |           |                                                                                    |              |   |     |   | 6,187     |   |   | 6,184 |   |
| Subtotal: Consumer & Business Products (0.57%)*                    |                             |                    |           |                                                                                    |              | 6,187  |     |   | 6,184     |   |
| 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 |     |   | 14,766    |   |   | 14,805 |   |
| Pico Quantitative Trading LLC (18)                                     | Diversified Financial Services   | Senior Secured          | June 2024      | Interest rate PRIME + 7.60% or Floor rate of 10.80%                                     | $                 | 30,000 |     |   | 29,537    |   |   | 29,537 |   |
| Subtotal: 1-5 Years Maturity                                           |                             |                    |           |                                                                                    |              |   |     |   | 44,303    |   |   | 44,342 |   |
| Subtotal: Diversified Financial Services (4.08%)*                      |                             |                    |           |                                                                                    |              | 44,303 |     |   | 44,342    |   |
| Drug Delivery                                                          |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| 1-5 Years Maturity                                                     |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| Antares Pharma Inc. (10)(11)(15)                                       | Drug Delivery                    | Senior Secured          | July 2022      | Interest rate PRIME + 4.50% or Floor rate of 4.50%, 4.14% Exit Fee                      | $                 | 40,000 |     |   | 40,514    |   |   | 40,405 |   |
| Subtotal: 1-5 Years Maturity                                           |                             |                    |           |                                                                                    |              |   |     |   | 40,514    |   |   | 40,405 |   |
| Subtotal: Drug Delivery (3.72%)*                                       |                             |                    |           |                                                                                    |              | 40,514 |     |   | 40,405    |   |
| Drug Discovery & Development                                       |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| 1-5 Years Maturity                                                     |                             |                    |           |                                                                                    |              |   |     |   |      |   |   |   |   |
| Acacia Pharma Inc. (5)(10)(11)                                         | Drug Discovery & Development | Senior Secured          | January 2022   | Interest rate PRIME + 4.50% or Floor rate of 9.25%, 3.95% Exit Fee                      | $                 | 10,000 |     |   | 10,050    |   |   | 9,979 |   |
| Aldeyra Therapeutics, Inc                                              | Drug Discovery & Development | Senior Secured          | October 2023   | Interest rate PRIME + 3.10% or Floor rate of 9.10%, 6.95% Exit Fee                      | $                 | 15,000 |     |   | 14,881    |   |   | 14,881 |   |
| Aveo Pharmaceuticals, Inc. (11)                                        | Drug Discovery & Development | Senior Secured          | July 2021      | Interest rate PRIME + 4.70% or Floor rate of 9.45%, 5.40% Exit Fee                      | $                 | 9,247  |     |   | 9,520     |   |   | 9,472 |   |
|                                                                   | Drug Discovery & Development | Senior Secured          | July 2021      | Interest rate PRIME + 4.70% or Floor rate of 9.45%, 3.00% Exit Fee                      | $                 | 9,247  |     |   | 9,679     |   |   | 9,679 |   |
|        Total Aveo Pharmaceuticals, Inc.  | $                                | 18,494                  |           |                                                                                    | 19,199            |   |     | 19,151 |      |
| Axovant Gene Therapies Ltd. (p.k.a. Axovant Sciences Ltd.) (5)(10)(11) | Drug Discovery & Development | Senior Secured          | March 2021     | Interest rate PRIME + 6.80% or Floor rate of 10.55%                                     | $                 | 35,037 |     |   | 34,726    |   |   | 34,621 |   |
| BridgeBio Pharma LLC (13)(16)                                          | Drug Discovery & Development | Senior Secured          | January 2023   | Interest rate PRIME + 3.85% or Floor rate of 8.85%, 6.35% Exit Fee                      | $                 | 35,000 |     |   | 35,536    |   |   | 35,435 |   |
|                                                                   | Drug Discovery & Development | Senior Secured          | January 2023   | Interest rate PRIME + 2.85% or Floor rate of 8.60%, 5.75% Exit Fee                      | $                 | 20,000 |     |   | 20,180    |   |   | 20,349 |   |
|                                                                   | Drug Discovery & Development | Senior Secured          | January 2023   | Interest rate PRIME + 3.10% or Floor rate of 9.10%, 5.75% Exit Fee                      | $                 | 20,000 |     |   | 19,958    |   |   | 20,121 |   |
| Total BridgeBio Pharma LLC                                             |                             |                    |           |                                                                                    | $                 | 75,000 |     |   | 75,674    |   |   | 75,905 |   |
| Chemocentryx, Inc. (10)(15)                                            | Drug Discovery & Development | Senior Secured          | December 2022  | Interest rate PRIME + 3.30% or Floor rate of 8.05%, 6.25% Exit Fee                      | $                 | 20,000 |     |   | 20,213    |   |   | 20,456 |   |
| Codiak Biosciences, Inc (17)                                           | Drug Discovery & Development | Senior Secured          | September 2024 | Interest rate PRIME + 3.75% or Floor rate of 9.00%, 5.50% Exit Fee                      | $                 | 10,000 |     |   | 9,921     |   |   | 9,921 |   |
| Constellation Pharmaceuticals, Inc. (12)                               | Drug Discovery & Development | Senior Secured          | April 2023     | Interest rate PRIME + 2.55% or Floor rate of 8.55%, 6.35% Exit Fee                      | $                 | 30,000 |     |   | 29,965    |   |   | 30,233 |   |
| Dermavant Sciences Ltd. (5)(10)(13)                                    | Drug Discovery & Development | Senior Secured          | June 2022      | Interest rate PRIME + 4.45% or Floor rate of 9.95%, 6.95% Exit Fee                      | $                 | 20,000 |     |   | 19,905    |   |   | 19,905 |   |
| 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                     | $                 | 12,922 |     |   | 13,406    |   |   | 13,343 |   |
| Mesoblast (5)(10)(11)                                                  | Drug Discovery & Development | Senior Secured          | March 2022     | Interest rate PRIME + 4.95% or Floor rate of 9.45%, 6.95% Exit Fee                      | $                 | 50,000 |     |   | 51,193    |   |   | 51,286 |   |
| Metuchen Pharmaceuticals LLC (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 | $                 | 14,300 |     |   | 15,196    |   |   | 15,143 |   |
| Motif BioSciences Inc. (5)(8)(10)(11)                                  | Drug Discovery & Development | Senior Secured          | September 2021 | Interest rate PRIME + 5.50% or Floor rate of 10.00%, 2.87% Exit Fee                     | $                 | 6,738  |     |   | 6,732     |   |   | — |   |
| Myovant Sciences, Ltd. (5)(10)(11)                                     | Drug Discovery & Development | Senior Secured          | November 2021  | Interest rate PRIME + 4.00% or Floor rate of 8.25%, 6.55% Exit Fee                      | $                 | 40,000 |     |   | 41,137    |   |   | 41,086 |   |
| Nabriva Therapeutics (5)(10)                                           | Drug Discovery & Development | Senior Secured          | June 2023      | Interest rate PRIME + 4.30% or Floor rate of 9.80%, 6.95% Exit Fee                      | $                 | 35,000 |     |   | 35,072    |   |   | 35,231 |   |

See notes to consolidated financial statements

10

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(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) |   |
|-------------------------------------------------------------------------------------|-------------------------------------------|-------------------------|----------------|-----------------------------------------------------------------------------------------|-------------------|---------|----------|--------|-----------|--------|
| Paratek Pharmaceuticals, Inc. (11)(15)(16)                                          | Drug Discovery & Development          | Senior Secured          | September 2021 | Interest rate PRIME + 2.75% or Floor rate of 8.50%, 4.13% Exit Fee                      | $                 | 62,700  |     | $      | 61,733    |   | $ | 61,661 |   |
|                                                                                | Drug Discovery & Development          | Senior Secured          | August 2022    | Interest rate PRIME + 2.75% or Floor rate of 7.85%, 6.95% Exit Fee                      | $                 | 7,300   |     |   | 10,184    |   |   | 10,168 |   |
|         Total Paratek Pharmaceuticals, Inc. | $                                         | 70,000                  |           |                                                                                    | 71,917            |    |     | 71,829 |      |
| Replimune Group, Inc. (5)(10)(11)                                                   | Drug Discovery & Development          | Senior Secured          | August 2023    | Interest rate PRIME + 2.75% or Floor rate of 8.75%, 4.95% Exit Fee                      | $                 | 10,000  |     |   | 9,936     |   |   | 9,936 |   |
| Stealth Bio Therapeutics Corp. (5)(10)(11)                                          | Drug Discovery & Development          | Senior Secured          | January 2021   | Interest rate PRIME + 5.50% or Floor rate of 9.50%, 6.68% Exit Fee                      | $                 | 17,220  |     |   | 18,065    |   |   | 18,016 |   |
| TG Therapeutics, Inc. (10)(13)                                                      | Drug Discovery & Development          | Senior Secured          | March 2022     | Interest rate PRIME + 4.75% or Floor rate of 10.25%, 3.25% Exit Fee                     | $                 | 30,000  |     |   | 29,535    |   |   | 29,601 |   |
| Tricida, Inc. (11)(15)(17)                                                          | Drug Discovery & Development          | Senior Secured          | April 2023     | Interest rate PRIME + 2.35% or Floor rate of 8.35%, 14.10% Exit Fee                     | $                 | 40,000  |     |   | 40,473    |   |   | 40,715 |   |
| uniQure B.V. (5)(10)(11)                                                            | Drug Discovery & Development          | Senior Secured          | June 2023      | Interest rate PRIME + 3.35% or Floor rate of 8.85%                                      | $                 | 35,000  |     |   | 35,963    |   |   | 36,127 |   |
| Urovant Sciences, Ltd. (5)(10)(13)                                                  | Drug Discovery & Development          | Senior Secured          | March 2023     | Interest rate PRIME + 4.65% or Floor rate of 10.15%, 4.25% Exit Fee                     | $                 | 45,000  |     |   | 44,371    |   |   | 44,605 |   |
| Verastem, Inc. (11)                                                                 | Drug Discovery & Development          | Senior Secured          | December 2022  | Interest rate PRIME + 4.25% or Floor rate of 9.75%, 5.25% Exit Fee                      | $                 | 5,000   |     |   | 5,004     |   |   | 5,036 |   |
|                                                                                | Drug Discovery & Development          | Senior Secured          | December 2022  | Interest rate PRIME + 4.25% or Floor rate of 9.75%, 5.25% Exit Fee                      | $                 | 5,000   |     |   | 5,026     |   |   | 5,058 |   |
|                                                                                | Drug Discovery & Development          | Senior Secured          | December 2022  | Interest rate PRIME + 4.25% or Floor rate of 9.75%, 5.25% Exit Fee                      | $                 | 5,000   |     |   | 5,029     |   |   | 5,047 |   |
|                                                                                | Drug Discovery & Development          | Senior Secured          | December 2022  | Interest rate PRIME + 4.25% or Floor rate of 9.75%, 5.25% Exit Fee                      | $                 | 10,000  |     |   | 10,018    |   |   | 10,083 |   |
|                                                                                | Drug Discovery & Development          | Senior Secured          | December 2022  | Interest rate PRIME + 4.25% or Floor rate of 9.75%, 5.25% Exit Fee                      | $                 | 10,000  |     |   | 9,984     |   |   | 10,048 |   |
| Total Verastem, Inc.                                                                |                                      |                    |           |                                                                                    | $                 | 35,000  |     |   | 35,061    |   |   | 35,272 |   |
| X4 Pharmaceuticals, Inc. (11)(17)                                                   | Drug Discovery & Development          | Senior Secured          | July 2023      | Interest rate PRIME + 2.75% or Floor rate of 8.75%, 7.98% Exit Fee                      | $                 | 20,000  |     |   | 19,977    |   |   | 19,953 |   |
| Subtotal: 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   | 702,568   |   |   | 697,195 |   |
| Subtotal: Drug Discovery & Development (64.22%)*                                |                                      |                    |           |                                                                                    |              | 702,568 |     |   | 697,195   |   |
| Electronics & Computer Hardware                                                 |                                      |                    |           |                                                                                    |              |    |     |
| 1-5 Years Maturity                                                                  |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| 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%, 5.03% Exit Fee | $                 | 9,682   |     |   | 10,045    |   |   | 7,143 |   |
| Subtotal: 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   | 10,045    |   |   | 7,143 |   |
| Subtotal: Electronics & Computer Hardware (0.66%)*                              |                                      |                    |           |                                                                                    |              | 10,045  |     |   | 7,143     |   |
| Healthcare Services, Other                                                          |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Under 1 Year Maturity                                                               |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| PH Group Holdings (13)                                                              | Healthcare Services, Other                | Senior Secured          | September 2020 | Interest rate PRIME + 7.45% or Floor rate of 10.95%                                     | $                 | 20,000  |     |   | 19,959    |   |   | 19,959 |   |
|                                                                                | Healthcare Services, Other                | Senior Secured          | September 2020 | Interest rate PRIME + 7.45% or Floor rate of 10.95%                                     | $                 | 10,000  |     |   | 9,977     |   |   | 9,977 |   |
| Total PH Group Holdings                                                             |                                      |                    |           |                                                                                    | $                 | 30,000  |     |   | 29,936    |   |   | 29,936 |   |
| Subtotal: Under 1 Year Maturity                                                     |                                      |                    |           |                                                                                    |              | 29,936  |     |   | 29,936    |   |
| 1-5 Years Maturity                                                                  |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Oak Street Health (11)(16)(17)                                                      | Healthcare Services, Other                | Senior Secured          | June 2022      | Interest rate PRIME + 5.00% or Floor rate of 9.75%, 5.95% Exit Fee                      | $                 | 60,000  |     |   | 60,969    |   |   | 60,683 |   |
| The CM Group LLC (17)                                                               | Healthcare Services, Other                | Senior Secured          | June 2024      | Interest rate 1-month LIBOR + 8.35% or Floor rate of 9.35%                              | $                 | 9,453   |     |   | 9,284     |   |   | 9,284 |   |
| Subtotal: 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   | 70,253    |   |   | 69,967 |   |
| Subtotal: Healthcare Services, Other (9.20%)*                                       |                                      |                    |           |                                                                                    |              | 100,189 |     |   | 99,903    |   |
| Information Services                                                                |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| 1-5 Years Maturity                                                                  |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| MDX Medical, Inc. (14)(15)(19)                                                      | Information Services                      | Senior Secured          | June 2021      | Interest rate PRIME + 2.75% or Floor rate of 9.50%, PIK Interest 1.70%, 2.80% Exit Fee  | $                 | 15,487  |     |   | 15,479    |   |   | 15,519 |   |
| Planet Labs, Inc. (11)                                                              | Information Services                      | Senior Secured          | June 2022      | Interest rate PRIME + 5.50% or Floor rate of 11.00%, 3.00% Exit Fee                     | $                 | 20,000  |     |   | 19,434    |   |   | 19,434 |   |
| YIPIT, LLC (17)(18)                                                                 | Information Services                      | Senior Secured          | May 2024       | Interest rate 3-month LIBOR + 7.99% or Floor rate of 8.99%                              | $                 | 10,625  |     |   | 10,405    |   |   | 10,405 |   |
| Subtotal: 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   | 45,318    |   |   | 45,358 |   |
| Subtotal: Information Services (4.18%)*                                             |                                      |                    |           |                                                                                    |              | 45,318  |     |   | 45,358    |   |
| Internet Consumer & Business Services                                           |                                      |                    |           |                                                                                    |              |    |     |
| Under 1 Year Maturity                                                               |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Snagajob.com, Inc. (13)(14)                                                         | Internet Consumer & Business Services | Senior Secured          | August 2020    | Interest rate PRIME + 5.15% or Floor rate of 9.15%, PIK Interest 1.95%, 2.55% Exit Fee  | $                 | 42,466  |     |   | 42,989    |   |   | 42,989 |   |

See notes to consolidated financial statements

11

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(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          | August 2020    | Interest rate PRIME + 5.65% or Floor rate of 10.65%, PIK Interest 1.95%, 2.55% Exit Fee | $                 | 5,108   |     | $      | 5,038     |   | $ | 5,038 |   |
|          Total Snagajob.com, Inc. |                                      |                    |           |                                                                                    | $                 | 47,574  |     |   | 48,027    |   |   | 48,027 |   |
| Subtotal: Under 1 Year Maturity                                           |                                      |                    |           |                                                                                    |              | 48,027  |     |   | 48,027    |   |
| 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| AppDirect, Inc. (11)(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  |     |   | 20,227    |   |   | 20,245 |   |
| Arctic Wolf Networks, Inc. (13)(19)                                       | Internet Consumer & Business Services | Senior Secured          | April 2023     | Interest rate 3-month LIBOR + 7.75% or Floor rate of 10.10%, 7.55% Exit Fee             | $                 | 30,000  |     |   | 30,017    |   |   | 29,951 |   |
| Cloudpay, Inc. (5)(10)(11)                                                | Internet Consumer & Business Services | Senior Secured          | April 2022     | Interest rate PRIME + 4.05% or Floor rate of 8.55%, 6.95% Exit Fee                      | $                 | 15,000  |     |   | 15,200    |   |   | 15,104 |   |
| Contentful, Inc. (5)(10)(11)(14)                                          | Internet Consumer & Business Services | Senior Secured          | July 2022      | Interest rate PRIME + 2.95% or Floor rate of 7.95%, PIK Interest 1.25%, 3.55% Exit Fee  | $                 | 3,782   |     |   | 3,766     |   |   | 3,756 |   |
| Convercent, Inc. (14)(15)                                                 | Internet Consumer & Business Services | Senior Secured          | July 2022      | Interest rate PRIME + 2.55% or Floor rate of 8.05%, PIK Interest 2.95%, 1.00% Exit Fee  | $                 | 13,706  |     |   | 13,611    |   |   | 13,610 |   |
| EverFi, Inc. (11)(14)(16)                                                 | Internet Consumer & Business Services | Senior Secured          | May 2022       | Interest rate PRIME + 3.90% or Floor rate of 9.15%, PIK Interest 2.30%                  | $                 | 71,801  |     |   | 71,470    |   |   | 71,787 |   |
| First Insight, Inc. (15)                                                  | Internet Consumer & Business Services | Senior Secured          | November 2021  | Interest rate PRIME + 6.25% or Floor rate of 11.25%                                     | $                 | 10,000  |     |   | 9,877     |   |   | 9,859 |   |
| Greenphire, Inc. (17)                                                     | Internet Consumer & Business Services | Senior Secured          | January 2021   | Interest rate 3-month LIBOR + 8.00% or Floor rate of 9.00%                              | $                 | 1,729   |     |   | 1,729     |   |   | 1,729 |   |
| Intent (p.k.a. Intent Media, Inc.) (12)                                   | Internet Consumer & Business Services | Senior Secured          | September 2021 | Interest rate PRIME + 5.13% or Floor rate of 10.13%                                     | $                 | 15,200  |     |   | 15,117    |   |   | 14,986 |   |
| Lendio, Inc. (11)(17)(19)                                                 | Internet Consumer & Business Services | Senior Secured          | April 2023     | Interest rate PRIME + 4.45% or Floor rate of 9.95%, 5.25% Exit Fee                      | $                 | 5,000   |     |   | 4,956     |   |   | 4,970 |   |
| Nextroll, Inc (14)(19)                                                    | Internet Consumer & Business Services | Senior Secured          | June 2022      | Interest rate PRIME + 3.85% or Floor rate of 9.35%, PIK Interest 2.95%, 3.50% Exit Fee  | $                 | 20,153  |     |   | 20,036    |   |   | 20,036 |   |
| Patron Technology (18)                                                    | Internet Consumer & Business Services | Senior Secured          | June 2024      | Interest rate 3-month LIBOR + 8.30% or Floor rate of 9.30%                              | $                 | 35,750  |     |   | 34,731    |   |   | 34,730 |   |
|                                                                      | Internet Consumer & Business Services | Senior Secured          | June 2024      | Interest rate 3-month LIBOR + 8.30% or Floor rate of 9.30%                              | $                 | 650     |     |   | 650       |   |   | 650 |   |
|         Total Patron Technology   |                                      |                    |           |                                                                                    | $                 | 36,400  |     |   | 35,381    |   |   | 35,380 |   |
| Postmates, Inc. (19)                                                      | Internet Consumer & Business Services | Senior Secured          | September 2022 | Interest rate PRIME + 3.85% or Floor rate of 8.85%, 8.05% Exit Fee                      | $                 | 20,000  |     |   | 20,141    |   |   | 20,106 |   |
| SeatGeek, Inc. (14)(17)                                                   | Internet Consumer & Business Services | Senior Secured          | June 2023      | Interest rate PRIME + 5.00% or Floor rate of 10.50%, PIK Interest 0.50%                 | $                 | 23,017  |     |   | 22,309    |   |   | 22,309 |   |
| Skyword, Inc (14)                                                         | Internet Consumer & Business Services | Senior Secured          | September 2023 | Interest rate PRIME + 3.88% or Floor rate of 9.38%, PIK Interest 1.25%, 2.75% Exit Fee  | $                 | 12,000  |     |   | 11,797    |   |   | 11,797 |   |
| Tectura Corporation (7)(8)(9)(14)                                         | Internet Consumer & Business Services | Senior Secured          | June 2021      | Interest rate FIXED 6.00%, PIK Interest 3.00%                                           | $                 | 21,407  |     |   | 21,407    |   |   | 9,605 |   |
|                                                                      | Internet Consumer & Business Services | Senior Secured          | June 2021      | PIK Interest 8.00%                                                                      | $                 | 10,680  |     |   | 240       |   |   | — |   |
| Total Tectura Corporation                                                 |                                      |                    |           |                                                                                    | $                 | 32,087  |     |   | 21,647    |   |   | 9,605 |   |
| Wheels Up Partners LLC (11)                                               | Internet Consumer & Business Services | Senior Secured          | July 2022      | Interest rate 3-month LIBOR + 8.55% or Floor rate of 9.55%                              | $                 | 17,933  |     |   | 17,815    |   |   | 17,815 |   |
| Xometry, Inc. (13)(19)                                                    | Internet Consumer & Business Services | Senior Secured          | November 2021  | Interest rate PRIME + 3.95% or Floor rate of 8.45%, 7.09% Exit Fee                      | $                 | 11,000  |     |   | 11,253    |   |   | 11,317 |   |
| Subtotal: 1-5 Years Maturity                                              |                                      |                    |           |                                                                                    |              |    |     |   | 346,349   |   |   | 334,362 |   |
| Subtotal: Internet Consumer & Business Services (35.22%)*             |                                      |                    |           |                                                                                    |              | 394,376 |     |   | 382,389   |   |
| 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%, 3.12% Exit Fee  | $                 | 15,544  |     |   | 15,608    |   |   | 15,806 |   |
| Subtotal: 1-5 Years Maturity                                              |                                      |                    |           |                                                                                    |              |    |     |   | 15,608    |   |   | 15,806 |   |
| Subtotal: Media/Content/Info (1.46%)*                                     |                                      |                    |           |                                                                                    |              | 15,608  |     |   | 15,806    |   |
| Medical Devices & Equipment                                           |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Under 1 Year Maturity                                                     |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Quanta Fluid Solutions (5)(10)                                            | Medical Devices & Equipment           | Senior Secured          | April 2020     | Interest rate PRIME + 8.05% or Floor rate of 11.55%, 5.00% Exit Fee                     | $                 | 2,446   |     |   | 3,049     |   |   | 3,049 |   |
| Subtotal: Under 1 Year Maturity                                           |                                      |                    |           |                                                                                    |              | 3,049   |     |   | 3,049     |   |
| 1-5 Years Maturity                                                        |                                      |                    |           |                                                                                    |              |    |     |   |      |   |   |   |   |
| Flowonix Medical Incorporated (11)                                        | Medical Devices & Equipment           | Senior Secured          | October 2021   | Interest rate PRIME + 4.00% or Floor rate of 9.00%, 7.95% Exit Fee                      | $                 | 15,059  |     |   | 15,308    |   |   | 15,236 |   |

See notes to consolidated financial statements

12

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(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) |   |
|----------------------------------------------------|---------------------------------|-------------------------|---------------|----------------------------------------------------------------------------------------|-------------------|--------|----------|--------|-----------|--------|
| Intuity Medical, Inc. (11)(15)                     | Medical Devices & Equipment | Senior Secured          | June 2021     | Interest rate PRIME + 5.00% or Floor rate of 9.25%, 6.95% Exit Fee                     | $                 | 16,345 |     | $      | 16,892    |   | $ | 16,818 |   |
| Quanterix Corporation (11)                         | Medical Devices & Equipment | Senior Secured          | October 2021  | Interest rate PRIME + 2.75% or Floor rate of 8.00%, 0.96% Exit Fee                     | $                 | 7,688  |     |   | 7,664     |   |   | 7,638 |   |
| Rapid Micro Biosystems, Inc. (11)(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 |     |   | 18,479    |   |   | 18,380 |   |
| Sebacia, Inc. (11)(15)                             | Medical Devices & Equipment | Senior Secured          | January 2021  | Interest rate PRIME + 4.35% or Floor rate of 8.85%, 6.05% Exit Fee                     | $                 | 11,000 |     |   | 11,426    |   |   | 11,380 |   |
| Transenterix, Inc. (10)(11)                        | Medical Devices & Equipment | Senior Secured          | June 2022     | Interest rate PRIME + 4.55% or Floor rate of 9.55%, 6.95% Exit Fee                     | $                 | 15,000 |     |   | 15,344    |   |   | 15,209 |   |
| Subtotal: 1-5 Years Maturity                       |                            |                    |          |                                                                                   |              | 85,113 |     |   | 84,661    |   |
| Subtotal: Medical Devices & Equipment (8.08%)* |                            |                    |          |                                                                                   |              | 88,162 |     |   | 87,710    |   |
| Semiconductors                                     |                            |                    |          |                                                                                   |              |   |     |   |      |   |   |   |   |
| 1-5 Years Maturity                                 |                            |                    |          |                                                                                   |              |   |     |   |      |   |   |   |   |
| Elenion Technologies Corporation (13)(14)          | Semiconductors                  | Senior Secured          | February 2022 | Interest rate PRIME + 4.25% or Floor rate of 9.75%, PIK Interest 2.25%, 5.00% Exit Fee | $                 | 10,129 |     |   | 10,183    |   |   | 10,226 |   |
| Subtotal: 1-5 Years Maturity                       |                            |                    |          |                                                                                   |              | 10,183 |     |   | 10,226    |   |
| Subtotal: Semiconductors (0.94%)*                  |                            |                    |          |                                                                                   |              | 10,183 |     |   | 10,226    |   |
| Software                                           |                            |                    |          |                                                                                   |              |   |     |   |      |   |   |   |   |
| Under 1 Year Maturity                              |                            |                    |          |                                                                                   |              |   |     |   |      |   |   |   |   |
| Lightbend, Inc. (14)(15)                           | Software                        | Senior Secured          | December 2019 | Interest rate PRIME + 4.25% or Floor rate of 8.50%, PIK Interest 2.00%, 9.95% Exit Fee | $                 | 2,016  |     |   | 2,149     |   |   | 2,149 |   |
| Subtotal: Under 1 Year Maturity                    |                            |                    |          |                                                                                   |              | 2,149  |     |   | 2,149     |   |
| 1-5 Years Maturity                                 |                            |                    |          |                                                                                   |              |   |     |   |      |   |   |   |   |
| Abrigo (18)                                        | Software                        | Senior Secured          | March 2023    | Interest rate 3-month LIBOR + 7.88% or Floor rate of 8.88%                             | $                 | 39,402 |     |   | 38,702    |   |   | 39,053 |   |
|                                               | Software                        | Senior Secured          | March 2023    | Interest rate 3-month LIBOR + 5.92% or Floor rate of 6.92%                             | $                 | 909    |     |   | 885       |   |   | 885 |   |
|        Total Abrigo  |                            |                    |          |                                                                                   | $                 | 40,311 |     |   | 39,587    |   |   | 39,938 |   |
| Businessolver.com, Inc. (11)(16)(17)               | Software                        | Senior Secured          | May 2023      | Interest rate 3-month LIBOR + 7.50% or Floor rate of 8.50%                             | $                 | 56,483 |     |   | 55,599    |   |   | 55,830 |   |
|                                               | Software                        | Senior Secured          | May 2023      | Interest rate 3-month LIBOR + 7.50% or Floor rate of 8.50%                             | $                 | 1,403  |     |   | 1,403     |   |   | 1,403 |   |
| Total Businessolver.com, Inc.                      |                            |                    |          |                                                                                   | $                 | 57,886 |     |   | 57,002    |   |   | 57,233 |   |
| Clarabridge, Inc. (12)(14)(17)                     | Software                        | Senior Secured          | April 2022    | Interest rate PRIME + 4.80% or Floor rate of 8.55%, PIK Interest 2.25%                 | $                 | 48,003 |     |   | 47,600    |   |   | 47,899 |   |
| Cloud 9 Software (13)(17)                          | Software                        | Senior Secured          | April 2024    | Interest rate 3-month LIBOR + 8.20% or Floor rate of 9.20%                             | $                 | 9,500  |     |   | 9,324     |   |   | 9,324 |   |
| Cloudian, Inc. (11)                                | Software                        | Senior Secured          | November 2022 | Interest rate PRIME + 3.25% or Floor rate of 8.25%, 9.75% Exit Fee                     | $                 | 15,000 |     |   | 15,188    |   |   | 15,069 |   |
| Couchbase, Inc. (11)(15)(19)                       | Software                        | Senior Secured          | May 2023      | Interest rate PRIME + 5.25% or Floor rate of 10.75%, 3.75% Exit Fee                    | $                 | 40,000 |     |   | 39,624    |   |   | 39,801 |   |
| Dashlane, Inc. (11)(14)(17)(19)                    | Software                        | Senior Secured          | April 2022    | Interest rate PRIME + 4.05% or Floor rate of 8.55%, PIK Interest 1.10%, 8.50% Exit Fee | $                 | 10,152 |     |   | 10,373    |   |   | 10,395 |   |
|                                               | Software                        | Senior Secured          | March 2023    | Interest rate PRIME + 4.05% or Floor rate of 8.55%, PIK Interest 1.10%, 4.95% Exit Fee | $                 | 10,053 |     |   | 9,841     |   |   | 9,819 |   |
| Total Dashlane, Inc.                               |                            |                    |          |                                                                                   | $                 | 20,205 |     |   | 20,214    |   |   | 20,214 |   |
| Evernote Corporation (11)(14)(15)(19)              | Software                        | Senior Secured          | October 2020  | Interest rate PRIME + 5.45% or Floor rate of 8.95%                                     | $                 | 5,549  |     |   | 5,461     |   |   | 5,446 |   |
|                                               | Software                        | Senior Secured          | July 2021     | Interest rate PRIME + 6.00% or Floor rate of 9.50%, PIK Interest 1.25%                 | $                 | 4,113  |     |   | 4,021     |   |   | 4,008 |   |
|                                               | Software                        | Senior Secured          | July 2022     | Interest rate PRIME + 6.00% or Floor rate of 9.50%, PIK Interest 1.25%                 | $                 | 5,061  |     |   | 4,987     |   |   | 5,065 |   |
| Total Evernote Corporation                         |                            |                    |          |                                                                                   | $                 | 14,723 |     |   | 14,469    |   |   | 14,519 |   |
| FPX, LLC (13)(17)                                  | Software                        | Senior Secured          | May 2024      | Interest rate 1-month LIBOR + 8.65% or Floor rate of 9.65%                             | $                 | 6,000  |     |   | 5,888     |   |   | 5,888 |   |
| Insurance Technologies Corporation (11)(18)        | Software                        | Senior Secured          | March 2023    | Interest rate 3-month LIBOR + 7.90% or Floor rate of 8.90%                             | $                 | 13,750 |     |   | 13,510    |   |   | 13,507 |   |
| Jolt Software, Inc (14)                            | Software                        | Senior Secured          | October 2022  | Interest rate PRIME + 3.00% or Floor rate of 8.50%, PIK Interest 1.75%, 4.50% Exit Fee | $                 | 5,000  |     |   | 4,969     |   |   | 4,969 |   |
| Kazoo, Inc. (p.k.a. YouEarnedIt, Inc.) (11)(18)    | Software                        | Senior Secured          | July 2023     | Interest rate 1-month LIBOR + 8.66% or Floor rate of 9.66%                             | $                 | 8,910  |     |   | 8,701     |   |   | 8,760 |   |
| Lastline, Inc.  (19)                               | Software                        | Senior Secured          | July 2022     | Interest rate PRIME + 5.45% or Floor rate of 10.95%                                    | $                 | 6,000  |     |   | 5,816     |   |   | 5,816 |   |
| Lightbend, Inc. (14)(15)                           | Software                        | Senior Secured          | February 2022 | Interest rate PRIME + 4.25% or Floor rate of 8.50%, PIK Interest 2.00%                 | $                 | 16,426 |     |   | 16,213    |   |   | 16,181 |   |

See notes to consolidated financial statements

13

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(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. (11)(16)                                                                        | Software                             | Senior Secured          | October 2022  | Interest rate 6-month LIBOR + 8.00% or Floor rate of 9.00%                              | $                 | 12,000  |     | $         | 11,822    |   | $ | 11,822 |   |
|                                                                                                       | Software                             | Senior Secured          | October 2022  | Interest rate 6-month LIBOR + 8.00% or Floor rate of 9.00%                              | $                 | 43,000  |     |      | 42,175    |   |   | 42,158 |   |
|                                                                                                       | Software                             | Senior Secured          | October 2022  | Interest rate 6-month LIBOR + 8.00% or Floor rate of 9.00%                              | $                 | 725     |     |      | 725       |   |   | 725 |   |
|          Total Lithium Technologies, Inc.                          | $                                    | 55,725                  |          |                                                                                    | 54,722            |    |     | 54,705    |      |
| Nuvolo Technologies Corporation (17)(19)                                                                   | Software                             | Senior Secured          | April 2022    | Interest rate PRIME + 6.25% or Floor rate of 11.75%                                     | $                 | 10,000  |     |      | 9,853     |   |   | 9,878 |   |
| OrthoFi, Inc (13)(18)                                                                                      | Software                             | Senior Secured          | April 2024    | Interest rate 3-month LIBOR + 8.28% or Floor rate of 9.28%                              | $                 | 17,853  |     |      | 17,396    |   |   | 17,396 |   |
| Pollen, Inc. (15)                                                                                          | Software                             | Senior Secured          | October 2020  | Interest rate PRIME + 4.25% or Floor rate of 8.50%, 5.95% Exit Fee                      | $                 | 7,000   |     |      | 7,315     |   |   | 7,250 |   |
| Quid, Inc. (11)(14)(15)                                                                                    | Software                             | Senior Secured          | November 2022 | Interest rate PRIME + 4.45% or Floor rate of 9.95%, PIK Interest 2.25%, 3.61% Exit Fee  | $                 | 13,175  |     |      | 13,372    |   |   | 13,441 |   |
| Regent Education (14)                                                                                      | Software                             | Senior Secured          | January 2022  | Interest rate FIXED 10.00%, PIK Interest 2.00%, 7.94% Exit Fee                          | $                 | 3,139   |     |      | 3,189     |   |   | 2,117 |   |
| Salsa Labs, Inc. (11)(17)                                                                                  | Software                             | Senior Secured          | April 2023    | Interest rate 3-month LIBOR + 8.15% or Floor rate of 9.15%                              | $                 | 6,000   |     |      | 5,909     |   |   | 5,969 |   |
|                                                                                                       | Software                             | Senior Secured          | April 2023    | Interest rate 3-month LIBOR + 8.15% or Floor rate of 9.15%                              | $                 | 150     |     |      | 150       |   |   | 151 |   |
| Total Salsa Labs, Inc.                                                                                     |                                 |                    |          |                                                                                    | $                 | 6,150   |     |      | 6,059     |   |   | 6,120 |   |
| ThreatConnect, Inc. (13)(17)(18)                                                                           | Software                             | Senior Secured          | May 2024      | Interest rate 3-month LIBOR + 8.26% or Floor rate of 9.26%                              | $                 | 4,500   |     |      | 4,436     |   |   | 4,436 |   |
| Varsity Tutors LLC (14)                                                                                    | Software                             | Senior Secured          | August 2023   | Interest rate PRIME + 5.25% or Floor rate of 10.75%, PIK Interest 0.55%, 3.00% Exit Fee | $                 | 35,006  |     |      | 34,683    |   |   | 34,683 |   |
| Vela Trading Technologies (11)(18)                                                                         | Software                             | Senior Secured          | July 2022     | Interest rate 3-month LIBOR + 10.50% or Floor rate of 11.50%                            | $                 | 19,500  |     |      | 19,090    |   |   | 19,090 |   |
| ZeroFox, Inc.                                                                                              | Software                             | Senior Secured          | January 2023  | Interest rate PRIME + 4.75% or Floor rate of 10.25%, 3.00% Exit Fee                     | $                 | 15,000  |     |      | 14,878    |   |   | 14,878 |   |
| ZocDoc (11)(19)                                                                                            | Software                             | Senior Secured          | August 2021   | Interest rate PRIME + 6.20% or Floor rate of 10.95%, 2.00% Exit Fee                     | $                 | 30,000  |     |      | 30,177    |   |   | 30,018 |   |
| Subtotal: 1-5 Years Maturity                                                                               |                                 |                    |          |                                                                                    |              | 513,275 |     |      | 513,130   |   |
| Greater than 5 Years Maturity                                                                              |                                 |                    |          |                                                                                    |              |    |     |      |      |   |   |   |   |
| Campaign Monitor Limited (11)(17)(19)                                                                      | Software                             | Senior Secured          | November 2025 | Interest rate 1-month LIBOR + 8.50% or Floor rate of 9.50%                              | $                 | 29,333  |     |      | 28,656    |   |   | 28,656 |   |
|                                                                                                       | Software                             | Senior Secured          | November 2025 | Interest rate 1-month LIBOR + 8.50% or Floor rate of 9.50%                              | $                 | 688     |     |      | 671       |   |   | 671 |   |
|         Total Campaign Monitor Limited                             |                                 |                    |          |                                                                                    | $                 | 30,021  |     |      | 29,327    |   |   | 29,327 |   |
| Imperva, Inc. (19)                                                                                         | Software                             | Senior Secured          | January 2027  | Interest rate 3-month LIBOR + 7.75% or Floor rate of 8.75%                              | $                 | 20,000  |     |      | 19,801    |   |   | 19,801 |   |
| Subtotal: Greater than 5 Years Maturity                                                                    |                                 |                    |          |                                                                                    |              | 49,128  |     |      | 49,128    |   |
| Subtotal: Software (51.99%)*                                                                               |                                 |                    |          |                                                                                    |              | 564,552 |     |      | 564,407   |   |
| Sustainable and Renewable Technology                                                                       |                                 |                    |          |                                                                                    |              |    |     |      |      |   |
| Under 1 Year Maturity                                                                                      |                                 |                    |          |                                                                                    |              |    |     |      |      |   |   |   |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)(8)(14)(19)                                        | Sustainable and Renewable Technology | Senior Secured          | October 2019  | Interest rate PRIME + 8.70% or Floor rate of 12.95%, 6.67% Exit Fee                     | $                 | 10,000  |     |      | 10,775    |   |   | 10,696 |   |
|                                                                                                       | Sustainable and Renewable Technology | Senior Secured          | October 2019  | PIK Interest 10.00%                                                                     | $                 | 683     |     |      | 683       |   |   | 679 |   |
|                                                                                                       | Sustainable and Renewable Technology | Senior Secured          | October 2019  | Interest rate PRIME + 10.70% or Floor rate of 15.70%, PIK Interest 2.00%                | $                 | 1,555   |     |      | 1,555     |   |   | 1,529 |   |
|         Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) | $                                    | 12,238                  |          |                                                                                    | 13,013            |    |     | 12,904    |      |
| Subtotal: Under 1 Year Maturity                                                                            |                                 |                    |          |                                                                                    |              | 13,013  |     |      | 12,904    |   |
| 1-5 Years Maturity                                                                                         |                                 |                    |          |                                                                                    |              |    |     |      |      |   |   |   |   |
| Impossible Foods, Inc. (12)                                                                                | Sustainable and Renewable Technology | Senior Secured          | January 2022  | Interest rate PRIME + 3.95% or Floor rate of 8.95%, 9.00% Exit Fee                      | $                 | 50,000  |     |      | 51,238    |   |   | 50,880 |   |
| Proterra, Inc. (11)(14)(19)                                                                                | Sustainable and Renewable Technology | Senior Secured          | May 2021      | Interest rate PRIME + 5.05% or Floor rate of 10.55%, PIK Interest 1.75%                 | $                 | 10,057  |     |      | 10,008    |   |   | 10,031 |   |
| Subtotal: 1-5 Years Maturity                                                                               |                                 |                    |          |                                                                                    |              | 61,246  |     |      | 60,911    |   |
| Subtotal: Sustainable and Renewable Technology (6.80%)*                                                    |                                 |                    |          |                                                                                    |              | 74,259  |     |      | 73,815    |   |
| Total: Debt Investments (191.58%)*                                                                         |                                 |                    |          |                                                                                    |              |    |     | 2,101,284 |      |   | 2,079,903 |   |

 

 

See notes to consolidated financial statements

14

----

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2019

(unaudited)

(dollars in thousands)

 

| Portfolio Company                                                     |   | Sub-Industry                              |   | Type of

Investment (1) |   | Series               |   | Shares |        |   | Cost (3) |   |    | Value (4) |   |
|-----------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------|--------|----------------------|--------|--------|-------------|--------|----------|--------|---------|-----------|--------|
| Equity Investments                                                    |   |
| Communications & Networking                                       |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Peerless Network Holdings, Inc.                                       |   | Communications & Networking           |   | Equity                  |   | Preferred Series A   |   |   | 1,135,000   |   |     | $      | 1,230   |      |   | $ | 3,778 |   |
| Subtotal: Communications & Networking (0.35%)*                    |   |                                      |   | 1,230                   |   |                 |   | 3,778  |        |
| Diversified Financial Services                                        |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Gibraltar Business Capital, LLC (7)                                   |   | Diversified Financial Services            |   | Equity                  |   | Common Stock         |   |   | 830,000     |   |     |   | 1,884   |      |   |   | 2,298 |   |
|                                                                  |   | Diversified Financial Services            |   | Equity                  |   | Preferred Series A   |   |   | 10,602,752  |   |     |   | 26,122  |      |   |   | 31,852 |   |
| Total Gibraltar Business Capital, LLC                                 |   |                                      |   |                    |   |                 |   |   | 11,432,752  |   |     |   | 28,006  |      |   |   | 34,150 |   |
| Subtotal: Diversified Financial Services (3.15%)*                     |   |                                      |   |                    |   |                 | 28,006 |   |        |   | 34,150   |   |
| Drug Delivery                                                         |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| AcelRx Pharmaceuticals, Inc. (4)                                      |   | Drug Delivery                             |   | Equity                  |   | Common Stock         |   |   | 176,730     |   |     |   | 1,329   |      |   |   | 389 |   |
| BioQ Pharma Incorporated (15)                                         |   | Drug Delivery                             |   | Equity                  |   | Preferred Series D   |   |   | 165,000     |   |     |   | 500     |      |   |   | 720 |   |
| Kaleo, Inc.                                                           |   | Drug Delivery                             |   | Equity                  |   | Preferred Series B   |   |   | 82,500      |   |     |   | 1,007   |      |   |   | 3,388 |   |
| Neos Therapeutics, Inc. (4)(15)                                       |   | Drug Delivery                             |   | Equity                  |   | Common Stock         |   |   | 125,000     |   |     |   | 1,500   |      |   |   | 185 |   |
| PDS Biotechnology Corporation (p.k.a. Edge Therapeutics, Inc.) (4)    |   | Drug Delivery                             |   | Equity                  |   | Common Stock         |   |   | 2,498       |   |     |   | 309     |      |   |   | 8 |   |
| Subtotal: Drug Delivery (0.43%)*                                      |   |                                      |   |                    |   |                 | 4,645  |   |        |   | 4,690    |   |
| Drug Discovery & Development                                      |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Aveo Pharmaceuticals, Inc. (4)(15)                                    |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 1,901,791   |   |     |   | 1,715   |      |   |   | 1,607 |   |
| Axovant Gene Therapies Ltd. (p.k.a. Axovant Sciences Ltd.) (4)(5)(10) |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 16,228      |   |     |   | 1,269   |      |   |   | 105 |   |
| BridgeBio Pharma LLC (4)(16)                                          |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 203,579     |   |     |   | 2,000   |      |   |   | 4,371 |   |
| Cerecor, Inc. (4)                                                     |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 119,087     |   |     |   | 1,000   |      |   |   | 392 |   |
| Concert Pharmaceuticals, Inc. (4)(10)                                 |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 70,796      |   |     |   | 1,367   |      |   |   | 416 |   |
| Dare Biosciences, Inc. (4)                                            |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 13,550      |   |     |   | 1,000   |      |   |   | 11 |   |
| Dynavax Technologies (4)(10)                                          |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 20,000      |   |     |   | 550     |      |   |   | 72 |   |
| Eidos Therapeutics, Inc. (4)(10)                                      |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 15,000      |   |     |   | 255     |      |   |   | 540 |   |
| Genocea Biosciences, Inc. (4)                                         |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 27,932      |   |     |   | 2,000   |      |   |   | 81 |   |
| Insmed, Incorporated (4)                                              |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 50,771      |   |     |   | 717     |      |   |   | 896 |   |
| Melinta Therapeutics (4)                                              |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 10,364      |   |     |   | 2,000   |      |   |   | 39 |   |
| Paratek Pharmaceuticals, Inc. (4)(16)                                 |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 76,362      |   |     |   | 2,744   |      |   |   | 328 |   |
| Rocket Pharmaceuticals, Ltd. (4)                                      |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 944         |   |     |   | 1,500   |      |   |   | 11 |   |
| Savara, Inc. (4)(15)                                                  |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 11,119      |   |     |   | 203     |      |   |   | 29 |   |
| uniQure B.V. (4)(5)(10)                                               |   | Drug Discovery & Development          |   | Equity                  |   | Common Stock         |   |   | 37,175      |   |     |   | 718     |      |   |   | 1,463 |   |
| Subtotal: Drug Discovery & Development (0.95%)*                   |   |                                      |   |                    |   |                 | 19,038 |   |        |   | 10,361   |   |
| Healthcare Services, Other                                            |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| 23andMe, Inc.                                                         |   | Healthcare Services, Other                |   | Equity                  |   | Common Stock         |   |   | 360,000     |   |     |   | 5,094   |      |   |   | 4,508 |   |
| Chromadex Corporation (4)                                             |   | Healthcare Services, Other                |   | Equity                  |   | Common Stock         |   |   | 44,264      |   |     |   | 157     |      |   |   | 174 |   |
| Subtotal: Healthcare Services, Other (0.43%)*                         |   |                                      |   |                    |   |                 | 5,251  |   |        |   | 4,682    |   |
| Information Services                                                  |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| DocuSign, Inc. (4)                                                    |   | Information Services                      |   | Equity                  |   | Common Stock         |   |   | 251,000     |   |     |   | 3,871   |      |   |   | 12,994 |   |
| Subtotal: Information Services (1.20%)*                               |   |                                      |   |                    |   |                 | 3,871  |   |        |   | 12,994   |   |
| Internet Consumer & Business Services                             |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Blurb, Inc.                                                           |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series B   |   |   | 220,653     |   |     |   | 175     |      |   |   | 50 |   |
| Contentful, Inc. (5)(10)                                              |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series D   |   |   | 217         |   |     |   | 500     |      |   |   | 457 |   |
| Countable Corporation (p.k.a. Brigade Group, Inc.)                    |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock         |   |   | 9,023       |   |     |   | 93      |      |   |   | — |   |
| DoorDash, Inc.                                                        |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock         |   |   | 105,000     |   |     |   | 6,051   |      |   |   | 14,422 |   |
| Lyft, Inc. (4)                                                        |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock         |   |   | 200,738     |   |     |   | 10,487  |      |   |   | 8,198 |   |
| Nextdoor.com, Inc.                                                    |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock         |   |   | 328,190     |   |     |   | 4,854   |      |   |   | 6,692 |   |
| OfferUp, Inc.                                                         |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series A   |   |   | 286,080     |   |     |   | 1,663   |      |   |   | 2,054 |   |
|                                                                  |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series A-1 |   |   | 108,710     |   |     |   | 632     |      |   |   | 780 |   |
| Total OfferUp, Inc.                                                   |   |                                      |   |                    |   |                 |   |   | 394,790     |   |     |   | 2,295   |      |   |   | 2,834 |   |
| Oportun (4)                                                           |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock         |   |   | 37,393      |   |     |   | 500     |      |   |   | 607 |   |
| 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 (3.06%)*          |   |                                      |   |                    |   |                 | 25,855 |   |        |   | 33,260   |   |
| Media/Content/Info                                                    |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Pinterest, Inc. (4)                                                   |   | Media/Content/Info                        |   | Equity                  |   | Common Stock         |   |   | 206,666     |   |     |   | 4,085   |      |   |   | 5,466 |   |
| Subtotal: Media/Content/Info (0.50%)*                                 |   |                                      |   |                    |   |                 | 4,085  |   |        |   | 5,466    |   |
| Medical Devices & Equipment                                       |   |                                      |   |                    |   |                 |   |   |        |   |     |   |    |      |   |   |   |   |
| Flowonix Medical Incorporated                                         |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series AA  |   |   | 221,893     |   |     |   | 1,500   |      |   |   | — |   |
| Gelesis, Inc.                                                         |   | Medical Devices & Equipment           |   | Equity                  |   | Common Stock         |   |   | 199,649     |   |     |   | — |      |   |   | 1,007 |   |
|                                                                  |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series A-1 |   |   | 191,210     |   |     |   | 425     |      |   |   | 1,044 |   |
|                                                                  |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series A-2 |   |   | 191,626     |   |     |   | 500     |      |   |   | 1,003 |   |
| Total Gelesis, Inc.                                                   |   |                                      |   |                    |   |                 |   |   | 582,485     |   |     |   | 925     |      |   |   | 3,054 |   |
| Medrobotics Corporation (15)                                          |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series E   |   |   | 136,798     |   |     |   | 250     |      |   |   | — |   |

See notes to consolidated financial statements

 

15

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(unaudited) 

(dollars in thousands)

 

 

| Portfolio Company                                                  |   | Sub-Industry                         |   | Type of

Investment (1) |   | Series               |   | Shares |      |   | Cost (3) |   |    | Value (4) |   |
|--------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------|--------|----------------------|--------|--------|-----------|--------|----------|--------|---------|-----------|--------|
|                                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series F   |   |   | 73,971    |   |     | $      | 155     |      |   | $ | — |   |
|                                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series G   |   |   | 163,934   |   |     |   | 500     |      |   |   | — |   |
| Total Medrobotics Corporation                                      |   |                                 |   |                    |   |                 |   |   | 374,703   |   |     |   | 905     |      |   |   | — |   |
| Optiscan Biomedical, Corp. (6)                                     |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series B   |   |   | 61,855    |   |     |   | 3,000   |      |   |   | 393 |   |
|                                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series C   |   |   | 19,273    |   |     |   | 655     |      |   |   | 111 |   |
|                                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series D   |   |   | 551,038   |   |     |   | 5,257   |      |   |   | 3,282 |   |
|                                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series E   |   |   | 507,103   |   |     |   | 4,239   |      |   |   | 4,061 |   |
| Total Optiscan Biomedical, Corp.                                   |   |                                 |   |                    |   |                 |   |   | 1,139,269 |   |     |   | 13,151  |      |   |   | 7,847 |   |
| Outset Medical, Inc.                                               |   | Medical Devices & Equipment      |   | Equity                  |   | Preferred Series B   |   |   | 232,061   |   |     |   | 527     |      |   |   | 538 |   |
| Quanterix Corporation (4)                                          |   | Medical Devices & Equipment      |   | Equity                  |   | Common Stock         |   |   | 45,690    |   |     |   | 205     |      |   |   | 1,004 |   |
| ViewRay, Inc. (4)(15)                                              |   | Medical Devices & Equipment      |   | Equity                  |   | Common Stock         |   |   | 36,457    |   |     |   | 333     |      |   |   | 106 |   |
| Subtotal: Medical Devices & Equipment (1.16%)*                 |   |                                 |   |                    |   |                 | 17,546 |   |      |   | 12,549   |   |
| Software                                                           |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| CapLinked, Inc.                                                    |   | Software                             |   | Equity                  |   | Preferred Series A-3 |   |   | 53,614    |   |     |   | 51      |      |   |   | 94 |   |
| Docker, Inc.                                                       |   | Software                             |   | Equity                  |   | Common Stock         |   |   | 200,000   |   |     |   | 4,284   |      |   |   | 3,890 |   |
| Druva Holdings, Inc. (p.k.a. Druva, Inc.)                          |   | Software                             |   | Equity                  |   | Preferred Series 2   |   |   | 458,841   |   |     |   | 1,000   |      |   |   | 1,703 |   |
|                                                               |   | Software                             |   | Equity                  |   | Preferred Series 3   |   |   | 93,620    |   |     |   | 300     |      |   |   | 405 |   |
| Total Druva Holdings, Inc. (p.k.a. Druva, Inc.)                    |   |                                 |   |                    |   |                 |   |   | 552,461   |   |     |   | 1,300   |      |   |   | 2,108 |   |
| HighRoads, Inc.                                                    |   | Software                             |   | Equity                  |   | Common Stock         |   |   | 190       |   |     |   | 307     |      |   |   | — |   |
| Palantir Technologies                                              |   | Software                             |   | Equity                  |   | Preferred Series D   |   |   | 9,535     |   |     |   | 47      |      |   |   | 43 |   |
|                                                               |   | Software                             |   | Equity                  |   | Preferred Series E   |   |   | 1,749,089 |   |     |   | 10,489  |      |   |   | 7,958 |   |
|                                                               |   | Software                             |   | Equity                  |   | Preferred Series G   |   |   | 326,797   |   |     |   | 2,211   |      |   |   | 1,488 |   |
| Total Palantir Technologies                                        |   |                                 |   |                    |   |                 |   |   | 2,085,421 |   |     |   | 12,747  |      |   |   | 9,489 |   |
| Sprinklr, Inc.                                                     |   | Software                             |   | Equity                  |   | Common Stock         |   |   | 700,000   |   |     |   | 3,749   |      |   |   | 3,910 |   |
| Subtotal: Software (1.80%)*                                        |   |                                 |   |                    |   |                 | 22,438 |   |      |   | 19,491   |   |
| Surgical Devices                                                   |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Gynesonics, Inc. (15)                                              |   | Surgical Devices                     |   | Equity                  |   | Preferred Series B   |   |   | 219,298   |   |     |   | 250     |      |   |   | 9 |   |
|                                                               |   | Surgical Devices                     |   | Equity                  |   | Preferred Series C   |   |   | 656,538   |   |     |   | 282     |      |   |   | 26 |   |
|                                                               |   | Surgical Devices                     |   | Equity                  |   | Preferred Series D   |   |   | 1,991,157 |   |     |   | 712     |      |   |   | 81 |   |
|                                                               |   | Surgical Devices                     |   | Equity                  |   | Preferred Series E   |   |   | 2,786,367 |   |     |   | 429     |      |   |   | 131 |   |
|                                                               |   | Surgical Devices                     |   | Equity                  |   | Preferred Series F   |   |   | 1,523,693 |   |     |   | 118     |      |   |   | 139 |   |
|                                                               |   | Surgical Devices                     |   | Equity                  |   | Preferred Series F-1 |   |   | 2,418,125 |   |     |   | 150     |      |   |   | 193 |   |
| Total Gynesonics, Inc.                                             |   |                                 |   |                    |   |                 |   |   | 9,595,178 |   |     |   | 1,941   |      |   |   | 579 |   |
| TransMedics Group, Inc. (p.k.a Transmedics, Inc.) (4)              |   | Surgical Devices                     |   | Equity                  |   | Common Stock         |   |   | 162,617   |   |     |   | 2,550   |      |   |   | 3,861 |   |
| Subtotal: Surgical Devices (0.41%)*                                |   |                                 |   |                    |   |                 | 4,491  |   |      |   | 4,440    |   |
| Sustainable and Renewable Technology                               |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Impossible Foods, Inc.                                             |   | Sustainable and Renewable Technology |   | Equity                  |   | Preferred Series E-1 |   |   | 188,611   |   |     |   | 2,000   |      |   |   | 2,000 |   |
| Modumetal, Inc.                                                    |   | Sustainable and Renewable Technology |   | Equity                  |   | Preferred Series A-1 |   |   | 103,584   |   |     |   | 500     |      |   |   | 10 |   |
| Proterra, Inc.                                                     |   | Sustainable and Renewable Technology |   | Equity                  |   | Preferred Series 5   |   |   | 99,280    |   |     |   | 500     |      |   |   | 518 |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)           |   | Sustainable and Renewable Technology |   | Equity                  |   | Common Stock         |   |   | 380       |   |     |   | 61,502  |      |   |   | — |   |
| Subtotal: Sustainable and Renewable Technology (0.23%)*            |   |                                 |   |                    |   |                 | 64,502 |   |      |   | 2,528    |   |
| Total: Equity Investments (13.67%)*                                |   |                                 |   |                    |   |                 |   |   |      |   |     |   | 200,958 |      |   |   | 148,389 |   |
| Warrant Investments                                                |   |
| Communications & Networking                                    |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Peerless Network Holdings, Inc.                                    |   | Communications & Networking      |   | Warrant                 |   | Common Stock         |   |   | 3,328     |   |     |   | — |      |   |   | 7 |   |
| Spring Mobile Solutions, Inc.                                      |   | Communications & Networking      |   | Warrant                 |   | Common Stock         |   |   | 2,834,375 |   |     |   | 418     |      |   |   | — |   |
| Subtotal: Communications & Networking (0.00%)*                 |   |                                 |   |                    |   |                 | 418    |   |      |   | 7        |   |
| Consumer & Business Products                                   |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Gadget Guard (15)                                                  |   | Consumer & Business Products     |   | Warrant                 |   | Common Stock         |   |   | 1,662,441 |   |     |   | 228     |      |   |   | — |   |
| Intelligent Beauty, Inc.                                           |   | Consumer & Business Products     |   | Warrant                 |   | Preferred Series B   |   |   | 190,234   |   |     |   | 230     |      |   |   | 384 |   |
| The Neat Company                                                   |   | Consumer & Business Products     |   | Warrant                 |   | Common Stock         |   |   | 54,054    |   |     |   | 365     |      |   |   | — |   |
| Whoop, Inc.                                                        |   | Consumer & Business Products     |   | Warrant                 |   | Preferred Series C   |   |   | 68,627    |   |     |   | 18      |      |   |   | 5 |   |
| Subtotal: Consumer & Business Products (0.04%)*                |   |                                 |   |                    |   |                 | 841    |   |      |   | 389      |   |
| Drug Delivery                                                      |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Agile Therapeutics, Inc. (4)                                       |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 180,274   |   |     |   | 730     |      |   |   | 29 |   |
| BioQ Pharma Incorporated                                           |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 459,183   |   |     |   | 1       |      |   |   | 885 |   |
| Dance Biopharm, Inc. (15)                                          |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 110,882   |   |     |   | 74      |      |   |   | — |   |
| Neos Therapeutics, Inc. (4)(15)                                    |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 70,833    |   |     |   | 285     |      |   |   | — |   |
| PDS Biotechnology Corporation (p.k.a. Edge Therapeutics, Inc.) (4) |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 3,929     |   |     |   | 390     |      |   |   | — |   |
| Pulmatrix Inc. (4)                                                 |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 2,515     |   |     |   | 116     |      |   |   | — |   |
| ZP Opco, Inc. (4)                                                  |   | Drug Delivery                        |   | Warrant                 |   | Common Stock         |   |   | 3,618     |   |     |   | 265     |      |   |   | — |   |
| Subtotal: Drug Delivery (0.08%)*                                   |   |                                 |   |                    |   |                 | 1,861  |   |      |   | 914      |   |
| Drug Discovery & Development                                   |   |                                 |   |                    |   |                 |   |   |      |   |     |   |    |      |   |   |   |   |
| Acacia Pharma Inc. (4)(5)(10)                                      |   | Drug Discovery & Development     |   | Warrant                 |   | Common Stock         |   |   | 201,330   |   |     |   | 304     |      |   |   | 75 |   |

See notes to consolidated financial statements

16

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(unaudited) 

(dollars in thousands)

 

 

| Portfolio Company                                            |   | Sub-Industry                              |   | Type of

Investment (1) |   | Series                     |   | Shares |      |   | Cost (3) |   |   | Value (4) |   |
|--------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------|--------|----------------------------|--------|--------|-----------|--------|----------|--------|--------|-----------|--------|
| ADMA Biologics, Inc. (4)                                     |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 89,750    |   |     | $      | 295    |      |   | $ | 54 |   |
| Brickell Biotech, Inc. (4)                                   |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 9,005     |   |     |   | 119    |      |   |   | — |   |
| Cerecor, Inc. (4)                                            |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 22,328    |   |     |   | 70     |      |   |   | 4 |   |
| Concert Pharmaceuticals, Inc. (4)(10)(15)                    |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 61,273    |   |     |   | 178    |      |   |   | 20 |   |
| CTI BioPharma Corp. (4)                                      |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 29,239    |   |     |   | 165    |      |   |   | — |   |
| CytRx Corporation (4)(15)                                    |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 105,694   |   |     |   | 160    |      |   |   | — |   |
| Dare Biosciences, Inc. (4)                                   |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 17,190    |   |     |   | 369    |      |   |   | — |   |
| Dermavant Sciences Ltd. (5)(10)                              |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 223,642   |   |     |   | 101    |      |   |   | 108 |   |
| Dicerna Pharmaceuticals, Inc. (4)                            |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 200       |   |     |   | 28     |      |   |   | — |   |
| Evofem Biosciences, Inc. (4)(15)                             |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 7,806     |   |     |   | 266    |      |   |   | 15 |   |
| Genocea Biosciences, Inc. (4)                                |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 50,391    |   |     |   | 431    |      |   |   | 31 |   |
| Immune Pharmaceuticals (4)                                   |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 10,742    |   |     |   | 164    |      |   |   | — |   |
| Melinta Therapeutics (4)                                     |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 8,109     |   |     |   | 625    |      |   |   | — |   |
| Motif BioSciences Inc. (4)(5)(10)(15)                        |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 73,452    |   |     |   | 282    |      |   |   | 3 |   |
| Myovant Sciences, Ltd. (4)(5)(10)                            |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 73,710    |   |     |   | 460    |      |   |   | 32 |   |
| Neuralstem, Inc. (4)(15)                                     |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 289       |   |     |   | 77     |      |   |   | — |   |
| Ology Bioservices, Inc. (15)                                 |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 171,389   |   |     |   | 838    |      |   |   | — |   |
| Paratek Pharmaceuticals, Inc. (4)(15)(16)                    |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 94,841    |   |     |   | 204    |      |   |   | 19 |   |
| Sorrento Therapeutics, Inc. (4)(10)                          |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 306,748   |   |     |   | 889    |      |   |   | 137 |   |
| Stealth Bio Therapeutics Corp. (4)(5)(10)                    |   | Drug Discovery & Development          |   | Warrant                 |   | American Depositary Shares |   |   | 41,667    |   |     |   | 158    |      |   |   | 15 |   |
| TG Therapeutics, Inc. (4)(10)                                |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 147,058   |   |     |   | 563    |      |   |   | 377 |   |
| Tricida, Inc. (4)(15)                                        |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 123,637   |   |     |   | 979    |      |   |   | 1,965 |   |
| Urovant Sciences, Ltd. (4)(5)(10)                            |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 99,777    |   |     |   | 383    |      |   |   | 363 |   |
| X4 Pharmaceuticals, Inc. (4)                                 |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 25,000    |   |     |   | 314    |      |   |   | 86 |   |
| Xoma Corporation (4)(10)(15)                                 |   | Drug Discovery & Development          |   | Warrant                 |   | Common Stock               |   |   | 9,063     |   |     |   | 279    |      |   |   | 2 |   |
| Subtotal: Drug Discovery & Development (0.30%)*          |   |                                      |   |                    |   |                       | 8,701  |   |      |   | 3,306    |   |
| Electronics & Computer Hardware                          |   |                                      |   |                    |   |                       |   |   |      |   |     |   |   |      |   |   |   |   |
| 908 DEVICES INC. (15)                                        |   | Electronics & Computer Hardware       |   | Warrant                 |   | Preferred Series D         |   |   | 79,856    |   |     |   | 101    |      |   |   | 45 |   |
| Subtotal: Electronics & Computer Hardware (0.00%)*       |   |                                      |   |                    |   |                       | 101    |   |      |   | 45       |   |
| Information Services                                         |   |                                      |   |                    |   |                       |   |   |      |   |     |   |   |      |   |   |   |   |
| INMOBI Inc. (5)(10)                                          |   | Information Services                      |   | Warrant                 |   | Common Stock               |   |   | 65,587    |   |     |   | 82     |      |   |   | — |   |
| MDX Medical, Inc. (15)                                       |   | Information Services                      |   | Warrant                 |   | Common Stock               |   |   | 2,812,500 |   |     |   | 283    |      |   |   | 125 |   |
| Netbase Solutions, Inc.                                      |   | Information Services                      |   | Warrant                 |   | Preferred Series 1         |   |   | 60,000    |   |     |   | 356    |      |   |   | 395 |   |
| Planet Labs, Inc.                                            |   | Information Services                      |   | Warrant                 |   | Common Stock               |   |   | 274,160   |   |     |   | 565    |      |   |   | 388 |   |
| RichRelevance, Inc.                                          |   | Information Services                      |   | Warrant                 |   | Preferred Series E         |   |   | 112,612   |   |     |   | 98     |      |   |   | — |   |
| Subtotal: Information Services (0.08%)*                      |   |                                      |   |                    |   |                       | 1,384  |   |      |   | 908      |   |
| 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    |      |   |   | 21 |   |
| Cloudpay, Inc. (5)(10)                                       |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B         |   |   | 6,763     |   |     |   | 54     |      |   |   | 14 |   |
| Contentful, Inc. (5)(10)                                     |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C         |   |   | 82        |   |     |   | 1      |      |   |   | 25 |   |
| Fastly, Inc. (4)                                             |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 76,098    |   |     |   | 71     |      |   |   | 836 |   |
| First Insight, Inc. (15)                                     |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B         |   |   | 75,917    |   |     |   | 96     |      |   |   | 123 |   |
| Intent (p.k.a. Intent Media, Inc.)                           |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 140,077   |   |     |   | 168    |      |   |   | 130 |   |
| Interactions Corporation                                     |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series G-3       |   |   | 68,187    |   |     |   | 204    |      |   |   | 446 |   |
| Just Fabulous, Inc.                                          |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B         |   |   | 206,184   |   |     |   | 1,102  |      |   |   | 2,581 |   |
| Lendio, Inc.                                                 |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series D         |   |   | 127,032   |   |     |   | 39     |      |   |   | 22 |   |
| LogicSource                                                  |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C         |   |   | 79,625    |   |     |   | 30     |      |   |   | 86 |   |
| Oportun (4)                                                  |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 23,514    |   |     |   | 78     |      |   |   | 147 |   |
| Postmates, Inc.                                              |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 189,865   |   |     |   | 317    |      |   |   | 155 |   |
| RumbleON, Inc. (4)                                           |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 102,768   |   |     |   | 87     |      |   |   | 71 |   |
| SeatGeek, Inc.                                               |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 137,976   |   |     |   | 662    |      |   |   | 632 |   |
| ShareThis, Inc.                                              |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C         |   |   | 493,502   |   |     |   | 547    |      |   |   | — |   |
| Skyword, Inc                                                 |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series A         |   |   | 444,444   |   |     |   | 83     |      |   |   | 88 |   |
| Snagajob.com, Inc.                                           |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series A         |   |   | 1,800,000 |   |     |   | 782    |      |   |   | 66 |   |
|                                                         |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B         |   |   | 1,211,537 |   |     |   | 62     |      |   |   | 27 |   |
| TotalSnagajob.com, Inc.                                      |   |                                      |   |                    |   |                       |   |   | 3,011,537 |   |     |   | 844    |      |   |   | 93 |   |
| Tapjoy, Inc.                                                 |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series D         |   |   | 748,670   |   |     |   | 316    |      |   |   | 4 |   |
| The Faction Group LLC                                        |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series AA        |   |   | 8,076     |   |     |   | 234    |      |   |   | 347 |   |
| Thumbtack, Inc.                                              |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock               |   |   | 190,953   |   |     |   | 553    |      |   |   | 881 |   |
| Xometry, Inc.                                                |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B         |   |   | 87,784    |   |     |   | 47     |      |   |   | 159 |   |
| Subtotal: Internet Consumer & Business Services (0.63%)* |   |                                      |   |                    |   |                       | 6,242  |   |      |   | 6,861    |   |
| Media/Content/Info                                           |   |                                      |   |                    |   |                       |   |   |      |   |     |   |   |      |   |   |   |   |
| Machine Zone, Inc.                                           |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock               |   |   | 1,552,710 |   |     |   | 1,961  |      |   |   | 493 |   |
| Napster                                                      |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock               |   |   | 715,755   |   |     |   | 383    |      |   |   | — |   |
| WP Technology, Inc. (Wattpad, Inc.) (5)(10)                  |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock               |   |   | 255,818   |   |     |   | 4      |      |   |   | — |   |
| Zoom Media Group, Inc.                                       |   | Media/Content/Info                        |   | Warrant                 |   | Preferred Series A         |   |   | 1,204     |   |     |   | 347    |      |   |   | — |   |
| Subtotal: Media/Content/Info (0.05%)*                        |   |                                      |   |                    |   |                       | 2,695  |   |      |   | 493      |   |

See notes to consolidated financial statements

17

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(unaudited) 

(dollars in thousands)

 

 

| Portfolio Company                                     |   | Sub-Industry                         |   | Type of

Investment (1) |   | Series                    |   | Shares |      |   | Cost (3) |   |    | Value (4) |   |
|-------------------------------------------------------|--------|--------------------------------------|--------|-------------------------|--------|---------------------------|--------|--------|-----------|--------|----------|--------|---------|-----------|--------|
| Medical Devices & Equipment                       |   |                                 |   |                    |   |                      |   |   |      |   |     |   |    |      |   |   |   |   |
| Aspire Bariatrics, Inc. (15)                          |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series B-1      |   |   | 112,858   |   |     | $      | 455     |      |   | $ | — |   |
| Flowonix Medical Incorporated                         |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series AA       |   |   | 155,325   |   |     |   | 362     |      |   |   | — |   |
|                                                  |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series BB       |   |   | 725,806   |   |     |   | 351     |      |   |   | — |   |
| Total Flowonix Medical Incorporated                   |   |                                 |   |                    |   |                      |   |   | 881,131   |   |     |   | 713     |      |   |   | — |   |
| Gelesis, Inc.                                         |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series A-1      |   |   | 74,784    |   |     |   | 78      |      |   |   | 253 |   |
| InspireMD, Inc. (4)(5)(10)                            |   | Medical Devices & Equipment      |   | Warrant                 |   | Common Stock              |   |   | 1,105     |   |     |   | — |      |   |   | — |   |
| Intuity Medical, Inc. (15)                            |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series 5        |   |   | 1,819,078 |   |     |   | 294     |      |   |   | 302 |   |
| Medrobotics Corporation (15)                          |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series E        |   |   | 455,539   |   |     |   | 370     |      |   |   | — |   |
| NinePoint Medical, Inc.                               |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series A-1      |   |   | 587,840   |   |     |   | 170     |      |   |   | 26 |   |
| Optiscan Biomedical, Corp. (6)                        |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series E        |   |   | 74,424    |   |     |   | 572     |      |   |   | 213 |   |
| Outset Medical, Inc.                                  |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series A        |   |   | 500,000   |   |     |   | 402     |      |   |   | 293 |   |
| Sebacia, Inc.                                         |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series D        |   |   | 778,301   |   |     |   | 133     |      |   |   | 7 |   |
| SonaCare Medical, LLC                                 |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series A        |   |   | 6,464     |   |     |   | 188     |      |   |   | — |   |
| Tela Bio, Inc.                                        |   | Medical Devices & Equipment      |   | Warrant                 |   | Preferred Series B        |   |   | 387,930   |   |     |   | 61      |      |   |   | 25 |   |
| Subtotal: Medical Devices & Equipment (0.10%)*    |   |                                 |   |                    |   |                      | 3,436  |   |      |   | 1,119    |   |
| Semiconductors                                        |   |                                 |   |                    |   |                      |   |   |      |   |     |   |    |      |   |   |   |   |
| Achronix Semiconductor Corporation                    |   | Semiconductors                       |   | Warrant                 |   | Preferred Series C        |   |   | 360,000   |   |     |   | 160     |      |   |   | 27 |   |
|                                                  |   | Semiconductors                       |   | Warrant                 |   | Preferred Series D-2      |   |   | 750,000   |   |     |   | 99      |      |   |   | 350 |   |
| Total Achronix Semiconductor Corporation              |   |                                 |   |                    |   |                      |   |   | 1,110,000 |   |     |   | 259     |      |   |   | 377 |   |
| Elenion Technologies Corporation                      |   | Semiconductors                       |   | Warrant                 |   | Preferred Series C        |   |   | 225       |   |     |   | 8       |      |   |   | 4 |   |
| Subtotal: Semiconductors (0.04%)*                     |   |                                 |   |                    |   |                      | 267    |   |      |   | 381      |   |
| Software                                              |   |                                 |   |                    |   |                      |   |   |      |   |     |   |    |      |   |   |   |   |
| Actifio, Inc.                                         |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 73,584    |   |     |   | 249     |      |   |   | 62 |   |
|                                                  |   | Software                             |   | Warrant                 |   | Preferred Series F        |   |   | 31,673    |   |     |   | 343     |      |   |   | 65 |   |
| Total Actifio, Inc.                                   |   |                                 |   |                    |   |                      |   |   | 105,257   |   |     |   | 592     |      |   |   | 127 |   |
| CareCloud Corporation (15)                            |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 13,499    |   |     |   | 257     |      |   |   | — |   |
| Clickfox, Inc. (15)                                   |   | Software                             |   | Warrant                 |   | Preferred Series B        |   |   | 492,877   |   |     |   | 152     |      |   |   | — |   |
|                                                  |   | Software                             |   | Warrant                 |   | Preferred Series C        |   |   | 592,019   |   |     |   | 730     |      |   |   | — |   |
|                                                  |   | Software                             |   | Warrant                 |   | Preferred Series C-A      |   |   | 2,218,214 |   |     |   | 231     |      |   |   | 2 |   |
| Total Clickfox, Inc.                                  |   |                                 |   |                    |   |                      |   |   | 3,303,110 |   |     |   | 1,113   |      |   |   | 2 |   |
| Cloudian, Inc.                                        |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 477,454   |   |     |   | 72      |      |   |   | 17 |   |
| Couchbase, Inc.                                       |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 188,127   |   |     |   | 344     |      |   |   | 248 |   |
| Dashlane, Inc.                                        |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 239,852   |   |     |   | 219     |      |   |   | 386 |   |
| DNAnexus, Inc.                                        |   | Software                             |   | Warrant                 |   | Preferred Series C        |   |   | 909,091   |   |     |   | 97      |      |   |   | 95 |   |
| Evernote Corporation                                  |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 62,500    |   |     |   | 106     |      |   |   | 64 |   |
| Fuze, Inc. (15)                                       |   | Software                             |   | Warrant                 |   | Preferred Series F        |   |   | 256,158   |   |     |   | 89      |      |   |   | — |   |
| Lastline, Inc.                                        |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 363,636   |   |     |   | 133     |      |   |   | 133 |   |
| Lightbend, Inc. (15)                                  |   | Software                             |   | Warrant                 |   | Preferred Series C-1      |   |   | 854,787   |   |     |   | 130     |      |   |   | 108 |   |
| Message Systems, Inc. (15)                            |   | Software                             |   | Warrant                 |   | Preferred Series C        |   |   | 503,718   |   |     |   | 334     |      |   |   | 612 |   |
| Nuvolo Technologies Corporation                       |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 30,000    |   |     |   | 43      |      |   |   | 78 |   |
| OneLogin, Inc. (15)                                   |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 381,620   |   |     |   | 305     |      |   |   | 635 |   |
| Poplicus, Inc.                                        |   | Software                             |   | Warrant                 |   | Common Stock              |   |   | 132,168   |   |     |   | — |      |   |   | — |   |
| Quid, Inc. (15)                                       |   | Software                             |   | Warrant                 |   | Preferred Series D        |   |   | 71,576    |   |     |   | 1       |      |   |   | 1 |   |
|                                                  |   | Software                             |   | Warrant                 |   | Preferred Series E        |   |   | 40,261    |   |     |   | 1       |      |   |   | — |   |
| Total Quid, Inc.                                      |   |                                 |   |                    |   |                      |   |   | 111,837   |   |     |   | 2       |      |   |   | 1 |   |
| RapidMiner, Inc.                                      |   | Software                             |   | Warrant                 |   | Preferred Series C-1      |   |   | 4,982     |   |     |   | 24      |      |   |   | 12 |   |
| RedSeal Inc. (15)                                     |   | Software                             |   | Warrant                 |   | Preferred Series C-Prime  |   |   | 640,603   |   |     |   | 66      |      |   |   | 16 |   |
| Signpost, Inc.                                        |   | Software                             |   | Warrant                 |   | Series Junior 1 Preferred |   |   | 474,019   |   |     |   | 314     |      |   |   | — |   |
| ZeroFox, Inc.                                         |   | Software                             |   | Warrant                 |   | Preferred Series C-1      |   |   | 486,263   |   |     |   | 57      |      |   |   | 77 |   |
| Subtotal: Software (0.24%)*                           |   |                                 |   |                    |   |                      | 4,297  |   |      |   | 2,611    |   |
| Specialty Pharmaceuticals                             |   |                                 |   |                    |   |                      |   |   |      |   |     |   |    |      |   |   |   |   |
| Alimera Sciences, Inc. (4)                            |   | Specialty Pharmaceuticals            |   | Warrant                 |   | Common Stock              |   |   | 1,717,709 |   |     |   | 861     |      |   |   | 25 |   |
| Subtotal: Specialty Pharmaceuticals (0.00%)*          |   |                                 |   |                    |   |                      | 861    |   |      |   | 25       |   |
| Surgical Devices                                      |   |                                 |   |                    |   |                      |   |   |      |   |     |   |    |      |   |   |   |   |
| Gynesonics, Inc. (15)                                 |   | Surgical Devices                     |   | Warrant                 |   | Preferred Series C        |   |   | 180,480   |   |     |   | 74      |      |   |   | 4 |   |
|                                                  |   | Surgical Devices                     |   | Warrant                 |   | Preferred Series D        |   |   | 1,575,965 |   |     |   | 321     |      |   |   | 21 |   |
| Total Gynesonics, Inc.                                |   |                                 |   |                    |   |                      |   |   | 1,756,445 |   |     |   | 395     |      |   |   | 25 |   |
| TransMedics Group, Inc. (p.k.a Transmedics, Inc.) (4) |   | Surgical Devices                     |   | Warrant                 |   | Common Stock              |   |   | 64,441    |   |     |   | 138     |      |   |   | 655 |   |
| Subtotal: Surgical Devices (0.06%)*                   |   |                                 |   |                    |   |                      | 533    |   |      |   | 680      |   |
| Sustainable and Renewable Technology                  |   |                                 |   |                    |   |                      |   |   |      |
| Agrivida, Inc.                                        |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series D        |   |   | 471,327   |   |     |   | 120     |      |   |   | — |   |
| Calera, Inc.                                          |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series C        |   |   | 44,529    |   |     |   | 513     |      |   |   | — |   |
| Fluidic, Inc.                                         |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series D        |   |   | 61,804    |   |     |   | 102     |      |   |   | — |   |
| Fulcrum Bioenergy, Inc.                               |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series C-1      |   |   | 280,897   |   |     |   | 275     |      |   |   | 504 |   |
| GreatPoint Energy, Inc. (15)                          |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series D-1      |   |   | 393,212   |   |     |   | 548     |      |   |   | — |   |

See notes to consolidated financial statements

18

----

HERCULES CAPITAL, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS 

September 30, 2019

(unaudited) 

(dollars in thousands)

 

 

| Portfolio Company                                        |   | Sub-Industry                         |   | Type of

Investment (1) |   | Series              |   | Shares    |    |   | Cost (3) |   |    | Value (4) |   |
|----------------------------------------------------------|--------|--------------------------------------|--------|-------------------------|--------|---------------------|--------|-----------|---------|--------|----------|--------|---------|-----------|--------|
| Kinestral Technologies, Inc.                             |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series A  |   |      | 325,000 |   |     | $      | 155     |      |   | $ | 150 |   |
|                                                     |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series B  |   |      | 131,883 |   |     |   | 63      |      |   |   | 47 |   |
| Total Kinestral Technologies, Inc.                       |   |                                 |   |                    |   |                |   |      | 456,883 |   |     |   | 218     |      |   |   | 197 |   |
| Polyera Corporation (15)                                 |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series C  |   |      | 311,609 |   |     |   | 338     |      |   |   | — |   |
| Proterra, Inc.                                           |   | Sustainable and Renewable Technology |   | Warrant                 |   | Common Stock        |   |      | 36,630  |   |     |   | 1       |      |   |   | 12 |   |
|                                                     |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series 4  |   |      | 477,517 |   |     |   | 41      |      |   |   | 462 |   |
| Total Proterra, Inc.                                     |   |                                 |   |                    |   |                |   |      | 514,147 |   |     |   | 42      |      |   |   | 474 |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6) |   | Sustainable and Renewable Technology |   | Warrant                 |   | Common Stock        |   |      | 0.69    |   |     |   | — |      |   |   | — |   |
| TAS Energy, Inc.                                         |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series AA |   |      | 428,571 |   |     |   | 299     |      |   |   | — |   |
| Subtotal: Sustainable and Renewable Technology (0.11%)*  |   |                                 |   |                    |   |                | 2,455  |      |    |   | 1,175    |   |
| Total: Warrant Investments (1.74%)*                      |   |                                 |   | 34,092                  |   |                |   | 18,914    |    |
| Total Investments in Securities (206.99%)*               |   |                                 | $      | 2,336,334               |   |                | $      | 2,247,206 |    |

 

| * | 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 September 30, 2019. 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 2.02%, 2.09% and 2.03%, respectively, at September 30, 2019. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $64.8 million, $166.2 million and $101.4 million, respectively. The tax cost of investments is $2.3 billion. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Except for warrants in 35 publicly traded companies and common stock in 26 publicly traded companies, all investments are restricted at September 30, 2019 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 September 30, 2019, and is therefore considered non-income producing. Note that at September 30, 2019, only the $10.7 million PIK, or payment-in-kind, loan is on non-accrual for the Company’s debt investment in Tectura Corporation. At September 30, 2019, only the $1.6 million and $683,000 loans are on non-accrual for the Company’s debt investment in Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 III, L.P., or HT III, the Company’s wholly owned small business investment company, or SBIC, subsidiary. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (16) | Denotes that the fair value of the Company’s total investments in this portfolio company represent greater than 5% of the Company’s total assets at September 30, 2019. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (17) | Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at September 30, 2019. 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

19

----

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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                                 |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   |   |      |   |   |   |   |  |
| Under 1 Year Maturity                               |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   |   |      |   |   |   |   |  |
| Exicure, Inc. (11)                                  |   |   | Biotechnology Tools              |   | Senior Secured          |   | September 2019 |   | Interest rate PRIME + 6.45% or Floor rate of 9.95%, 3.85% Exit Fee  |   | $                | 4,999  |   |     | $      | 5,165  |      |   | $      | 5,165 |   |  |
| Subtotal: Under 1 Year Maturity                     |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   | 5,165  |      |   |   | 5,165 |   |  |
| Subtotal: Biotechnology Tools (0.54%)*              |   |   |                             |   |                    |   |           |   |                                                                |   |             |   | 5,165  |     |   |   | 5,165     |   |        |
| 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  |   |     |   | 6,026  |      |   |   | 5,983 |   |  |
| Subtotal: 1-5 Years Maturity                        |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   | 6,026  |      |   |   | 5,983 |   |  |
| Subtotal: Consumer & Business Products (0.63%)* |   |   |                             |   |                    |   |           |   |                                                                |   |             |   | 6,026  |     |   |   | 5,983     |   |        |
| 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 |   |     |   | 14,729 |      |   |   | 14,401 |   |  |
| Subtotal: 1-5 Years Maturity                        |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   | 14,729 |      |   |   | 14,401 |   |  |
| Subtotal: Diversified Financial Services (1.51%)*   |   |   |                             | 14,729 |                    |   |           | 14,401 |                                                                |
| Drug Delivery                                       |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   |   |      |   |   |   |   |  |
| 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 |   | $                | 10,936 |   |     |   | 11,926 |      |   |   | 11,842 |   |  |
| Antares Pharma Inc. (10)(11)(15)                    |   |   | Drug Delivery                    |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 4.50% or Floor rate of 9.25%, 4.25% Exit Fee  |   | $                | 25,000 |   |     |   | 25,313 |      |   |   | 25,081 |   |  |
| Subtotal: 1-5 Years Maturity                        |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   | 37,239 |      |   |   | 36,923 |   |  |
| Subtotal: Drug Delivery (3.86%)*                    |   |   |                             |   |                    |   |           |   |                                                                |   |             |   |   |     |   | 37,239 |      |   |   | 36,923 |   |  |

 

See notes to consolidated financial statements

 

20

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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       |   |   |                             |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   |   |      |   |
| 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                      |   | $                | 757    |   |     | $      | 1,471  |      |   | $ | 1,471 |   |
| 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                      |   | $                | 4,808  |   |     |   | 5,281  |      |   |   | 5,281 |   |
| Epirus Biopharmaceuticals, Inc. (8)    |   |   | Drug Discovery & Development |   | Senior Secured          |   | June 2019      |   | Interest rate PRIME + 4.70% or Floor rate of 7.95%, 3.00% Exit Fee                      |   | $                | 2,203  |   |     |   | 2,487  |      |   |   | — |   |
| Subtotal: Under 1 Year Maturity        |   |   |                             |   |                    |   |           |   |                                                                                    |   |             |   | 9,239  |     |   |   | 6,752     |   |
| 1-5 Years Maturity                     |   |   |                             |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   |   |      |   |   |   |   |
| Acacia Pharma Inc. (10)(11)            |   |   | Drug Discovery & Development |   | Senior Secured          |   | January 2022   |   | Interest rate PRIME + 4.50% or Floor rate of 9.25%, 3.95% Exit Fee                      |   | $                | 10,000 |   |     |   | 9,871  |      |   |   | 9,819 |   |
| Aveo Pharmaceuticals, Inc.  (11)       |   |   | Drug Discovery & Development |   | Senior Secured          |   | July 2021      |   | Interest rate PRIME + 4.70% or Floor rate of 9.45%, 5.40% Exit Fee                      |   | $                | 10,000 |   |     |   | 10,111 |      |   |   | 10,042 |   |
|                                   |   |   | Drug Discovery & Development |   | Senior Secured          |   | July 2021      |   | Interest rate PRIME + 4.70% or Floor rate of 9.45%, 3.00% Exit Fee                      |   | $                | 10,000 |   |     |   | 10,220 |      |   |   | 10,157 |   |
| Total Aveo Pharmaceuticals, Inc.       |   |   |                             |   |                    |   |           | $      | 20,000                                                                                  |   |             |   | 20,331 |     |   |   | 20,199    |   |
| Axovant Sciences Ltd. (5)(10)(11)(16)  |   |   | Drug Discovery & Development |   | Senior Secured          |   | March 2021     |   | Interest rate PRIME + 6.80% or Floor rate of 10.55%                                     |   | $                | 50,219 |   |     |   | 49,485 |      |   |   | 49,286 |   |
| BridgeBio Pharma LLC (13)(16)          |   |   | Drug Discovery & Development |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 4.35% or Floor rate of 9.35%, 6.35% Exit Fee                      |   | $                | 35,000 |   |     |   | 35,054 |      |   |   | 35,263 |   |
|                                   |   |   | Drug Discovery & Development |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 3.35% or Floor rate of 9.10%, 5.75% Exit Fee                      |   | $                | 20,000 |   |     |   | 19,904 |      |   |   | 19,904 |   |
| Total BridgeBio Pharma LLC             |   |   |                             |   |                    |   |           | $      | 55,000                                                                                  |   |             |   | 54,958 |     |   |   | 55,167    |   |
| Chemocentryx, Inc. (10)(15)            |   |   | Drug Discovery & Development |   | Senior Secured          |   | December 2022  |   | Interest rate PRIME + 3.30% or Floor rate of 8.05%, 6.25% Exit Fee                      |   | $                | 20,000 |   |     |   | 19,957 |      |   |   | 20,104 |   |
| 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 |   |     |   | 14,937 |      |   |   | 14,788 |   |
| Merrimack Pharmaceuticals, Inc. (12)   |   |   | Drug Discovery & Development |   | Senior Secured          |   | August 2021    |   | Interest rate PRIME + 4.00% or Floor rate of 9.25%, 5.55% Exit Fee                      |   | $                | 15,000 |   |     |   | 15,024 |      |   |   | 15,024 |   |
| Mesoblast (5)(10)(11)                  |   |   | Drug Discovery & Development |   | Senior Secured          |   | March 2022     |   | Interest rate PRIME + 4.95% or Floor rate of 9.45%, 6.95% Exit Fee                      |   | $                | 35,000 |   |     |   | 35,346 |      |   |   | 35,190 |   |
| Metuchen Pharmaceuticals LLC (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 |   | $                | 18,569 |   |     |   | 19,256 |      |   |   | 19,122 |   |
| Motif BioSciences Inc. (5)(10)(11)(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 |   |     |   | 14,907 |      |   |   | 14,786 |   |
| Myovant Sciences, Ltd. (5)(10)(11)     |   |   | Drug Discovery & Development |   | Senior Secured          |   | November 2021  |   | Interest rate PRIME + 4.00% or Floor rate of 8.25%, 6.55% Exit Fee                      |   | $                | 40,000 |   |     |   | 40,320 |      |   |   | 40,151 |   |

 

See notes to consolidated financial statements

21

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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) |   |
|-----------------------------------------------------------------------------------------|--------|--------|----------------------------------|--------|-------------------------|--------|----------------|--------|----------------------------------------------------------------------|--------|------------------|--------|--------|----------|--------|---------|-----------|--------|
| Nabriva Therapeutics (5)(10)                                                            |   |   | Drug Discovery & Development |   | Senior Secured          |   | June 2023      |   | Interest rate PRIME + 4.30% or Floor rate of 9.80%, 6.95% Exit Fee   |   | $                | 25,000 |   |     | $      | 24,750  |      |   | $ | 24,750 |   |
| Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.) (10)(11)(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 |   |     |   | 40,882  |      |   |   | 40,472 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | September 2021 |   | Interest rate PRIME + 2.75% or Floor rate of 8.50%, 4.50% Exit Fee   |   | $                | 10,000 |   |     |   | 10,240  |      |   |   | 10,137 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | September 2021 |   | Interest rate PRIME + 2.75% or Floor rate of 8.50%, 2.25% Exit Fee   |   | $                | 10,000 |   |     |   | 10,084  |      |   |   | 9,925 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | August 2022    |   | Interest rate PRIME + 2.10% or Floor rate of 7.85%, 6.95% Exit Fee   |   | $                | 10,000 |   |     |   | 10,014  |      |   |   | 10,014 |   |
| Total Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.)            |   | $      | 70,000                           |   |                    |   | 71,220         |   |                                                                 |   | 70,548           |   |
| Stealth Bio Therapeutics Corp.  (5)(10)(11)                                             |   |   | Drug Discovery & Development |   | Senior Secured          |   | January 2021   |   | Interest rate PRIME + 5.50% or Floor rate of 9.50%, 6.25% Exit Fee   |   | $                | 19,313 |   |     |   | 19,740  |      |   |   | 19,597 |   |
| Tricida, Inc. (11)(15)                                                                  |   |   | Drug Discovery & Development |   | Senior Secured          |   | March 2022     |   | Interest rate PRIME + 3.35% or Floor rate of 8.85%, 8.19% Exit Fee   |   | $                | 40,000 |   |     |   | 39,622  |      |   |   | 39,794 |   |
| uniQure B.V. (5)(10)(11)                                                                |   |   | Drug Discovery & Development |   | Senior Secured          |   | June 2023      |   | Interest rate PRIME + 3.35% or Floor rate of 8.85%, 7.72% Exit Fee   |   | $                | 35,000 |   |     |   | 35,538  |      |   |   | 35,386 |   |
| Verastem, Inc. (11)                                                                     |   |   | Drug Discovery & Development |   | Senior Secured          |   | December 2020  |   | Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee |   | $                | 5,000  |   |     |   | 5,058   |      |   |   | 5,059 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | December 2020  |   | Interest rate PRIME + 6.00%

or Floor rate of 10.50%, 4.50% Exit Fee |   | $                | 5,000  |   |     |   | 5,082   |      |   |   | 5,083 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | December 2020  |   | Interest rate PRIME + 6.00% or Floor rate of 10.50%, 4.50% Exit Fee  |   | $                | 5,000  |   |     |   | 5,057   |      |   |   | 5,057 |   |
|                                                                                    |   |   | Drug Discovery & Development |   | Senior Secured          |   | December 2020  |   | Interest rate PRIME + 6.00% or Floor rate of 10.50%, 4.50% Exit Fee  |   | $                | 10,000 |   |     |   | 10,033  |      |   |   | 9,976 |   |
| Total Verastem, Inc.                                                                    |   |   |                             |   |                    |   |           |   |                                                                 |   | $                | 25,000 |   |     |   | 25,230  |      |   |   | 25,175 |   |
| X4 Pharmaceuticals Inc.                                                                 |   |   | Drug Discovery & Development |   | Senior Secured          |   | November 2021  |   | Interest rate PRIME + 4.25% or Floor rate of 9.50%, 7.95% Exit Fee   |   | $                | 10,000 |   |     |   | 9,746   |      |   |   | 9,746 |   |
| Subtotal: 1-5 Years Maturity                                                            |   |   |                             |   |                    |   |           |   |                                                                 |   |             |   |   |     |   | 520,238 |      |   |   | 518,632 |   |
| Subtotal: Drug Discovery & Development (54.99%)*                                    |   |   |                             |   |                    |   | 529,477        |   |                                                                 |   | 525,384          |   |

 

See notes to consolidated financial statements

22

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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)      |   |
|--------------------------------------------------------|--------|--------------|-------------------------------------|--------|-------------------------|--------|----------------|--------------|-----------------------------------------------------------------------------------------|--------|-------------------|--------|--------|----------------|--------|--------|----------------|--------|
| 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 |   |           | $      | 10,145 |           |   | $ | 10,155 |   |
| 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 |   | $                 | 12,192 |   |  

  | 12,265 |   |  

  | 5,556  |   |
| Subtotal: 1-5 Years Maturity                           |   |         |                           |   |                    | 22,410 |           |    | 15,711                                                                                  |   |
| Subtotal: Electronics & Computer Hardware (1.64%)* |   |    |                                |   | 22,410                  |   |           | 15,711       |                                                                                         |
| Healthcare Services, Other                             |   |         |                           |   |                    |   |           |         |                                                                                    |   |              |
| 1-5 Years Maturity                                     |   |         |                                |   |                    |   |           |         |                                                                                    |   |              |   |   |           |   |   |           |   |   |   |   |
| 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 |   |           |   | 30,486 |           |   |   | 30,338 |   |
| PH Group Holdings (13)(17)                             |   |         | Healthcare Services, Other          |   | Senior Secured          |   | September 2020 |         | Interest rate PRIME + 7.45% or Floor rate of 10.95%                                     |   | $                 | 20,000 |   |           |   | 19,889 |           |   |   | 19,806 |   |
|                                                   |   |         | Healthcare Services, Other          |   | Senior Secured          |   | September 2020 |         | Interest rate PRIME + 7.45% or Floor rate of 10.95%                                     |   | $                 | 10,000 |   |  

  | 9,938  |   |           |   | 9,896 |   |
| Total PH Group Holdings                                |   |         |                                |   |                    |   |           |         |                                                                                    |   | $                 | 30,000 |   |           | 29,827 |   |           |   | 29,702 |   |
| Subtotal: 1-5 Years Maturity                           |   |         |                                |   |                    |   | 60,313         |         |                                                                                    |   | 60,040            |   |
| Subtotal: Healthcare Services, Other (6.28%)*          |   |         |                                |   |                    |   | 60,313         |         |                                                                                    |   | 60,040            |   |
| 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%                  |   | $                 | 15,288 |   |  

  | 15,037 |   |           |   | 14,987 |   |
| Subtotal: 1-5 Years Maturity                           |   |         |                                |   |                    |   | 15,037         |         |                                                                                    | 14,987 |                   |
| Subtotal: Information Services (1.57%)*                |   |         |                                |   |                    |   | 15,037         |         |                                                                                    | 14,987 |                   |

 

See notes to consolidated financial statements

23

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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                     |   |   |                                      |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   |   |      |   |   |   |   |
| Under 1 Year Maturity                                         |   |   |                                      |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   |   |      |   |   |   |   |
| LogicSource                                                   |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | October 2019   |   | Interest rate PRIME + 6.25% or Floor rate of 9.75%, 5.00% Exit Fee                      |   | $                | 3,099  |   |     | $      | 3,486  |      |   | $ | 3,486 |   |
| The Faction Group LLC (11)                                    |   |   | 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                               |   |   |                                      |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   | 5,486  |      |   |   | 5,486 |   |
| 1-5 Years Maturity                                            |   |   |                                      |   |                    |   |           |   |                                                                                    |   |             |   |   |     |   |   |      |   |   |   |   |
| AppDirect, Inc. (11)(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 |   |     |   | 20,006 |      |   |   | 19,941 |   |
| Art.com, Inc. (12)(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 |   | $                | 10,117 |   |     |   | 10,020 |      |   |   | 10,028 |   |
| 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 |   |     |   | 11,017 |      |   |   | 11,020 |   |
| Contentful, Inc. (5)(10)(14)                                  |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 2.95% or Floor rate of 7.95%, PIK Interest 1.25%                  |   | $                | 3,750  |   |     |   | 3,692  |      |   |   | 3,692 |   |
| Convercent, Inc. (14)(15)(17)                                 |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 2.55% or Floor rate of 7.80%, PIK Interest 2.95%, 1.00% Exit Fee  |   | $                | 7,500  |   |     |   | 7,419  |      |   |   | 7,419 |   |
| EverFi, Inc. (11)(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%                  |   | $                | 60,729 |   |     |   | 60,687 |      |   |   | 60,408 |   |
| Fastly, Inc. (17)(19)                                         |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | December 2021  |   | Interest rate PRIME + 4.25%, 1.50% Exit Fee                                             |   | $                | 6,667  |   |     |   | 6,563  |      |   |   | 6,563 |   |
| First Insight, Inc. (15)                                      |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | November 2021  |   | Interest rate PRIME + 6.25% or Floor rate of 11.25%                                     |   | $                | 7,500  |   |     |   | 7,368  |      |   |   | 7,375 |   |
| Greenphire, Inc. (17)                                         |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | January 2021   |   | Interest rate 3-month LIBOR + 8.00% or Floor rate of 9.00%                              |   | $                | 2,776  |   |     |   | 2,776  |      |   |   | 2,785 |   |
|                                                          |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | January 2021   |   | Interest rate PRIME + 3.75% or Floor rate of 7.00%                                      |   | $                | 1,500  |   |     |   | 1,500  |      |   |   | 1,498 |   |
| Total Greenphire, Inc.                                        |   |   |                                      |   |                    |   |           |   |                                                                                    |   | $                | 4,276  |   |     |   | 4,276  |      |   |   | 4,283 |   |
| Intent Media, Inc. (12)(17)                                   |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | September 2021 |   | Interest rate PRIME + 5.13% or Floor rate of 10.125%, 2.00% Exit Fee                    |   | $                | 12,200 |   |     |   | 12,210 |      |   |   | 12,147 |   |
| Interactions Corporation (11)(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 |   |     |   | 25,092 |      |   |   | 24,987 |   |
| Postmates, Inc. (17)(19)                                      |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | September 2022 |   | Interest rate PRIME + 3.85% or Floor rate of 8.85%, 8.05% Exit Fee                      |   | $                | 20,000 |   |     |   | 19,666 |      |   |   | 19,666 |   |
| 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  |   |     |   | 5,018  |      |   |   | 4,984 |   |
|                                                          |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | October 2021   |   | Interest rate PRIME + 5.75% or Floor rate of 10.25%, 2.95% Exit Fee                     |   | $                | 5,000  |   |     |   | 4,941  |      |   |   | 4,941 |   |
| Total RumbleON, Inc.                                          |   |   |                                      |   |                    |   |           |   |                                                                                    |   | $                | 10,000 |   |     |   | 9,959  |      |   |   | 9,925 |   |
| 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  |   | $                | 41,841 |   |     |   | 42,139 |      |   |   | 42,075 |   |
|                                                          |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | July 2020      |   | Interest rate PRIME + 5.65% or Floor rate of 10.65%, PIK Interest 1.95%, 2.55% Exit Fee |   | $                | 5,033  |   |     |   | 4,867  |      |   |   | 4,867 |   |
| Total Snagajob.com, Inc.                                      |   |   |                                      |   |                    |   |           |   |                                                                                    |   | $                | 46,874 |   |     |   | 47,006 |      |   |   | 46,942 |   |
| Tectura Corporation (7)(8)(9)(14)                             |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | June 2021      |   | Interest rate FIXED 6.00%, PIK Interest 3.00%                                           |   | $                | 20,924 |   |     |   | 20,924 |      |   |   | 18,128 |   |
|                                                          |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | June 2021      |   | PIK Interest 8.00%                                                                      |   | $                | 10,680 |   |     |   | 240    |      |   |   | — |   |
| Total Tectura Corporation                                     |   |   |                                      |   |                    |   |           |   |                                                                                    |   | $                | 31,604 |   |     |   | 21,164 |      |   |   | 18,128 |   |
| The Faction Group LLC (11)                                    |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | January 2021   |   | Interest rate 3-month LIBOR + 9.25% or Floor rate of 10.25%                             |   | $                | 6,667  |   |     |   | 6,667  |      |   |   | 6,653 |   |
| Wheels Up Partners LLC  (11)                                  |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | July 2022      |   | Interest rate 3-month LIBOR + 8.55% or Floor rate of 9.55%                              |   | $                | 20,241 |   |     |   | 20,076 |      |   |   | 19,921 |   |
| Xometry, Inc. (13)(17)(19)                                    |   |   | Internet Consumer & Business Services |   | Senior Secured          |   | November 2021  |   | Interest rate PRIME + 3.95% or Floor rate of 8.45%, 7.09% Exit Fee                      |   | $                | 11,000 |   |     |   | 10,997 |      |   |   | 10,995 |   |
| Subtotal: 1-5 Years Maturity                                  |   |   |                                      |   |                    |   | 303,885        |   |                                                                                    |   | 300,093          |   |
| Subtotal: Internet Consumer & Business Services (31.98%)* |   |   |                                      |   |                    |   | 309,371        |   |                                                                                    |   | 305,579          |   |

 

See notes to consolidated financial statements

24

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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) |   |
|-----------------------------------------------------|--------|--------|---------------------------------|--------|-------------------------|--------|---------------|--------|----------------------------------------------------------------------------------------|--------|------------------|--------|--------|----------|--------|--------|-----------|--------|
| 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%, 3.12% Exit Fee |   | $                | 15,315 |   |     | $      | 15,336 |      |   | $ | 15,453 |   |
| Subtotal: 1-5 Years Maturity                        |   |   |                            |   |                    |   | 15,336        |   |                                                                                   |   | 15,453           |   |
| Subtotal: Media/Content/Info (1.62%)*               |   |   |                            |   |                    |   | 15,336        |   |                                                                                   |   | 15,453           |   |
| Medical Devices & Equipment                     |   |   |                            |   |                    |   |          |   |                                                                                   |   |             |   |   |     |   |   |      |   |   |   |   |
| Under 1 Year Maturity                               |   |   |                            |   |                    |   |          |   |                                                                                   |   |             |   |   |     |   |   |      |   |   |   |   |
| Micell Technologies, Inc. (11)                      |   |   | Medical Devices & Equipment |   | Senior Secured          |   | August 2019   |   | Interest rate PRIME + 7.25% or Floor rate of 10.50%, 5.00% Exit Fee                    |   | $                | 2,323  |   |     |   | 2,724  |      |   |   | 2,405 |   |
| Subtotal: Under 1 Year Maturity                     |   |   |                            |   |                    |   |          |   |                                                                                   |   |             |   |   |     |   | 2,724  |      |   |   | 2,405 |   |
| 1-5 Years Maturity                                  |   |   |                            |   |                    |   |          |   |                                                                                   |   |             |   |   |     |   |   |      |   |   |   |   |
| Flowonix Medical, Inc.  (11)(14)                    |   |   | Medical Devices & Equipment |   | Senior Secured          |   | October 2021  |   | Interest rate PRIME + 4.00% or Floor rate of 9.00%, PIK Interest 0.5%, 7.95% Exit Fee  |   | $                | 15,007 |   |     |   | 14,673 |      |   |   | 14,673 |   |
| Intuity Medical, Inc. (11)(15)                      |   |   | Medical Devices & Equipment |   | Senior Secured          |   | June 2021     |   | Interest rate PRIME + 5.00% or Floor rate of 9.25%, 5.95% Exit Fee                     |   | $                | 17,500 |   |     |   | 17,504 |      |   |   | 17,417 |   |
| Quanta Fluid Solutions  (5)(10)                     |   |   | Medical Devices & Equipment |   | Senior Secured          |   | April 2020    |   | Interest rate PRIME + 8.05% or Floor rate of 11.55%, 5.00% Exit Fee                    |   | $                | 5,806  |   |     |   | 6,324  |      |   |   | 6,344 |   |
| Quanterix Corporation (11)                          |   |   | Medical Devices & Equipment |   | Senior Secured          |   | March 2020    |   | Interest rate PRIME + 2.75% or Floor rate of 8.00%, 0.58% Exit Fee                     |   | $                | 7,688  |   |     |   | 7,656  |      |   |   | 7,577 |   |
| Rapid Micro Biosystems, Inc. (11)(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 |   |     |   | 18,143 |      |   |   | 18,013 |   |
| Sebacia, Inc. (11)(15)                              |   |   | Medical Devices & Equipment |   | Senior Secured          |   | January 2021  |   | Interest rate PRIME + 4.35% or Floor rate of 8.85%, 6.05% Exit Fee                     |   | $                | 11,000 |   |     |   | 11,151 |      |   |   | 11,071 |   |
| Transenterix, Inc. (10)(11)                         |   |   | Medical Devices & Equipment |   | Senior Secured          |   | June 2022     |   | Interest rate PRIME + 4.55% or Floor rate of 9.55%, 6.95% Exit Fee                     |   | $                | 30,000 |   |     |   | 29,972 |      |   |   | 29,852 |   |
| Subtotal: 1-5 Years Maturity                        |   |   |                            |   |                    |   | 105,423       |   |                                                                                   |   | 104,947          |   |
| Subtotal: Medical Devices & Equipment (11.24%)* |   |   |                            |   |                    |   | 108,147       |   |                                                                                   |   | 107,352          |   |
| 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  |   |     |   | 7,214  |      |   |   | 7,214 |   |
| Subtotal: Under 1 Year Maturity                     |   |   |                            |   |                    |   | 7,214         |   |                                                                                   |   | 7,214            |   |

 

See notes to consolidated financial statements

25

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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) |   |
|-------------------------------------------------|--------|--------|--------------|--------|-------------------------|--------|----------------|--------|----------------------------------------------------------------------------------------|--------|------------------|--------|--------|----------|--------|--------|-----------|--------|
| 1-5 Years Maturity                              |   |   |         |   |                    |   |           |   |                                                                                   |   |             |   |   |     |   |   |      |   |   |   |   |
| Abrigo (p.k.a. Banker's Toolbox, Inc.) (13)(18) |   |   | Software     |   | Senior Secured          |   | March 2023     |   | Interest rate 3-month LIBOR + 7.88% or Floor rate of 7.88%                             |   | $                | 39,701 |   |     | $      | 38,871 |      |   | $ | 38,617 |   |
| Businessolver.com, Inc. (16)(17)                |   |   | Software     |   | Senior Secured          |   | May 2023       |   | Interest rate 3-month LIBOR + 7.50% or Floor rate of 7.50%                             |   | $                | 52,913 |   |     |   | 51,958 |      |   |   | 51,417 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | May 2023       |   | Interest rate 3-month LIBOR + 7.50% or Floor rate of 7.50%                             |   | $                | 2,550  |   |     |   | 2,551  |      |   |   | 2,550 |   |
| Total Businessolver.com, Inc.                   |   | $      | 55,463       |   |                    |   | 54,509         |   |                                                                                   |   | 53,967           |   |
| Clarabridge, Inc. (12)(14)(17)                  |   |   | Software     |   | Senior Secured          |   | April 2022     |   | Interest rate PRIME + 4.80% or Floor rate of 8.55%, PIK Interest 2.25%                 |   | $                | 42,300 |   |     |   | 41,843 |      |   |   | 41,921 |   |
| Cloudian, Inc.                                  |   |   | Software     |   | Senior Secured          |   | November 2022  |   | Interest rate PRIME + 3.25% or Floor rate of 8.25%, 9.75% Exit Fee                     |   | $                | 15,000 |   |     |   | 14,814 |      |   |   | 14,814 |   |
| Couchbase, Inc. (15)(17)(19)                    |   |   | Software     |   | Senior Secured          |   | September 2021 |   | Interest rate PRIME + 5.25% or Floor rate of 10.75%                                    |   | $                | 15,000 |   |     |   | 14,921 |      |   |   | 14,921 |   |
| Credible Behavioral Health, Inc. (14)(17)       |   |   | Software     |   | Senior Secured          |   | September 2021 |   | Interest rate PRIME + 3.20% or Floor rate of 7.95%, PIK Interest 3.30%                 |   | $                | 7,573  |   |     |   | 7,493  |      |   |   | 7,493 |   |
| 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 |   | $                | 10,067 |   |     |   | 10,107 |      |   |   | 10,137 |   |
| DocuTAP, Inc. (17)                              |   |   | Software     |   | Senior Secured          |   | October 2023   |   | Interest rate 3-month LIBOR + 8.00% or Floor rate of 8.00%                             |   | $                | 14,000 |   |     |   | 13,609 |      |   |   | 13,609 |   |
| Emma, Inc. (17)(18)                             |   |   | Software     |   | Senior Secured          |   | September 2022 |   | Interest rate 3-month LIBOR + 8.39% or Floor rate of 8.39%                             |   | $                | 37,037 |   |     |   | 35,858 |      |   |   | 35,251 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | September 2022 |   | Interest rate 3-month LIBOR + 8.18% or Floor rate of 8.18%                             |   | $                | 6,000  |   |     |   | 5,827  |      |   |   | 5,826 |   |
| Total Emma, Inc.                                |   | $      | 43,037       |   |                    |   | 41,685         |   |                                                                                   |   | 41,077           |   |
| Evernote Corporation (14)(15)(17)(19)           |   |   | Software     |   | Senior Secured          |   | October 2020   |   | Interest rate PRIME + 5.45% or Floor rate of 8.95%                                     |   | $                | 5,549  |   |     |   | 5,537  |      |   |   | 5,592 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | July 2021      |   | Interest rate PRIME + 6.00% or Floor rate of 9.50%, PIK Interest 1.25%                 |   | $                | 4,074  |   |     |   | 4,058  |      |   |   | 4,074 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | July 2022      |   | Interest rate PRIME + 6.00% or Floor rate of 9.50%, PIK Interest 1.25%                 |   | $                | 5,015  |   |     |   | 4,982  |      |   |   | 4,993 |   |
| Total Evernote Corporation                      |   | $      | 14,638       |   |                    |   | 14,577         |   |                                                                                   |   | 14,659           |   |
| 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 |   | $                | 51,129 |   |     |   | 51,284 |      |   |   | 51,943 |   |
| Impact Radius Holdings, Inc. (11)(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 |   | $                | 10,191 |   |     |   | 10,271 |      |   |   | 10,237 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | December 2020  |   | Interest rate PRIME + 4.25% or Floor rate of 8.75%, PIK Interest 1.55%                 |   | $                | 2,014  |   |     |   | 2,014  |      |   |   | 2,008 |   |
| Total Impact Radius Holdings, Inc.              |   | $      | 12,205       |   |                    |   | 12,285         |   |                                                                                   |   | 12,245           |   |
| Insurance Technologies Corporation (17)(18)     |   |   | Software     |   | Senior Secured          |   | March 2023     |   | Interest rate 3-month LIBOR + 7.82% or Floor rate of 8.75%                             |   | $                | 12,500 |   |     |   | 12,258 |      |   |   | 12,071 |   |
| Lightbend, Inc. (14)(15)                        |   |   | Software     |   | Senior Secured          |   | February 2022  |   | Interest rate PRIME + 4.25% or Floor rate of 8.50%, PIK Interest 2.00%                 |   | $                | 16,179 |   |     |   | 15,850 |      |   |   | 15,741 |   |
| Lithium Technologies, Inc. (11)(16)(17)         |   |   | Software     |   | Senior Secured          |   | October 2022   |   | Interest rate 1-month LIBOR + 8.00% or Floor rate of 9.00%                             |   | $                | 12,000 |   |     |   | 11,785 |      |   |   | 11,659 |   |
|                                            |   |   | Software     |   | Senior Secured          |   | October 2022   |   | Interest rate 1-month LIBOR + 8.00% or Floor rate of 9.00%                             |   | $                | 43,000 |   |     |   | 42,047 |      |   |   | 42,047 |   |
| Total Lithium Technologies, Inc.                |   | $      | 55,000       |   |                    |   | 53,832         |   |                                                                                   |   | 53,706           |   |
| 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 |   |     |   | 11,854 |      |   |   | 11,842 |   |
| Quid, Inc. (14)(15)                             |   |   | Software     |   | Senior Secured          |   | February 2021  |   | Interest rate PRIME + 4.75% or Floor rate of 8.25%, PIK Interest 2.25%, 3.00% Exit Fee |   | $                | 8,494  |   |     |   | 8,632  |      |   |   | 8,619 |   |

 

See notes to consolidated financial statements

26

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 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) |   |
|------------------------------------------------------------------|--------|--------|--------------------------------------|--------|-------------------------|--------|---------------|--------|----------------------------------------------------------------------------------------|--------|------------------|--------|--------|----------|--------|--------|-----------|--------|
| RapidMiner, Inc. (12)(14)                                        |   |   | Software                             |   | Senior Secured          |   | December 2020 |   | Interest rate PRIME + 5.50% or Floor rate of 9.75%, PIK Interest 1.65%                 |   | $                | 7,119  |   |     | $      | 7,018  |      |   | $ | 6,965 |   |
| Regent Education (14)                                            |   |   | Software                             |   | Senior Secured          |   | January 2021  |   | Interest rate FIXED 10.00%, PIK Interest 2.00%, 6.35% Exit Fee                         |   | $                | 3,092  |   |     |   | 3,115  |      |   |   | 1,579 |   |
| Salsa Labs, Inc. (11)(17)                                        |   |   | Software                             |   | Senior Secured          |   | April 2023    |   | Interest rate 3-month LIBOR + 8.15% or Floor rate of 9.15%                             |   | $                | 6,000  |   |     |   | 5,894  |      |   |   | 5,823 |   |
| Signpost, Inc. (11)(14)                                          |   |   | Software                             |   | Senior Secured          |   | February 2020 |   | Interest rate PRIME + 4.15% or Floor rate of 8.15%, PIK Interest 1.75%, 5.75% Exit Fee |   | $                | 15,787 |   |     |   | 16,293 |      |   |   | 16,267 |   |
| ThreatConnect, Inc. (14)(15)(19)                                 |   |   | Software                             |   | Senior Secured          |   | October 2022  |   | Interest rate PRIME + 4.95% or Floor rate of 9.95%, PIK Interest 1.05%, 2.20% Exit Fee |   | $                | 7,519  |   |     |   | 7,443  |      |   |   | 7,443 |   |
| Vela Trading Technologies (11)(18)                               |   |   | Software                             |   | Senior Secured          |   | July 2022     |   | Interest rate 3-month LIBOR + 9.50% or Floor rate of 10.50%                            |   | $                | 19,750 |   |     |   | 19,345 |      |   |   | 19,309 |   |
| YouEarnedIt, Inc. (18)                                           |   |   | Software                             |   | Senior Secured          |   | July 2023     |   | Interest rate 1-month LIBOR + 8.66%                                                    |   | $                | 8,978  |   |     |   | 8,735  |      |   |   | 8,735 |   |
| ZocDoc (11)(19)                                                  |   |   | Software                             |   | Senior Secured          |   | August 2021   |   | Interest rate PRIME + 6.20% or Floor rate of 10.95%, 2.00% Exit Fee                    |   | $                | 30,000 |   |     |   | 30,003 |      |   |   | 29,875 |   |
| Subtotal: 1-5 Years Maturity                                     |   |   |                                 |   |                    |   | 516,270       |   |                                                                                   |   | 513,378          |   |
| Subtotal: Software (54.49%)*                                     |   |   |                                 |   |                    |   | 523,484       |   |                                                                                   |   | 520,592          |   |
| Sustainable and Renewable Technology                             |   |   |                                 |   |                    |   |          |   |                                                                                   |   |             |   |
| Under 1 Year Maturity                                            |   |   |                                 |   |                    |   |          |   |                                                                                   |   |             |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)(14)(19) |   |   | Sustainable and Renewable Technology |   | Senior Secured          |   | August 2019   |   | Interest rate PRIME + 8.70% or Floor rate of 12.95%, 5.00% Exit Fee                    |   | $                | 10,000 |   |     |   | 10,151 |      |   |   | 10,151 |   |
|                                                             |   |   | Sustainable and Renewable Technology |   | Senior Secured          |   | February 2019 |   | PIK Interest 10.00%                                                                    |   | $                | 649    |   |     |   | 650    |      |   |   | 650 |   |
|                                                             |   |   | Sustainable and Renewable Technology |   | Senior Secured          |   | February 2019 |   | Interest rate PRIME + 10.70% or Floor rate of 15.70%, PIK Interest 2.00%               |   | $                | 603    |   |     |   | 603    |      |   |   | 603 |   |
| Total Solar Spectrum LLC                                         |   |   |                                 |   |                    |   |          |   |                                                                                   |   | $                | 11,252 |   |     |   | 11,404 |      |   |   | 11,404 |   |
| Subtotal: Under 1 Year Maturity                                  |   |   |                                 |   |                    |   | 11,404        |   |                                                                                   |   | 11,404           |   |
| 1-5 Years Maturity                                               |   |   |                                 |   |                    |   |          |   |                                                                                   |   |             |   |
| 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 |   |     |   | 13,362 |      |   |   | 13,330 |   |
|                                                             |   |   | 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 |   |     |   | 11,908 |      |   |   | 11,874 |   |
| Total FuelCell Energy, Inc.                                      |   | $      | 25,000                               |   |                    | $      | 25,270        |   |                                                                                   | $      | 25,204           |   |
| Impossible Foods, Inc. (12)(17)                                  |   |   | Sustainable and Renewable Technology |   | Senior Secured          |   | January 2022  |   | Interest rate PRIME + 3.95% or Floor rate of 8.95%, 9.00% Exit Fee                     |   | $                | 30,000 |   |     |   | 29,981 |      |   |   | 29,680 |   |
| Metalysis Limited (5)(10)(11)                                    |   |   | Sustainable and Renewable Technology |   | Senior Secured          |   | March 2021    |   | Interest rate PRIME + 5.00% or Floor rate of 9.25%, 6.95% Exit Fee                     |   | $                | 7,254  |   |     |   | 7,400  |      |   |   | 7,360 |   |
| Proterra, Inc. (11)(14)                                          |   |   | 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 |   | $                | 25,484 |   |     |   | 26,775 |      |   |   | 26,888 |   |
|                                                             |   |   | 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 |   | $                | 5,097  |   |     |   | 5,381  |      |   |   | 5,386 |   |
| Total Proterra, Inc.                                             |   |   |                                 |   |                    |   |          |   |                                                                                   |   | $                | 30,581 |   |     |   | 32,156 |      |   |   | 32,274 |   |
| Subtotal: 1-5 Years Maturity                                     |   |   |                                 |   |                    |   | 94,807        |   |                                                                                   |   | 94,518           |   |
| Subtotal: Sustainable and Renewable Technology (11.09%)*         |   |   |                                 |   |                    |   | 106,211       |   |                                                                                   |   | 105,922          |   |
| Total: Debt Investments (181.43%)*                               |   |   |                                 |   |                    |   | 1,752,945     |   |                                                                                   |   | 1,733,492        |   |

 

See notes to consolidated financial statements

27

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company |   |   | Sub-Industry |   | Type of

Investment (1) |   | Series |   | Shares |   |   | Cost (3) |   |   | Value (4) |   |
|-------------------|--------|--------|--------------|--------|-------------------------|--------|--------|--------|--------|--------|--------|----------|--------|--------|-----------|--------|

| Equity Investments                                                                 |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |
|------------------------------------------------------------------------------------|--------|--------|-------------------------------------|--------|--------|--------|--------------------|--------|--------|------------|--------|--------|--------|--------|--------|--------|
| Communications & Networking                                                    |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |
| GlowPoint, Inc. (4)                                                                |   |   | Communications & Networking     |   | Equity |   | Common Stock       |   |   | 114,192    |   |   | $      | 102    |   |   | $ | 14 |   |  |
| Peerless Network Holdings, Inc.                                                    |   |   | Communications & Networking     |   | Equity |   | Preferred Series A |   |   | 1,135,000  |   |   |   | 1,229  |   |   |   | 4,847 |   |  |
| Subtotal: Communications & Networking (0.51%)*                                 |   |   |                                | 1,331  |   |   |               | 4,861  |   |            |
|  

Diagnostic                                                                 |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| Singulex, Inc.                                                                     |   |   | Diagnostic                          |   | Equity |   | Common Stock       |   |   | 937,998    |   |   |   | 750    |   |   |   | 348 |   |  |
| Subtotal: Diagnostic (0.04%)*                                                      |   |   |                                |   |   |   |               |   |   |       | 750    |   |   |   | 348    |   |  |
|  

Diversified Financial Services                                             |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| Gibraltar Business Capital, LLC. (7)                                               |   |   | Diversified Financial Services      |   | Equity |   | Common Stock       |   |   | 830,000    |   |   |   | 1,884  |   |   |   | 1,688 |   |  |
|                                                                               |   |   | Diversified Financial Services      |   | Equity |   | Preferred Series A |   |   | 10,602,752 |   |   |   | 26,122 |   |   |   | 23,402 |   |  |
| Total Gibraltar Business Capital, LLC                                              |   |   |                                |   |   |   | 11,432,752         |   |   |       | 28,006 |   |   |   | 25,090 |   |  |
| Subtotal: Diversified Financial Services (2.63%)*                                  |   |   |                                |   |   |   |               |   |   |       | 28,006 |   |   |   | 25,090 |   |  |
| Drug Delivery                                                                      |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| AcelRx Pharmaceuticals, Inc. (4)                                                   |   |   | Drug Delivery                       |   | Equity |   | Common Stock       |   |   | 176,730    |   |   |   | 1,329  |   |   |   | 318 |   |  |
| BioQ Pharma Incorporated (15)                                                      |   |   | Drug Delivery                       |   | Equity |   | Preferred Series D |   |   | 165,000    |   |   |   | 500    |   |   |   | 599 |   |  |
| Edge Therapeutics, Inc. (4)                                                        |   |   | Drug Delivery                       |   | Equity |   | Common Stock       |   |   | 49,965     |   |   |   | 309    |   |   |   | 16 |   |  |
| Neos Therapeutics, Inc. (4)(15)                                                    |   |   | Drug Delivery                       |   | Equity |   | Common Stock       |   |   | 125,000    |   |   |   | 1,500  |   |   |   | 206 |   |  |
| Subtotal: Drug Delivery (0.12%)*                                                   |   |   |                                |   |   |   |               |   |   |       | 3,638  |   |   |   | 1,139  |   |  |
|  

Drug Discovery & Development                                           |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| Aveo Pharmaceuticals, Inc.  (4)(15)                                                |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 1,901,791  |   |   |   | 1,715  |   |   |   | 3,112 |   |  |
| Axovant Sciences Ltd. (4)(5)(10)(16)                                               |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 129,827    |   |   |   | 1,269  |   |   |   | 129 |   |  |
| BridgeBio Pharma LLC (16)                                                          |   |   | Drug Discovery & Development    |   | Equity |   | Preferred Series D |   |   | 1,008,929  |   |   |   | 2,000  |   |   |   | 1,819 |   |  |
| Cerecor, Inc. (4)                                                                  |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 119,087    |   |   |   | 1,000  |   |   |   | 385 |   |  |
| Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.) (4)                          |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 13,550     |   |   |   | 1,000  |   |   |   | 10 |   |  |
| Dicerna Pharmaceuticals, Inc. (4)                                                  |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 142,858    |   |   |   | 1,000  |   |   |   | 1,527 |   |  |
| Dynavax Technologies (4)(10)                                                       |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 20,000     |   |   |   | 550    |   |   |   | 183 |   |  |
| Eidos Therapeutics, Inc. (4)(10)                                                   |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 15,000     |   |   |   | 255    |   |   |   | 206 |   |  |
| Genocea Biosciences, Inc. (4)                                                      |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 223,463    |   |   |   | 2,000  |   |   |   | 64 |   |  |
| Insmed, Incorporated (4)                                                           |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 70,771     |   |   |   | 1,000  |   |   |   | 929 |   |  |
| Melinta Therapeutics (4)                                                           |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 51,821     |   |   |   | 2,000  |   |   |   | 42 |   |  |
| Paratek Pharmaceuticals, Inc. (p.k.a. Transcept Pharmaceuticals, Inc.) (4)(10)(16) |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 76,362     |   |   |   | 2,744  |   |   |   | 392 |   |  |
| Rocket Pharmaceuticals, Ltd (p.k.a. Inotek Pharmaceuticals Corporation) (4)        |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 944        |   |   |   | 1,500  |   |   |   | 14 |   |  |
| Tricida, Inc. (4)                                                                  |   |   | Drug Discovery & Development    |   | Equity |   | Common Stock       |   |   | 105,260    |   |   |   | 2,000  |   |   |   | 2,481 |   |  |
| Subtotal: Drug Discovery & Development (1.18%)*                                |   |   |                                |   |   |   |               |   |   |       | 20,033 |   |   |   | 11,293 |   |  |
|  

Electronics & Computer Hardware                                        |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| Identiv, Inc. (4)                                                                  |   |   | Electronics & Computer Hardware |   | Equity |   | Common Stock       |   |   | 6,700      |   |   |   | 34     |   |   |   | 24 |   |  |
| Subtotal: Electronics & Computer Hardware (0.00%)*                             |   |   |                                |   |   |   |               |   |   |       | 34     |   |   |   | 24     |   |  |
|  

Information Services                                                       |   |   |                                |   |   |   |               |   |   |       |   |   |   |   |   |   |  |
| DocuSign, Inc. (4)                                                                 |   |   | Information Services                |   | Equity |   | Common Stock       |   |   | 385,000    |   |   |   | 6,081  |   |   |   | 15,431 |   |  |
| Subtotal: Information Services (1.62%)*                                            |   |   |                                |   |   |   |               |   |   |       | 6,081  |   |   |   | 15,431 |   |  |

 

See notes to consolidated financial statements

28

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company                                            |   |   | Sub-Industry                              |   | Type of

Investment (1) |   | Series                |   | Shares |        |   | Cost (3) |   |    | Value (4) |   |
|--------------------------------------------------------------|--------|--------|-------------------------------------------|--------|-------------------------|--------|-----------------------|--------|--------|-------------|--------|----------|--------|---------|-----------|--------|
| Internet Consumer & Business Services                    |   |   |                                      |   |                    |   |                  |   |   |        |   |     |   |    |      |   |
| Blurb, Inc.                                                  |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series B    |   |   | 220,653     |   |     | $      | 175     |      |   | $ | 44 |   |
| Brigade Group, Inc. (p.k.a. Philotic, Inc.)                  |   |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock          |   |   | 9,023       |   |     |   | 93      |      |   |   | — |   |
| Contentful, Inc. (5)(10)                                     |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series D    |   |   | 217         |   |     |   | 500     |      |   |   | 504 |   |
| DoorDash, Inc.                                               |   |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock          |   |   | 105,000     |   |     |   | 6,051   |      |   |   | 6,051 |   |
| Lightspeed POS, Inc. (5)(10)                                 |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series C    |   |   | 230,030     |   |     |   | 250     |      |   |   | 363 |   |
|                                                         |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series D    |   |   | 198,677     |   |     |   | 250     |      |   |   | 326 |   |
| Total Lightspeed POS, Inc.                                   |   |   |                                      |   |                    |   | 428,707               |   |   |        | 500    |     |   |    | 689       |   |
| Lyft, Inc.                                                   |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series F    |   |   | 91,648      |   |     |   | 4,819   |      |   |   | 4,819 |   |
| Nextdoor.com, Inc.                                           |   |   | Internet Consumer & Business Services |   | Equity                  |   | Common Stock          |   |   | 328,190     |   |     |   | 4,854   |      |   |   | 4,854 |   |
| OfferUp, Inc.                                                |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series A    |   |   | 286,080     |   |     |   | 1,663   |      |   |   | 1,565 |   |
|                                                         |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series A-1  |   |   | 108,710     |   |     |   | 632     |      |   |   | 595 |   |
| Total OfferUp, Inc.                                          |   |   |                                      |   |                    |   | 394,790               |   |   |        | 2,295  |     |   |    | 2,160     |   |
| Oportun (p.k.a. Progress Financial)                          |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series G    |   |   | 218,351     |   |     |   | 250     |      |   |   | 537 |   |
|                                                         |   |   | Internet Consumer & Business Services |   | Equity                  |   | Preferred Series H    |   |   | 87,802      |   |     |   | 250     |      |   |   | 279 |   |
| Total Oportun (p.k.a. Progress Financial)                    |   |   |                                      |   |                    |   | 306,153               |   |   |        | 500    |     |   |    | 816       |   |
| 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 (2.09%)* |   |   |                                      |   |                    |   |                  |   |   |        | 20,687 |     |   |    | 19,937    |   |
|  

Media/Content/Info                                   |   |   |                                      |   |                    |   |                  |   |   |        |   |     |   |    |      |   |
| Pinterest, Inc.                                              |   |   | Media/Content/Info                        |   | Equity                  |   | Preferred Series Seed |   |   | 620,000     |   |     |   | 4,085   |      |   |   | 3,787 |   |
| Subtotal: Media/Content/Info (0.40%)*                        |   |   |                                      |   |                    |   |                  |   |   |        | 4,085  |     |   |    | 3,787     |   |
| Medical Devices & Equipment                              |   |   |                                      |   |                    |   |                  |   |   |        |   |     |   |    |      |   |
| AtriCure, Inc. (4)(15)                                       |   |   | Medical Devices & Equipment           |   | Equity                  |   | Common Stock          |   |   | 10,119      |   |     |   | 266     |      |   |   | 310 |   |
| Flowonix Medical Incorporated                                |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series AA   |   |   | 221,893     |   |     |   | 1,500   |      |   |   | 27 |   |
| Gelesis, Inc.                                                |   |   | Medical Devices & Equipment           |   | Equity                  |   | Common Stock          |   |   | 198,202     |   |     |   | — |      |   |   | 677 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series A-1  |   |   | 191,210     |   |     |   | 425     |      |   |   | 729 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series A-2  |   |   | 191,626     |   |     |   | 500     |      |   |   | 691 |   |
| Total Gelesis, Inc.                                          |   |   |                                      |   |                    |   | 581,038               |   |   |        | 925    |     |   |    | 2,097     |   |
| Medrobotics Corporation (15)                                 |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series E    |   |   | 136,798     |   |     |   | 250     |      |   |   | 24 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series F    |   |   | 73,971      |   |     |   | 155     |      |   |   | 26 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series G    |   |   | 163,934     |   |     |   | 500     |      |   |   | 87 |   |
| Total Medrobotics Corporation                                |   |   |                                      |   |                    |   | 374,703               |   |   |        | 905    |     |   |    | 137       |   |
| Optiscan Biomedical, Corp. (6)                               |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series B    |   |   | 61,855      |   |     |   | 3,000   |      |   |   | 393 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series C    |   |   | 19,273      |   |     |   | 655     |      |   |   | 111 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series D    |   |   | 551,038     |   |     |   | 5,257   |      |   |   | 3,524 |   |
|                                                         |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series E    |   |   | 311,989     |   |     |   | 2,609   |      |   |   | 2,771 |   |
| Total Optiscan Biomedical, Corp.                             |   |   |                                      |   |                    |   | 944,155               |   |   |        | 11,521 |     |   |    | 6,799     |   |
| Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)       |   |   | Medical Devices & Equipment           |   | Equity                  |   | Preferred Series B    |   |   | 232,061     |   |     |   | 527     |      |   |   | 473 |   |
| Quanterix Corporation (4)                                    |   |   | Medical Devices & Equipment           |   | Equity                  |   | Common Stock          |   |   | 84,778      |   |     |   | 1,000   |      |   |   | 1,553 |   |
| Subtotal: Medical Devices & Equipment (1.19%)*           |   |   |                                      |   |                    |   |                  |   |   |        | 16,644 |     |   |    | 11,396    |   |
| Software                                                     |   |   |                                      |   |                    |   |                  |   |   |        |   |     |   |    |      |   |
| CapLinked, Inc.                                              |   |   | Software                                  |   | Equity                  |   | Preferred Series A-3  |   |   | 53,614      |   |     |   | 51      |      |   |   | 87 |   |
| Docker, Inc.                                                 |   |   | Software                                  |   | Equity                  |   | Common Stock          |   |   | 200,000     |   |     |   | 4,284   |      |   |   | 4,284 |   |
| Druva, Inc.                                                  |   |   | Software                                  |   | Equity                  |   | Preferred Series 2    |   |   | 458,841     |   |     |   | 1,000   |      |   |   | 1,972 |   |
|                                                         |   |   | Software                                  |   | Equity                  |   | Preferred Series 3    |   |   | 93,620      |   |     |   | 300     |      |   |   | 433 |   |
| Total Druva, Inc.                                            |   |   |                                      |   |                    |   | 552,461               |   |   |        | 1,300  |     |   |    | 2,405     |   |
| HighRoads, Inc.                                              |   |   | Software                                  |   | Equity                  |   | Common Stock          |   |   | 190         |   |     |   | 307     |      |   |   | — |   |
| Palantir Technologies                                        |   |   | Software                                  |   | Equity                  |   | Preferred Series D    |   |   | 9,535       |   |     |   | 47      |      |   |   | 47 |   |
|                                                         |   |   | Software                                  |   | Equity                  |   | Preferred Series E    |   |   | 1,749,089   |   |     |   | 10,489  |      |   |   | 8,662 |   |
|                                                         |   |   | Software                                  |   | Equity                  |   | Preferred Series G    |   |   | 326,797     |   |     |   | 2,211   |      |   |   | 1,618 |   |
| Total Palantir Technologies                                  |   |   |                                      |   |                    |   | 2,085,421             |   |   |        | 12,747 |     |   |    | 10,327    |   |
| Sprinklr, Inc.                                               |   |   | Software                                  |   | Equity                  |   | Common Stock          |   |   | 700,000     |   |     |   | 3,749   |      |   |   | 3,226 |   |
| WildTangent, Inc.                                            |   |   | Software                                  |   | Equity                  |   | Preferred Series 3    |   |   | 100,000     |   |     |   | 402     |      |   |   | 176 |   |
| Subtotal: Software (2.15%)*                                  |   |   |                                      |   |                    |   |                  |   |   |        | 22,840 |     |   |    | 20,505    |   |

 

See notes to consolidated financial statements

29

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company                                             |   |   | Sub-Industry                         |   | Type of

Investment (1) |   | Series               |   | Shares |      |    | Cost (3) |   |   | Value (4) |   |
|---------------------------------------------------------------|--------|--------|--------------------------------------|--------|-------------------------|--------|----------------------|--------|--------|-----------|---------|----------|--------|--------|-----------|--------|
| Surgical Devices                                              |   |   |                                 |   |                    |   |                 |   |   |      |    |     |   |   |      |   |
| Gynesonics, Inc. (15)                                         |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series B   |   |   | 219,298   |    |     | $      | 250    |      |   | $ | 8 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series C   |   |   | 656,538   |    |     |   | 282    |      |   |   | 25 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series D   |   |   | 1,991,157 |    |     |   | 712    |      |   |   | 79 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series E   |   |   | 2,786,367 |    |     |   | 429    |      |   |   | 125 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series F   |   |   | 1,523,693 |    |     |   | 118    |      |   |   | 117 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series F-1 |   |   | 2,418,125 |    |     |   | 150    |      |   |   | 167 |   |
| Total Gynesonics, Inc.                                        |   |   |                                 |   |                    |   | 9,595,178            |   |   |      | 1,941   |     |   |   | 521       |   |
| Transmedics, Inc.                                             |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series B   |   |   | 88,961    |    |     |   | 1,100  |      |   |   | 356 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series C   |   |   | 119,999   |    |     |   | 300    |      |   |   | 479 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series D   |   |   | 260,000   |    |     |   | 650    |      |   |   | 1,040 |   |
|                                                          |   |   | Surgical Devices                     |   | Equity                  |   | Preferred Series F   |   |   | 100,200   |    |     |   | 500    |      |   |   | 401 |   |
| Total Transmedics, Inc.                                       |   |   |                                 |   |                    |   | 569,160              |   |   |      | 2,550   |     |   |   | 2,276     |   |
| Subtotal: Surgical Devices (0.29%)*                           |   |   |                                 |   |                    |   |                 |   |   |      | 4,491   |     |   |   | 2,797     |   |
| 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    |      |   |   | 40 |   |
| Proterra, Inc.                                                |   |   | Sustainable and Renewable Technology |   | Equity                  |   | Preferred Series 5   |   |   | 99,280    |    |     |   | 500    |      |   |   | 449 |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)      |   |   | Sustainable and Renewable Technology |   | Equity                  |   | Common Stock         |   |   | 380       |    |     |   | 61,502 |      |   |   | 3,115 |   |
| Subtotal: Sustainable and Renewable Technology (0.38%)*       |   |   |                                 |   |                    |   |                 |   |   |      | 63,263  |     |   |   | 3,604     |   |
| Total: Equity Investments (12.58%)*                           |   |   |                                 |   |                    |   |                 |   |   |      | 191,883 |     |   |   | 120,212   |   |

 

See notes to consolidated financial statements

30

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company                                   |   |   | Sub-Industry                     |   | Type of

Investment (1) |   | Series               |   | Shares |      |   | Cost (3) |   |    | Value (4) |   |
|-----------------------------------------------------|--------|--------|----------------------------------|--------|-------------------------|--------|----------------------|--------|--------|-----------|--------|----------|--------|---------|-----------|--------|
| Warrant Investments                                 |   |   |                             |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Biotechnology Tools                                 |   |   |                             |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Labcyte, Inc.                                       |   |   | Biotechnology Tools              |   | Warrant                 |   | Preferred Series C   |   |   | 1,127,624 |   |     | $      | 323     |      |   | $ | 1,114 |   |
| Subtotal: Biotechnology Tools (0.12%)*              |   |   |                             |   |                    |   |                 |   |   |      | 323    |     |   |    | 1,114     |   |
| Communications & Networking                     |   |   |                             |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Peerless Network Holdings, Inc.                     |   |   | Communications & Networking  |   | Warrant                 |   | Common Stock         |   |   | 3,328     |   |     |   | — |      |   |   | 10 |   |
| Spring Mobile Solutions, Inc.                       |   |   | Communications & Networking  |   | Warrant                 |   | Common Stock         |   |   | 2,834,375 |   |     |   | 418     |      |   |   | — |   |
| Subtotal: Communications & Networking (0.00%)*  |   |   |                             |   |                    |   |                 |   |   |      | 418    |     |   |    | 10        |   |
| Consumer & Business Products                    |   |   |                             |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Gadget Guard (p.k.a Antenna79) (15)                 |   |   | Consumer & Business Products |   | Warrant                 |   | Common Stock         |   |   | 1,662,441 |   |     |   | 228     |      |   |   | — |   |
| Intelligent Beauty, Inc.                            |   |   | Consumer & Business Products |   | Warrant                 |   | Preferred Series B   |   |   | 190,234   |   |     |   | 230     |      |   |   | 191 |   |
| The Neat Company                                    |   |   | Consumer & Business Products |   | Warrant                 |   | Preferred Series C-1 |   |   | 540,540   |   |     |   | 365     |      |   |   | — |   |
| WHOOP, INC.                                         |   |   | Consumer & Business Products |   | Warrant                 |   | Preferred Series C   |   |   | 68,627    |   |     |   | 18      |      |   |   | 5 |   |
| Subtotal: Consumer & Business Products (0.02%)* |   |   |                             |   |                    |   |                 |   |   |      | 841    |     |   |    | 196       |   |
| Drug Delivery                                       |   |   |                             |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Agile Therapeutics, Inc. (4)                        |   |   | Drug Delivery                    |   | Warrant                 |   | Common Stock         |   |   | 180,274   |   |     |   | 730     |      |   |   | 6 |   |
| BioQ Pharma Incorporated                            |   |   | Drug Delivery                    |   | Warrant                 |   | Common Stock         |   |   | 459,183   |   |     |   | 1       |      |   |   | 525 |   |
| Dance Biopharm, Inc. (15)                           |   |   | Drug Delivery                    |   | Warrant                 |   | Common Stock         |   |   | 110,882   |   |     |   | 74      |      |   |   | — |   |
| Edge Therapeutics, Inc. (4)                         |   |   | Drug Delivery                    |   | Warrant                 |   | Common Stock         |   |   | 78,595    |   |     |   | 390     |      |   |   | 3 |   |
| Kaleo, Inc. (p.k.a. Intelliject, Inc.)              |   |   | Drug Delivery                    |   | Warrant                 |   | Preferred Series B   |   |   | 82,500    |   |     |   | 593     |      |   |   | 1,923 |   |
| Neos Therapeutics, Inc. (4)(15)                     |   |   | Drug Delivery                    |   | Warrant                 |   | Common Stock         |   |   | 70,833    |   |     |   | 285     |      |   |   | — |   |
| 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 (0.26%)*                    |   |   |                             |   |                    |   |                 |   |   |      | 2,455  |     |   |    | 2,457     |   |

 

See notes to consolidated financial statements

31

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 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)(10)                                                             |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 201,330   |   |     | $      | 304    |      |   | $ | 52 |   |
| ADMA Biologics, Inc. (4)                                                               |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 89,750    |   |     |   | 295    |      |   |   | 5 |   |
| 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    |      |   |   | 48 |   |
| Cerecor, Inc. (4)                                                                      |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 22,328    |   |     |   | 70     |      |   |   | 8 |   |
| Chroma Therapeutics, Ltd. (5)(10)                                                      |   |   | Drug Discovery & Development    |   | Warrant                 |   | Preferred Series D |   |   | 325,261   |   |     |   | 490    |      |   |   | — |   |
| Concert Pharmaceuticals, Inc. (4)(10)(15)                                              |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 132,069   |   |     |   | 545    |      |   |   | 289 |   |
| 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    |      |   |   | — |   |
| Dare Biosciences, Inc. (p.k.a. Cerulean Pharma, Inc.) (4)                              |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 17,190    |   |     |   | 369    |      |   |   | — |   |
| Dicerna Pharmaceuticals, Inc. (4)                                                      |   |   | 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    |      |   |   | 15 |   |
| Fortress Biotech, Inc. (p.k.a. Coronado Biosciences, Inc.) (4)                         |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 73,009    |   |     |   | 142    |      |   |   | — |   |
| Genocea Biosciences, Inc. (4)                                                          |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 403,136   |   |     |   | 431    |      |   |   | 40 |   |
| 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    |      |   |   | 78 |   |
| Myovant Sciences, Ltd. (4)(5)(10)                                                      |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 73,710    |   |     |   | 460    |      |   |   | 502 |   |
| 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       |   |   | 94,841    |   |     |   | 204    |      |   |   | 20 |   |
| Savara Inc. (p.k.a. Mast Therapeutics, Inc.) (4)(15)                                   |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 32,467    |   |     |   | 203    |      |   |   | 52 |   |
| Sorrento Therapeutics, Inc. (4)(10)                                                    |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 306,748   |   |     |   | 889    |      |   |   | 192 |   |
| Stealth Bio Therapeutics Corp.  (5)(10)                                                |   |   | Drug Discovery & Development    |   | Warrant                 |   | Preferred Series A |   |   | 216,666   |   |     |   | 158    |      |   |   | 55 |   |
| Tricida, Inc. (4)(15)                                                                  |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 106,916   |   |     |   | 863    |      |   |   | 1,268 |   |
| uniQure B.V. (4)(5)(10)                                                                |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 37,174    |   |     |   | 218    |      |   |   | 468 |   |
| X4 Pharmaceuticals, Inc.                                                               |   |   | Drug Discovery & Development    |   | Warrant                 |   | Preferred Series B |   |   | 210,638   |   |     |   | 270    |      |   |   | 206 |   |
| XOMA Corporation (4)(10)(15)                                                           |   |   | Drug Discovery & Development    |   | Warrant                 |   | Common Stock       |   |   | 9,063     |   |     |   | 279    |      |   |   | 2 |   |
| Subtotal: Drug Discovery & Development (0.35%)*                                    |   |   |                                |   |                    |   |               |   |   |      | 9,164  |     |   |   | 3,300     |   |
| Electronics & Computer Hardware                                                    |   |   |                                |   |                    |   |               |   |   |      |   |     |   |   |      |   |
| 908 DEVICES INC. (15)                                                                  |   |   | Electronics & Computer Hardware |   | Warrant                 |   | Preferred Series D |   |   | 79,856    |   |     |   | 101    |      |   |   | 28 |   |
| Subtotal: Electronics & Computer Hardware (0.00%)*                                 |   |   |                                |   |                    |   |               |   |   |      | 101    |     |   |   | 28        |   |
| Healthcare Services, Other                                                             |   |   |                                |   |                    |   |               |   |   |      |   |     |   |   |      |   |
| Chromadex Corporation (4)                                                              |   |   | Healthcare Services, Other          |   | Warrant                 |   | Common Stock       |   |   | 139,673   |   |     |   | 157    |      |   |   | 102 |   |
| Subtotal: Healthcare Services, Other (0.01%)*                                          |   |   |                                |   |                    |   |               |   |   |      | 157    |     |   |   | 102       |   |
| Information Services                                                                   |   |   |                                |   |                    |   |               |   |   |      |   |     |   |   |      |   |
| INMOBI Inc. (5)(10)                                                                    |   |   | Information Services                |   | Warrant                 |   | Common Stock       |   |   | 65,587    |   |     |   | 82     |      |   |   | — |   |
| MDX Medical, Inc. (15)                                                                 |   |   | Information Services                |   | Warrant                 |   | Common Stock       |   |   | 2,812,500 |   |     |   | 283    |      |   |   | 144 |   |
| Netbase Solutions, Inc.                                                                |   |   | Information Services                |   | Warrant                 |   | Preferred Series 1 |   |   | 60,000    |   |     |   | 356    |      |   |   | 378 |   |
| RichRelevance, Inc.                                                                    |   |   | Information Services                |   | Warrant                 |   | Preferred Series E |   |   | 112,612   |   |     |   | 98     |      |   |   | — |   |
| Subtotal: Information Services (0.05%)*                                                |   |   |                                |   |                    |   |               |   |   |      | 819    |     |   |   | 522       |   |

 

See notes to consolidated financial statements

32

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company                                             |   |   | Sub-Industry                              |   | Type of

Investment (1) |   | Series               |   | Shares |      |   | Cost (3) |   |    | Value (4) |   |
|---------------------------------------------------------------|--------|--------|-------------------------------------------|--------|-------------------------|--------|----------------------|--------|--------|-----------|--------|----------|--------|---------|-----------|--------|
| 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      |      |   |   | — |   |
| Blurb, Inc. (15)                                              |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C   |   |   | 234,280   |   |     |   | 636     |      |   |   | 13 |   |
| ClearObject, Inc. (p.k.a. CloudOne, Inc.)                     |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series E   |   |   | 968,992   |   |     |   | 19      |      |   |   | 27 |   |
| Cloudpay, Inc. (5)(10)                                        |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B   |   |   | 4,960     |   |     |   | 45      |      |   |   | 11 |   |
| Contentful, Inc. (5)(10)                                      |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C   |   |   | 82        |   |     |   | 1       |      |   |   | 41 |   |
| Fastly, Inc.                                                  |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series F   |   |   | 152,195   |   |     |   | 71      |      |   |   | 72 |   |
| First Insight, Inc. (15)                                      |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B   |   |   | 56,938    |   |     |   | 70      |      |   |   | 55 |   |
| Intent Media, Inc.                                            |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock         |   |   | 140,077   |   |     |   | 168     |      |   |   | 168 |   |
| Interactions Corporation                                      |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series G-3 |   |   | 68,187    |   |     |   | 204     |      |   |   | 401 |   |
| Just Fabulous, Inc.                                           |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B   |   |   | 206,184   |   |     |   | 1,101   |      |   |   | 1,877 |   |
| Lightspeed POS, Inc. (5)(10)                                  |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series C   |   |   | 245,610   |   |     |   | 20      |      |   |   | 165 |   |
| LogicSource                                                   |   |   | 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      |      |   |   | 247 |   |
| Postmates, Inc.                                               |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock         |   |   | 189,865   |   |     |   | 317     |      |   |   | 239 |   |
| RumbleON, Inc. (4)                                            |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock         |   |   | 102,768   |   |     |   | 87      |      |   |   | 89 |   |
| ShareThis, Inc.                                               |   |   | 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     |      |   |   | 121 |   |
|                                                          |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B   |   |   | 173,076   |   |     |   | 8       |      |   |   | 7 |   |
| Total Snagajob.com, Inc.                                      |   |   |                                      |   |                    |   | 1,973,076            |   |   |      | 790    |     |   |    | 128       |   |
| Tapjoy, Inc.                                                  |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series D   |   |   | 748,670   |   |     |   | 316     |      |   |   | 12 |   |
| The Faction GroupLLC                                          |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series A   |   |   | 8,703     |   |     |   | 234     |      |   |   | 260 |   |
| Thumbtack, Inc.                                               |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Common Stock         |   |   | 102,821   |   |     |   | 124     |      |   |   | 102 |   |
| Xometry, Inc.                                                 |   |   | Internet Consumer & Business Services |   | Warrant                 |   | Preferred Series B   |   |   | 87,784    |   |     |   | 47      |      |   |   | 63 |   |
| Subtotal: Internet Consumer & Business Services (0.42%)*  |   |   |                                      |   |                    |   |                 |   |   |      | 5,044  |     |   |    | 3,996     |   |
| Media/Content/Info                                            |   |   |                                      |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Machine Zone, Inc.                                            |   |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock         |   |   | 1,552,710 |   |     |   | 1,960   |      |   |   | 2,361 |   |
| Napster (p.k.a. Rhapsody International, Inc.)                 |   |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock         |   |   | 715,755   |   |     |   | 383     |      |   |   | 38 |   |
| WP Technology, Inc. (Wattpad, Inc.) (5)(10)                   |   |   | Media/Content/Info                        |   | Warrant                 |   | Common Stock         |   |   | 255,818   |   |     |   | 4       |      |   |   | 5 |   |
| Zoom Media Group, Inc.                                        |   |   | Media/Content/Info                        |   | Warrant                 |   | Preferred Series A   |   |   | 1,204     |   |     |   | 348     |      |   |   | 22 |   |
| Subtotal: Media/Content/Info (0.25%)*                         |   |   |                                      |   |                    |   |                 |   |   |      | 2,695  |     |   |    | 2,426     |   |
| Medical Devices & Equipment                               |   |   |                                      |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| SINTX Technologies, Inc. (p.k.a. 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     |      |   |   | 367 |   |
| Flowonix Medical Incorporated                                 |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series AA  |   |   | 155,325   |   |     |   | 362     |      |   |   | — |   |
|                                                          |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series BB  |   |   | 725,806   |   |     |   | 351     |      |   |   | 351 |   |
| Total Flowonix Medical Incorporated                           |   |   |                                      |   |                    |   | 881,131              |   |   |      | 713    |     |   |    | 351       |   |
| Gelesis, Inc.                                                 |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series A-1 |   |   | 74,784    |   |     |   | 78      |      |   |   | 158 |   |
| InspireMD, Inc. (4)(5)(10)                                    |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Common Stock         |   |   | 1,105     |   |     |   | — |      |   |   | — |   |
| Intuity Medical, Inc. (15)                                    |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series 4   |   |   | 1,819,078 |   |     |   | 294     |      |   |   | 508 |   |
| Medrobotics Corporation (15)                                  |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series E   |   |   | 455,539   |   |     |   | 370     |      |   |   | 25 |   |
| Micell Technologies, Inc.                                     |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series D-2 |   |   | 84,955    |   |     |   | 262     |      |   |   | — |   |
| NinePoint Medical, Inc.                                       |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series A-1 |   |   | 587,840   |   |     |   | 170     |      |   |   | 90 |   |
| Optiscan Biomedical, Corp. (6)                                |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series E   |   |   | 74,424    |   |     |   | 573     |      |   |   | 178 |   |
| Outset Medical, Inc. (p.k.a. Home Dialysis Plus, Inc.)        |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series A   |   |   | 500,000   |   |     |   | 402     |      |   |   | 184 |   |
| Quanterix Corporation (4)                                     |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Common Stock         |   |   | 66,039    |   |     |   | 204     |      |   |   | 394 |   |
| Sebacia, Inc.                                                 |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series D   |   |   | 778,301   |   |     |   | 133     |      |   |   | 186 |   |
| SonaCare Medical, LLC (p.k.a. US HIFU, LLC)                   |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series A   |   |   | 6,464     |   |     |   | 188     |      |   |   | — |   |
| Tela Bio, Inc.                                                |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Preferred Series B   |   |   | 387,930   |   |     |   | 61      |      |   |   | 55 |   |
| ViewRay, Inc. (4)(15)                                         |   |   | Medical Devices & Equipment           |   | Warrant                 |   | Common Stock         |   |   | 128,231   |   |     |   | 333     |      |   |   | 176 |   |
| Subtotal: Medical Devices & Equipment (0.28%)*            |   |   |                                      |   |                    |   |                 |   |   |      | 5,096  |     |   |    | 2,672     |   |
| Semiconductors                                                |   |   |                                      |   |                    |   |                 |   |   |      |   |     |   |    |      |   |
| Achronix Semiconductor Corporation                            |   |   | Semiconductors                            |   | Warrant                 |   | Preferred Series C   |   |   | 360,000   |   |     |   | 160     |      |   |   | 354 |   |
|                                                          |   |   | Semiconductors                            |   | Warrant                 |   | Preferred Series D-2 |   |   | 750,000   |   |     |   | 99      |      |   |   | 543 |   |
| Total Achronix Semiconductor Corporation                      |   |   |                                      |   |                    |   | 1,110,000            |   |   |      | 259    |     |   |    | 897       |   |
| Aquantia Corp. (4)                                            |   |   | Semiconductors                            |   | Warrant                 |   | Common Stock         |   |   | 19,683    |   |     |   | 4       |      |   |   | 2 |   |
| Subtotal: Semiconductors (0.09%)*                             |   |   |                                      |   |                    |   |                 |   |   |      | 263    |     |   |    | 899       |   |

 

See notes to consolidated financial statements

33

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(unaudited)

(dollars in thousands)

 

| Portfolio Company                            |   |   | Sub-Industry              |   | Type of

Investment (1) |   | Series                   |   | Shares |      |   | Cost (3) |   |    | Value (4) |   |
|----------------------------------------------|--------|--------|---------------------------|--------|-------------------------|--------|--------------------------|--------|--------|-----------|--------|----------|--------|---------|-----------|--------|
| Software                                     |   |   |                      |   |                    |   |                     |   |   |      |   |     |   |    |      |   |
| Actifio, Inc.                                |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 73,584    |   |     | $      | 249     |      |   | $ | 77 |   |
|                                         |   |   | Software                  |   | Warrant                 |   | Preferred Series F       |   |   | 31,673    |   |     |   | 343     |      |   |   | 90 |   |
| Total Actifio, Inc.                          |   |   |                      |   |                    |   | 105,257                  |   |   |      | 592    |     |   |    | 167       |   |
| CareCloud Corporation (15)                   |   |   | Software                  |   | Warrant                 |   | Preferred Series B       |   |   | 413,433   |   |     |   | 257     |      |   |   | 25 |   |
| Clickfox, Inc. (15)                          |   |   | Software                  |   | Warrant                 |   | Preferred Series B       |   |   | 539,818   |   |     |   | 167     |      |   |   | 5 |   |
|                                         |   |   | Software                  |   | Warrant                 |   | Preferred Series C       |   |   | 592,019   |   |     |   | 730     |      |   |   | 9 |   |
|                                         |   |   | Software                  |   | Warrant                 |   | Preferred Series C-A     |   |   | 2,218,214 |   |     |   | 231     |      |   |   | 133 |   |
| Total Clickfox, Inc.                         |   |   |                      |   |                    |   | 3,350,051                |   |   |      | 1,128  |     |   |    | 147       |   |
| Cloudian, Inc.                               |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 477,454   |   |     |   | 72      |      |   |   | 57 |   |
| DNAnexus, Inc.                               |   |   | Software                  |   | Warrant                 |   | Preferred Series C       |   |   | 909,091   |   |     |   | 97      |      |   |   | 126 |   |
| Evernote Corporation                         |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 62,500    |   |     |   | 106     |      |   |   | 100 |   |
| Fuze, Inc. (15)(16)                          |   |   | Software                  |   | Warrant                 |   | Preferred Series F       |   |   | 256,158   |   |     |   | 89      |      |   |   | — |   |
| Lightbend, Inc. (15)                         |   |   | Software                  |   | Warrant                 |   | Preferred Series C-1     |   |   | 712,323   |   |     |   | 109     |      |   |   | 49 |   |
| Message Systems, Inc. (15)                   |   |   | Software                  |   | Warrant                 |   | Preferred Series C       |   |   | 503,718   |   |     |   | 334     |      |   |   | 499 |   |
| Neos, Inc.                                   |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 221,150   |   |     |   | 22      |      |   |   | — |   |
| OneLogin, Inc. (15)                          |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 381,620   |   |     |   | 304     |      |   |   | 401 |   |
| Poplicus, Inc.                               |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 132,168   |   |     |   | — |      |   |   | — |   |
| Quid, Inc. (15)                              |   |   | Software                  |   | Warrant                 |   | Preferred Series D       |   |   | 71,576    |   |     |   | 1       |      |   |   | 3 |   |
| RapidMiner, Inc.                             |   |   | Software                  |   | Warrant                 |   | Preferred Series C-1     |   |   | 4,982     |   |     |   | 24      |      |   |   | 17 |   |
| RedSeal Inc. (15)                            |   |   | Software                  |   | Warrant                 |   | Preferred Series C-Prime |   |   | 640,603   |   |     |   | 66      |      |   |   | 28 |   |
| Signpost, Inc.                               |   |   | Software                  |   | Warrant                 |   | Preferred Series C       |   |   | 324,005   |   |     |   | 314     |      |   |   | 187 |   |
| ThreatConnect, Inc. (15)                     |   |   | Software                  |   | Warrant                 |   | Preferred Series B       |   |   | 134,086   |   |     |   | 26      |      |   |   | 25 |   |
| Wrike, Inc.                                  |   |   | Software                  |   | Warrant                 |   | Common Stock             |   |   | 698,760   |   |     |   | 461     |      |   |   | 6,024 |   |
| Subtotal: Software (0.82%)*                  |   |   |                      |   |                    |   |                     |   |   |      | 4,002  |     |   |    | 7,855     |   |
| Specialty Pharmaceuticals                    |   |   |                      |   |                    |   |                     |   |   |      |   |     |   |    |      |   |
| Alimera Sciences, Inc. (4)                   |   |   | Specialty Pharmaceuticals |   | Warrant                 |   | Common Stock             |   |   | 1,717,709 |   |     |   | 861     |      |   |   | 24 |   |
| Subtotal: Specialty Pharmaceuticals (0.00%)* |   |   |                      |   |                    |   |                     |   |   |      | 861    |     |   |    | 24        |   |
| Surgical Devices                             |   |   |                      |   |                    |   |                     |   |   |      |   |     |   |    |      |   |
| Gynesonics, Inc. (15)                        |   |   | Surgical Devices          |   | Warrant                 |   | Preferred Series C       |   |   | 180,480   |   |     |   | 74      |      |   |   | 4 |   |
|                                         |   |   | Surgical Devices          |   | Warrant                 |   | Preferred Series D       |   |   | 1,575,965 |   |     |   | 321     |      |   |   | 24 |   |
| Total Gynesonics, Inc.                       |   |   |                      |   |                    |   | 1,756,445                |   |   |      | 395    |     |   |    | 28        |   |
| Transmedics, Inc.                            |   |   | Surgical Devices          |   | Warrant                 |   | Preferred Series D       |   |   | 175,000   |   |     |   | 100     |      |   |   | 263 |   |
|                                         |   |   | Surgical Devices          |   | Warrant                 |   | Preferred Series F       |   |   | 50,544    |   |     |   | 38      |      |   |   | — |   |
| Total Transmedics, Inc.                      |   |   |                      |   |                    |   | 225,544                  |   |   |      | 138    |     |   |    | 263       |   |
| Subtotal: Surgical Devices (0.03%)*          |   |   |                      |   |                    |   |                     |   |   |      | 533    |     |   |    | 291       |   |

 

See notes to consolidated financial statements

34

----

 

 

HERCULES CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 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.                                                      |   |   | 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      |      |   |   | 208 |   |
| Calera, Inc.                                                        |   |   | 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     |      |   |   | 365 |   |
| GreatPoint Energy, Inc. (15)                                        |   |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series D-1 |   |   | 393,212   |      |     |   | 547     |      |   |   | — |   |
| Kinestral Technologies, Inc.                                        |   |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series A   |   |   | 325,000   |      |     |   | 155     |      |   |   | 45 |   |
|                                                                |   |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series B   |   |   | 131,883   |      |     |   | 63      |      |   |   | 13 |   |
| Total Kinestral Technologies, Inc.                                  |   |   |                                 |   |                    |   | 456,883              |   |   |      | 218       |     |   |    | 58        |   |
| 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      |      |   |   | 138 |   |
| Rive Technology, Inc. (15)                                          |   |   | Sustainable and Renewable Technology |   | Warrant                 |   | Preferred Series E   |   |   | 234,477   |      |     |   | 13      |      |   |   | 8 |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)            |   |   | Sustainable and Renewable Technology |   | Warrant                 |   | Class A Units        |   |   | 0.69      |      |     |   | — |      |   |   | — |   |
| 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 (0.08%)*             |   |   |                                 |   |                    |   |                 |   |   |      | 2,924     |     |   |    | 777       |   |
| Total: Warrant Investments (2.79%)*                                 |   |   |                                 |   |                    |   |                 |   |   |      | 35,696    |     |   |    | 26,669    |   |
| Total Investments in Securities (196.81%)*                          |   |   |                                 |   |                    |   |                 |   |   | $         | 1,980,524 |     |   | $       | 1,880,373 |   |

 

| * | 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 5.50% at December 31, 2018. Daily LIBOR, 1-month LIBOR, 3-month LIBOR and 12-month LIBOR represent 2.39%, 2.52%, 2.80% and 3.01%, respectively, at December 31, 2018. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $39.6 million, $158.7 million and $119.1 million, respectively. The tax cost of investments is $2.0 billion. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Except for warrants in 37 publicly traded companies and common stock in 21 publicly traded companies, all investments are restricted at December 31, 2018 and were valued at fair value using Level 3 significant unobservable inputs as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Non-U.S. company or the company’s principal place of business is outside the United States. |
|-----|---------------------------------------------------------------------------------------------------|

| (6) | Affiliate investment as defined under the 1940 Act in which Hercules owns at least 5% but generally less than 25% of the company’s voting securities. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Control investment as defined under the 1940 Act in which Hercules owns at least 25% of the company’s voting securities or has greater than 50% representation on its board. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Debt is on non-accrual status at December 31, 2018, and is therefore considered non-income producing. Note that at December 31, 2018, only the $11.0 million PIK loan is on non-accrual for the Company’s debt investment in Tectura Corporation. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 III, the Company’s wholly owned SBIC subsidiary. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------|

| (16) | Denotes that the fair value of the Company’s total investments in this portfolio company represent greater than 5% of the Company’s total assets at December 31, 2018. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (17) | Denotes that there is an unfunded contractual commitment available at the request of this portfolio company at December 31, 2018. Refer to Note 10. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| (18) | Denotes unitranche debt with first lien “last-out” senior secured position and security interest in all assets of the portfolio company whereby the “last-out” portion will be subordinated to the “first-out” portion in a liquidation, sale or other disposition. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (19) | Denotes second lien senior secured debt. |
|------|------------------------------------------|

 

 

 

See notes to consolidated financial statements

35

----

 

 

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, Bethesda, MD, 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. On July 13, 2018, the Company completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II. 

 

As an SBIC, HT III is subject to a variety of regulations concerning, among other things, the size and nature of the companies in which it may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license; however, the Company has not received such license, and HT IV currently has no material assets or liabilities. The Company also formed Hercules Technology SBIC Management, LLC (“HTM”), a limited liability company, in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the Company’s consolidated financial statements).

 

The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations or limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). These 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 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 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, 2018. 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. 

 

36

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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 VIEs consolidated by the Company are its securitization VIEs formed in conjunction with the issuance of the 2027 Asset-Backed Notes and the 2028 Asset-Backed Notes (as defined herein). See “Note 4 – Borrowings”. 

Valuation of Investments 

The most significant estimate inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

At September 30, 2019, approximately 97.0% of the Company’s total assets represented investments in portfolio companies whose fair value is determined in good faith by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and ASC Topic 946 and measured in accordance with ASC Topic 820 (“Fair Value Measurements”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related industries including technology, drug discovery and development, biotechnology, life sciences, healthcare, and sustainable and renewable technology at all stages of development. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy by the Board of Directors in accordance with the provisions of ASC Topic 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board of Directors may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.

The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments. The Company engages independent valuation firms on a discretionary basis. Specifically, on a quarterly basis, the Company will identify portfolio investments with respect to which an independent valuation firm will assist in valuing. The Company selects these portfolio investments based on a number of factors, including, but not limited to, the potential for material fluctuations in valuation results, size, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm.

The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Board of Directors are ultimately, and solely, responsible for determining the fair value of the Company’s investments in good faith. 

37

----

 

 

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Board of Directors have approved a multi-step valuation process each quarter, as described below: 

(1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; 

(2) preliminary valuation conclusions are then documented and business-based assumptions are discussed with the Company’s investment committee; 

(3) the Audit Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate; and

(4) the Board of Directors, upon the recommendation of the Audit Committee, discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. 

ASC Topic 820 establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC Topic 820 also requires disclosure for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC Topic 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 

The Company has categorized all investments recorded at fair value in accordance with ASC Topic 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC Topic 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. 

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are publicly held debt investments and warrants held in a public company. 

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. 

38

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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 September 30, 2019 and as of December 31, 2018. 

 

| (in thousands)      |   | Balance

September 30, |      |   | Quoted Prices In

Active Markets For

Identical Assets |   |    | Significant

Other Observable

Inputs |   |   | Significant

Unobservable

Inputs |   |
|---------------------|--------|------------------------|-----------|--------|--------------------------------------------------------|--------|---------|---------------------------------------|--------|--------|-----------------------------------|--------|
| Description         |   | 2019                   |      |   | (Level 1)                                              |   |    | (Level 2)                             |   |   | (Level 3)                         |   |
| Senior Secured Debt |   | $                      | 2,065,097 |   |                                                   | $      | — |                                  |   | $      | —                           |   |   | $ | 2,065,097 |   |
| Unsecured Debt      |   |                   | 14,806    |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 14,806 |   |
| Preferred Stock     |   |                   | 68,310    |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 68,310 |   |
| Common Stock        |   |                   | 80,079    |   |                                                   |   | 43,354  |                                  |   |   | —                           |   |   |   | 36,725 |   |
| Warrants            |   |                   | 18,914    |   |                                                   |   | — |                                  |   |   | 4,961                             |   |   |   | 13,953 |   |
| Escrow Receivable   |   |                   | 959       |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 959 |   |
| Total               |   | $                      | 2,248,165 |   |                                                   | $      | 43,354  |                                  |   | $      | 4,961                             |   |   | $ | 2,199,850 |   |
|                |   |                   |      |   |                                                   |   |    |                                  |   |   |                              |   |   |   |   |   |
| (in thousands)      |   | Balance

December 31,  |      |   | Quoted Prices In

Active Markets For

Identical Assets |   |    | Significant

Other Observable

Inputs |   |   | Significant

Unobservable

Inputs |   |
| Description         |   | 2018                   |      |   | (Level 1)                                              |   |    | (Level 2)                             |   |   | (Level 3)                         |   |
| Senior Secured Debt |   | $                      | 1,719,091 |   |                                                   | $      | — |                                  |   | $      | —                           |   |   | $ | 1,719,091 |   |
| Unsecured Debt      |   |                   | 14,401    |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 14,401 |   |
| Preferred Stock     |   |                   | 68,625    |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 68,625 |   |
| Common Stock        |   |                   | 51,587    |   |                                                   |   | 27,346  |                                  |   |   | —                           |   |   |   | 24,241 |   |
| Warrants            |   |                   | 26,669    |   |                                                   |   | — |                                  |   |   | 3,996                             |   |   |   | 22,673 |   |
| Escrow Receivable   |   |                   | 970       |   |                                                   |   | — |                                  |   |   | —                           |   |   |   | 970 |   |
| Total               |   | $                      | 1,881,343 |   |                                                   | $      | 27,346  |                                  |   | $      | 3,996                             |   |   | $ | 1,850,001 |   |

 

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 nine months ended September 30, 2019 and the year ended December 31, 2018.

 

| (in thousands)         |   | Balance

January 1, 2019 |      |   | 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

September 30, 2019 |    |
|------------------------|--------|--------------------------|-----------|--------|---------------------------------------|--------|---------|------------------------------------------------------------------|--------|--------|--------------------|--------|--------|--------|---------|--------|---------------------|--------|---------|-----------------------------------------------|--------|--------|-------------------------------------------------|--------|--------|-----------------------------|---------|
| Senior Debt            |   | $                        | 1,719,091 |   |                                  | $      | (5,513  | )                                                                |   | $      | (2,297             | )      |   | $      | 784,445 |   |                | $      | — |                                          |   | $      | (430,629                                        | )      |   | $                           | — |   |   | $ | — |   |   | $ | 2,065,097 |   |
| Unsecured Debt         |   |                     | 14,401    |   |                                  |   | — |                                                             |   |   | 368                |   |   |   | 37      |   |                |   | — |                                          |   |   | —                                         |   |   |                        | — |   |   |   | — |   |   |   | 14,806 |   |
| Preferred Stock        |   |                     | 68,625    |   |                                  |   | (1,146  | )                                                                |   |   | 11,159             |   |   |   | 4,638   |   |                |   | (16     | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | (14,950 | ) |   |   | 68,310 |   |
| Common Stock           |   |                     | 24,241    |   |                                  |   | (750    | )                                                                |   |   | 8,140              |   |   |   | 5,094   |   |                |   | — |                                          |   |   | —                                         |   |   |                        | — |   |   |   | — |   |   |   | 36,725 |   |
| Warrants               |   |                     | 22,673    |   |                                  |   | 6,270   |                                                             |   |   | (6,975             | )      |   |   | 2,794   |   |                |   | (8,981  | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | (1,828 | ) |   |   | 13,953 |   |
| Escrow Receivable |   |                     | 970       |   |                                  |   | (875    | )                                                                |   |   | —            |   |   |   | 896     |   |                |   | (32     | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | — |   |   |   | 959 |   |
| Total                  |   | $                        | 1,850,001 |   |                                  | $      | (2,014  | )                                                                |   | $      | 10,395             |   |   | $      | 797,904 |   |                | $      | (9,029  | )                                             |   | $      | (430,629                                        | )      |   | $                           | — |   |   | $ | (16,778 | ) |   | $ | 2,199,850 |   |
|                   |   |                     |      |   |                                  |   |    |                                                             |   |   |               |   |   |   |    |   |                |   |    |                                          |   |   |                                            |   |   |                        |    |   |   |   |   |   |   |   |   |   |
| (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 (4) |   |   | Gross

Transfers

out of

Level 3 (4) |   |   | Balance

December 31, 2018  |    |
| Senior Debt            |   | $                        | 1,415,984 |   |                                  | $      | (14,066 | )                                                                |   | $      | 4,947              |   |   | $      | 896,831 |   |                | $      | — |                                          |   | $      | (584,605                                        | )      |   | $                           | — |   |   | $ | — |   |   | $ | 1,719,091 |   |
| Unsecured Debt         |   |                     | —   |   |                                  |   | — |                                                             |   |   | (328               | )      |   |   | 20,583  |   |                |   | — |                                          |   |   | (5,671                                          | )      |   |                        | — |   |   |   | (183 | ) |   |   | 14,401 |   |
| Preferred Stock        |   |                     | 40,683    |   |                                  |   | 2,540   |                                                             |   |   | (11,068            | )      |   |   | 39,993  |   |                |   | (3,706  | )                                             |   |   | —                                         |   |   |                        | 183     |   |   |   | — |   |   |   | 68,625 |   |
| Common Stock           |   |                     | 25,853    |   |                                  |   | (3,299  | )                                                                |   |   | (7,583             | )      |   |   | 17,950  |   |                |   | (301    | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | (8,379 | ) |   |   | 24,241 |   |
| Warrants               |   |                     | 31,205    |   |                                  |   | (982    | )                                                                |   |   | (2,982             | )      |   |   | 2,050   |   |                |   | (6,402  | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | (216 | ) |   |   | 22,673 |   |
| Escrow Receivable      |   |                     | 752       |   |                                  |   | 1       |                                                             |   |   | (143               | )      |   |   | 892     |   |                |   | (532    | )                                             |   |   | —                                         |   |   |                        | — |   |   |   | — |   |   |   | 970 |   |
| Total                  |   | $                        | 1,514,477 |   |                                  | $      | (15,806 | )                                                                |   | $      | (17,157            | )      |   | $      | 978,299 |   |                | $      | (10,941 | )                                             |   | $      | (590,276                                        | )      |   | $                           | 183     |   |   | $ | (8,778 | ) |   | $ | 1,850,001 |   |

 

| (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 nine months ended September 30, 2019 relate to the initial public offerings of Lightspeed POS, Inc., Lyft, Inc., Avedro, Inc., Stealth Bio Therapeutics Corp., X4 Pharmaceuticals, Inc., BridgeBio Pharma LLC, Pinterest, Inc., TransMedics Group, Inc., Fastly, Inc., Brickell Biotech, Inc., and Oportun. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Transfers out of Level 3 during the year ended December 31, 2018 relate to the initial public offerings of DocuSign, Inc. and Tricida, Inc. and the conversion of our debt investment in Gynesonics, Inc. to preferred stock. Transfers into Level 3 for the year ended December 31, 2018 relate to the conversion of our debt investment in Gynesonics, Inc. to preferred stock. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 along with regularly scheduled amortization. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

39

----

 

 

For the nine months ended September 30, 2019, approximately $10.2 million and $7.7 million 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 $5.3million and $568,000 in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. 

For the year ended December 31, 2018, approximately $10.5 million and $10.9 million in net unrealized depreciation was recorded for preferred stock and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $14.5 million and $294,000 in net unrealized depreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.

The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of September 30, 2019 and December 31, 2018. 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

September 30, 2019

(in thousands) |      |   | Valuation

Techniques/Methodologies |                                                | Unobservable Input (1) |                                          | Range  |            |   | Weighted

Average (2) |   |        |        |
|----------------------------------------------------------------|--------|---------------------------------------------------|-----------|--------|-------------------------------------|-----------------------------------------------------|------------------------|-----------------------------------------------|--------|-----------------|--------|----------------------------|--------|--------|--------|
| Pharmaceuticals                                                |   | $                                                 | 19,905    |   |                                | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 14.28%          |   |                       | 14.28% |   |
|                                                           |   |                                              | 642,552   |   |                                | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 9.72% - 15.76%  |   |                       | 11.94% |   |
|                                                           |   |                                              |      |   |                                |                                                |                   | Premium/(Discount)                            |   | (0.50%) - 0.50% |   |                       |   |   |   |
|                                                           |   |                                              | —   |   |                                | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 0.00% - 100.00% |   |                       |   |   |   |
| Technology                                                     |   |                                              | 222,845   |   |                                | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 11.99% - 14.94% |   |                       | 12.96% |   |
|                                                           |   |                                              | 658,835   |   |                                | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 10.41% - 16.17% |   |                       | 12.42% |   |
|                                                           |   |                                              |      |   |                                |                                                |                   | Premium/(Discount)                            |   | (0.25%) - 0.50% |   |                       |   |   |   |
|                                                           |   |                                              | 2,117     |   |                                | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 40.00% - 60.00% |   |                       |   |   |   |
| Sustainable and Renewable Technology                           |   |                                              | 34,251    |   |                                | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 11.87% - 25.98% |   |                       | 14.36% |   |
|                                                           |   |                                              |      |   |                                |                                                |                   | Premium/(Discount)                            |   | (0.25%) - 3.00% |   |                       |   |   |   |
|                                                           |   |                                              | 7,143     |   |                                | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 20.00% - 50.00% |   |                       |   |   |   |
| Medical Devices                                                |   |                                              | 125,067   |   |                                | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 9.76% - 15.26%  |   |                       | 12.81% |   |
|                                                           |   |                                              |      |   |                                |                                                |                   | Premium/(Discount)                            |   | 0.00% - 0.50%   |   |                       |   |   |   |
| Lower Middle Market                                            |   |                                              | 9,284     |   |                                | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 12.02%          |   |                       | 12.02% |   |
|                                                           |   |                                              | 158,115   |   |                                | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 10.02% - 16.10% |   |                       | 13.54% |   |
|                                                           |   |                                              |      |   |                                |                                                |                   | Premium/(Discount)                            |   | 0.00%           |   |                       |   |   |   |
|                                                           |   |                                              | 9,604     |   |                                | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 10.00% - 80.00% |   |                       |   |   |   |
|                                                           |   |                                              |      |   |                                |                                                |                   |                                          |   |            |   |                       |   |   |   |   |
|                                                           |   |                                              |      |   |                                | Debt Investments Where Fair Value Approximates Cost |                   |                                               |        |                 |        |
|                                                           |   |                                              | 88,393    |   |                                | Debt Investments originated within 3 months         |                   |                                          |   |            |   |                       |   |   |        |  |  |
|                                                           |   |                                              | 13,612    |   |                                | Imminent Payoffs (4)                                |                   |                                          |   |            |   |                       |   |   |   |   |  |  |  |
|                                                           |   |                                              | 88,180    |   |                                | Debt Investments Maturing in Less than One Year     |                   |                                               |        |                 |        |
|                                                           |   | $                                                 | 2,079,903 |   |                                | 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, Biotechnology Tools, and Drug Discovery & Development industries in the Consolidated Schedule of Investments. |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Technology, above, is comprised of debt investments in the Software, Media/Content/Info, Internet Consumer & Business Services, Consumer & Business Products, Semiconductors, Diversified Financial Services, and Information Services industries in the Consolidated Schedule of Investments. |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Sustainable and Renewable Technology, above, is comprised of debt investments in the Sustainable and Renewable Technology, Internet Consumer & Business Services, and Electronics & Computer Hardware industries in the Consolidated Schedule of Investments. |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Medical Devices, above, is comprised of debt investments in the Drug Delivery, and Medical Devices & Equipment industries in the Consolidated Schedule of Investments. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Lower Middle Market, above, is comprised of debt investments in the Healthcare Services - Other, Internet Consumer & Business Services, Diversified Financial Services, Sustainable and Renewable Technology, and Software industries in the Consolidated Schedule of Investments. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | 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. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

40

----

 

 

| Investment Type - Level

Three Debt Investments |   | Fair Value at

December 31, 2018

(in thousands) |      |   | Valuation Techniques/Methodologies |                                                | Unobservable Input (1) |                                          | Range  |            |   | Weighted

Average (2) |   |
|----------------------------------------------------------------|--------|--------------------------------------------------|-----------|--------|------------------------------------|-----------------------------------------------------|------------------------|-----------------------------------------------|--------|-----------------|--------|----------------------------|--------|
| Pharmaceuticals                                                |   | $                                                | 25,039    |   |                               | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 10.50% - 12.47% |   |                       | 11.68% |   |  |
|                                                           |   |                                             | 480,737   |   |                               | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 10.25% - 16.86% |   |                       | 13.33% |   |  |
|                                                           |   |                                             |      |   |                               |                                                |                   | Premium/(Discount)                            |   | (0.25%) - 0.50% |   |                       |   |   |   |
| Technology                                                     |   |                                             | 63,125    |   |                               | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 11.71% - 19.94% |   |                       | 13.02% |   |  |
|                                                           |   |                                             | 618,141   |   |                               | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 10.73% - 16.13% |   |                       | 13.08% |   |  |
|                                                           |   |                                             |      |   |                               |                                                |                   | Premium/(Discount)                            |   | 0.00% - 0.75%   |   |                       |   |   |   |
|                                                           |   |                                             | 1,579     |   |                               | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 40.00% - 60.00% |   |                       |   |   |   |
| Sustainable and Renewable Technology                           |   |                                             | 75,834    |   |                               | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 11.90% - 17.48% |   |                       | 13.47% |   |  |
|                                                           |   |                                             |      |   |                               |                                                |                   | Premium/(Discount)                            |   | (0.25%) - 0.25% |   |                       |   |   |   |
|                                                           |   |                                             | 5,556     |   |                               | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 20.00% - 50.00% |   |                       |   |   |   |
| Medical Devices                                                |   |                                             | 14,673    |   |                               | Originated Within 4-6 Months                        |                   | Origination Yield                             |   | 15.15%          |   |                       | 15.15% |   |  |
|                                                           |   |                                             | 115,355   |   |                               | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 10.99% - 22.38% |   |                       | 13.77% |   |  |
|                                                           |   |                                             |      |   |                               |                                                |                   | Premium/(Discount)                            |   | 0.00% - 0.75%   |   |                       |   |   |   |
|                                                           |   |                                             | 2,405     |   |                               | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 50.00%          |   |                       |   |   |   |
| Lower Middle Market                                            |   |                                             | 123,589   |   |                               | Market Comparable Companies                         |                   | Hypothetical Market Yield                     |   | 9.74% - 17.25%  |   |                       | 14.24% |   |  |
|                                                           |   |                                             |      |   |                               |                                                |                   | Premium/(Discount)                            |   | (0.25%) - 0.00% |   |                       |   |   |   |
|                                                           |   |                                             | 18,128    |   |                               | Liquidation (3)                                     |                   | Probability weighting of alternative outcomes |   | 30.00% - 70.00% |   |                       |   |   |   |
|                                                           |   |                                             |      |   |                               |                                                |                   |                                          |   |            |   |                       |   |   |   |   |
|                                                           |   |                                             |      |   |                               | Debt Investments Where Fair Value Approximates Cost |                   |                                               |
|                                                           |   |                                             | 153,312   |   |                               | Debt Investments originated within 3 months         |                   |                                          |   |            |   |                       |   |   |
|                                                           |   |                                             | 36,019    |   |                               | Debt Investments Maturing in Less than One Year     |                   |                                               |
|                                                           |   | $                                                | 1,733,492 |   |                               | Total Level Three Debt Investments                  |                   |                                               |

 

| (1) | The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums/(discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation may result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries noted above as follows: |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Pharmaceuticals, above, is comprised of debt investments in the Healthcare Services - Other, Drug Discovery & Development, Drug Delivery and Biotechnology Tools industries in the Consolidated Schedule of Investments. |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Technology, above, is comprised of debt investments in the Software, Electronics & Computer Hardware, Media/Content/Info, Internet Consumer & Business Services, Consumer & Business Products, and Information Services industries in the Consolidated Schedule of Investments. |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Sustainable and Renewable Technology, above, is comprised of debt investments in the Sustainable and Renewable Technology, Internet Consumer & Business Services, and Electronics & Computer Hardware industries in the Consolidated Schedule of Investments. |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Medical Devices, above, is comprised of debt investments in the Drug Delivery, and Medical Devices & Equipment industries in the Consolidated Schedule of Investments. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Lower Middle Market, above, is comprised of debt investments in the Healthcare Services - Other, Internet Consumer & Business Services, Diversified Financial Services, Sustainable and Renewable Technology, and Software industries in the Consolidated Schedule of Investments. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | 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. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------|

41

----

 

 

 

| Investment Type - Level Three

Equity and Warrant Investments |   | Fair Value at

September 30, 2019

(in thousands) |    |   | Valuation Techniques/

Methodologies |                          | Unobservable Input (1) |                                   | Range  |              | Weighted Average (6) |    |
|------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|--------|--------------------------------------|-------------------------------|------------------------|----------------------------------------|--------|-------------------|----------------------|---------|
| Equity Investments                                                           |   | $                                                 | 41,823  |   |                                 | Market Comparable Companies   |                   | EBITDA Multiple (2)                    |   | 5.4x - 6.6x       |                 | 6.0x    |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Revenue Multiple (2)                   |   | 0.5x - 4.9x       |                 | 3.5x    |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Discount for Lack of Marketability (3) |   | 16.18% - 28.57%   |                 | 20.90%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 57.94% - 104.95%  |                 | 79.33%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.57% - 1.77%     |                 | 1.76%   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 11 - 35           |                 |    | 12 |   |
|                                                                         |   |                                              | 15,468  |   |                                 | Market Adjusted OPM Backsolve |                   | Market Equity Adjustment (5)           |   | (22.50%) - 18.90% |                 | (1.97%) |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 33.84% - 97.75%   |                 | 91.05%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.50% - 2.66%     |                 | 2.05%   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 11 - 15           |                 |    | 13 |   |
|                                                                         |   |                                              | — |   |                                 | Liquidation                   |                   | Revenue Multiple (2)                   |   | 1.9x - 3.4x       |                 | 2.7x    |   |
|                                                                         |   |                                              | 47,744  |   |                                 | Other (7)                     |                   |                                   |   |              |                 |    |   |   |
| Warrant Investments                                                          |   |                                              | 8,381   |   |                                 | Market Comparable Companies   |                   | EBITDA Multiple (2)                    |   | 4.7x - 13.9x      |                 | 13.8x   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Revenue Multiple (2)                   |   | 0.4x - 7.0x       |                 | 4.6x    |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Discount for Lack of Marketability (3) |   | 12.31% - 35.57%   |                 | 18.61%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 43.00% - 99.06%   |                 | 54.94%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.56% - 1.81%     |                 | 1.71%   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 7 - 47            |                 |    | 19 |   |
|                                                                         |   |                                              | 5,572   |   |                                 | Market Adjusted OPM Backsolve |                   | Market Equity Adjustment (5)           |   | (54.12%) - 21.60% |                 | 2.38%   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 27.50% - 99.69%   |                 | 65.01%  |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.61% - 2.73%     |                 | 1.89%   |   |
|                                                                         |   |                                              |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 5 - 42            |                 |    | 19 |   |
| Total Level Three

Warrant and Equity Investments                            |   | $                                                 | 118,988 |   |                                 |                          |                   |                                   |   |              |                 |    |   |   |

 

| (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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|

42

----

 

 

| Investment Type - Level Three

Equity and Warrant Investments |   | Fair Value at

December 31, 2018

(in thousands) |    |   | Valuation Techniques/

Methodologies |                          | Unobservable Input (1) |                                   | Range  |              |   | Weighted Average (6) |    |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------|--------------------------------------|-------------------------------|------------------------|----------------------------------------|--------|-------------------|--------|----------------------|---------|
| Equity Investments                                                                               |   | $                                                | 34,204  |   |                                 | Market Comparable Companies   |                   | EBITDA Multiple (2)                    |   | 6.3x - 14.7x      |   |                 | 8.4x    |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Revenue Multiple (2)                   |   | 0.4x - 11.8x      |   |                 | 3.9x    |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Discount for Lack of Marketability (3) |   | 12.53% - 22.68%   |   |                 | 15.79%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 40.19% - 88.21%   |   |                 | 60.37%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 2.61%             |   |                 | 2.61%   |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 10 - 14           |   |                 |    | 12 |   |
|                                                                                             |   |                                             | 16,040  |   |                                 | Market Adjusted OPM Backsolve |                   | Market Equity Adjustment (5)           |   | (95.22%) - 12.81% |   |                 | (3.45%) |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 34.1% - 100.56%   |   |                 | 76.79%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.00% - 2.84%     |   |                 | 2.16%   |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 10 - 43           |   |                 |    | 16 |   |
|                                                                                             |   |                                             | 3,115   |   |                                 | Liquidation                   |                   | EBITDA Multiple (2)                    |   | 11.3x             |   |                 | 11.3x   |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Revenue Multiple (2)                   |   | 1.5x - 1.7x       |   |                 | 1.6x    |   |
|                                                                                             |   |                                             | 39,507  |   |                                 | Other (7)                     |                   |                                   |   |              |   |                 |    |   |   |   |
| Warrant Investments                                                                              |   |                                             | 11,267  |   |                                 | Market Comparable Companies   |                   | EBITDA Multiple (2)                    |   | 6.3x - 13.8x      |   |                 | 9.3x    |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Revenue Multiple (2)                   |   | 0.2x - 7.7x       |   |                 | 4.0x    |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Discount for Lack of Marketability (3) |   | 12.53% - 32.20%   |   |                 | 17.14%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 33.76% - 100.71%  |   |                 | 63.71%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 2.46% - 2.63%     |   |                 | 2.59%   |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 10 - 48           |   |                 |    | 14 |   |
|                                                                                             |   |                                             | 4,243   |   |                                 | Market Adjusted OPM Backsolve |                   | Market Equity Adjustment (5)           |   | (69.28%) - 22.02% |   |                 | (7.75%) |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Average Industry Volatility (4)        |   | 34.10% - 109.24%  |   |                 | 74.15%  |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Risk-Free Interest Rate                |   | 1.04% - 2.97%     |   |                 | 2.27%   |   |
|                                                                                             |   |                                             |    |   |                                 |                          |                   | Estimated Time to Exit (in months)     |   | 4 - 47            |   |                 |    | 23 |   |
|                                                                                             |   |                                             | 7,163   |   |                                 | Other (7)                     |                   |                                   |   |              |   |                 |    |   |   |   |
| Total Level Three Warrant and Equity Investments                                                 |   | $                                                | 115,539 |   |                                 |                          |                   |                                   |   |              |   |                 |    |   |   |   |

 

| (1) | The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples, market equity adjustment factors, and discounts for lack of marketability. Additional inputs used in the 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.

 

The Company applies a procedure for debt investments that assumes the sale of each investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. The Company determines the yield at inception for each debt investment. The Company then uses senior secured, leveraged loan yields provided by third party providers to determine the change in market yields between inception of the debt investment and the measurement date. Industry specific indices and other relevant market data are used to benchmark and assess market-based movements. 

43

----

 

 

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.

Cash, Restricted Cash, and Cash Equivalents

Cash and cash equivalents consist solely of funds deposited with financial institutions and short-term liquid investments in money market deposit accounts. Cash and cash equivalents are carried at cost, which approximates fair value. Restricted cash and cash equivalents include amounts that are collected and are held by trustees who have been appointed as custodians of the assets securing certain of the Company’s financing transactions.

Other Assets

Other assets generally consist of prepaid expenses, deferred financing costs net of accumulated amortization, fixed assets net of accumulated depreciation, deferred revenues and deposits and other assets, including escrow receivable. The escrow receivable balance as of September 30, 2019 and December 31, 2018 was approximately $959,000 and $972,000, respectively, and was fair valued and held in accordance with ASC Topic 820.

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 both September 30, 2019 and December 31, 2018, there were no material past due escrow receivables.

44

----

 

 

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, and operating lease liability obligations in our Consolidated Statement of Assets and Liabilities. The Company recognizes a ROU asset and an operating lease liability for all leases, with the exception of short-term leases which have a term of 12 months or less. ROU assets represent the right to use an underlying asset for the lease term and operating lease liability obligations represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The Company has lease agreements with lease and non-lease components and has separated these components when determining the ROU assets and the related lease liabilities. As most of the Company’s leases do not provide an implicit rate, the Company estimated its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. See “Note 10 – Commitments and Contingencies” and “Note 11 – Recent Accounting Pronouncements”.

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. 

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 nine months ended September 30, 2019 and 2018.

 

| (in thousands)                                       |   |      |   |                              |    |   |            | For the Three Months Ended September 30, 2019 |    |       | For the Nine Months Ended September 30, 2019 |   |
|------------------------------------------------------|--------|-----------|--------|-----------------------------------|---------|--------|-----------------|-----------------------------------------------|---------|------------|----------------------------------------------|--------|
| Portfolio Company                                    |   | Type      |   | Fair Value at

September 30, 2019 |    |   | 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                                  |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gibraltar Business Capital, LLC                      |   | Control   |   | $                                 | 48,955  |   |            | $                                             | 564     |       |                                         | $      | 5 |   |   | $ | 2,719 |   |   | $ | — |   |   | $ | 1,673 |   |   | $ | 13 |   |   | $ | 9,427 |   |   | $ | — |   |
| Tectura Corporation                                  |   | Control   |   |                              | 9,605   |   |            |                                          | 491     |       |                                         |   | — |   |   |   | (230 | ) |   |   | — |   |   |   | 1,446 |   |   |   | — |   |   |   | (9,006 | ) |   |   | — |   |
| Total Control Investments                            |   | $         | 58,560 |                              |    | $      | 1,055           |                                          |    | $          | 5                                            |   |   | $ | 2,489 |   |   | $ | — |   |   | $ | 3,119 |   |   | $ | 13 |   |   | $ | 421 |   |   | $ | — |   |
|                                                 |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate Investments                                |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Optiscan BioMedical, Corp.                           |   | Affiliate |   | $                                 | 8,060   |   |            | $                                             | — |       |                                         | $      | — |   |   | $ | (312 | ) |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | (548 | ) |   | $ | — |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) |   | Affiliate |   |                              | 12,904  |   |            |                                          | 493     |       |                                         |   | 26 |   |   |   | (235 | ) |   |   | — |   |   |   | 1,740 |   |   |   | 186 |   |   |   | (3,225 | ) |   |   | — |   |
| Total Affiliate Investments                          |   | $         | 20,964 |                              |    | $      | 493             |                                          |    | $          | 26                                           |   |   | $ | (547 | ) |   | $ | — |   |   | $ | 1,740 |   |   | $ | 186 |   |   | $ | (3,773 | ) |   | $ | — |   |
| Total Control & Affiliate Investments            |   | $         | 79,524 |                              |    | $      | 1,548           |                                          |    | $          | 31                                           |   |   | $ | 1,942 |   |   | $ | — |   |   | $ | 4,859 |   |   | $ | 199 |   |   | $ | (3,352 | ) |   | $ | — |   |
|                                                 |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (in thousands)                                       |   |      |   |                              |    |   |            | For the Three Months Ended September 30, 2018 |    |       | For the Nine Months Ended September 30, 2018 |   |
| Portfolio Company                                    |   | Type      |   | Fair Value at

September 30, 2018 |    |   | Interest Income |                                          |    | Fee Income |                                         |   | Net Change in Unrealized (Depreciation)/ Appreciation |   |   | 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   |   | $                                 | — |   |            | $                                             | — |       |                                         | $      | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | 2,858 |   |   | $ | (2,900 | ) |
| Gibraltar Business Capital, LLC                      |   | Control   |   |                              | 42,715  |   |            |                                          | 445     |       |                                         |   | 1 |   |   |   | (9 | ) |   |   | — |   |   |   | 945 |   |   |   | 1 |   |   |   | (9 | ) |   |   | — |   |
| Second Time Around (Simplify Holdings, LLC)          |   | Control   |   |                              | — |   |            |                                          | — |       |                                         |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,781 |   |   |   | (1,743 | ) |
| Tectura Corporation                                  |   | Control   |   |                              | 19,672  |   |            |                                          | 476     |       |                                         |   | — |   |   |   | 387 |   |   |   | — |   |   |   | 1,403 |   |   |   | — |   |   |   | (915 | ) |   |   | 335 |   |
| Total Control Investments                            |   | $         | 62,387 |                              |    | $      | 921             |                                          |    | $          | 1                                            |   |   | $ | 378 |   |   | $ | — |   |   | $ | 2,348 |   |   | $ | 1 |   |   | $ | 3,715 |   |   | $ | (4,308 | ) |
|                                                 |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Affiliate Investments                                |   |      |   |                              |    |   |            |                                          |    |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Optiscan BioMedical, Corp.                           |   | Affiliate |   | $                                 | 8,165   |   |            | $                                             | — |       |                                         | $      | — |   |   | $ | 837 |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | 1,252 |   |   | $ | (680 | ) |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) |   | Affiliate |   |                              | 19,930  |   |            |                                          | 509     |       |                                         |   | 71 |   |   |   | (2,205 | ) |   |   | — |   |   |   | 1,570 |   |   |   | 263 |   |   |   | (2,696 | ) |   |   | — |   |
| Stion Corporation                                    |   | Affiliate |   |                              | — |   |            |                                          | — |       |                                         |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,378 |   |   |   | (1,378 | ) |
| Total Affiliate Investments                          |   | $         | 28,095 |                              |    | $      | 509             |                                          |    | $          | 71                                           |   |   | $ | (1,368 | ) |   | $ | — |   |   | $ | 1,570 |   |   | $ | 263 |   |   | $ | (66 | ) |   | $ | (2,058 | ) |
| Total Control & Affiliate Investments            |   | $         | 90,482 |                              |    | $      | 1,430           |                                          |    | $          | 72                                           |   |   | $ | (990 | ) |   | $ | — |   |   | $ | 3,918 |   |   | $ | 264 |   |   | $ | 3,649 |   |   | $ | (6,366 | ) |

45

----

 

 

The following table shows the fair value of the Company’s portfolio of investments by asset class as of September 30, 2019 and December 31, 2018: 

 

|                              | September 30, 2019              |      |   | December 31, 2018                   |   |
|-----------------------------------|---------------------------------|-----------|--------|-------------------------------------|--------|
| (in thousands)                    | Investments at

Fair Value |      |   | Percentage of

Total Portfolio |   |   | Investments at

Fair Value |   |   | Percentage of

Total Portfolio |   |
| Senior Secured Debt with Warrants | $                               | 749,161   |   |                                |   | 33.3 | % |   | $ | 716,505 |   |   |   | 38.1 | % |
| Senior Secured Debt               |                            | 1,334,850 |   |                                |   | 59.4 | % |   |   | 1,029,255 |   |   |   | 54.8 | % |
| Unsecured Debt                    |                            | 14,806    |   |                                |   | 0.7 | % |   |   | 14,401 |   |   |   | 0.8 | % |
| Preferred Stock                   |                            | 68,310    |   |                                |   | 3.0 | % |   |   | 68,625 |   |   |   | 3.6 | % |
| Common Stock                      |                            | 80,079    |   |                                |   | 3.6 | % |   |   | 51,587 |   |   |   | 2.7 | % |
| Total                             | $                               | 2,247,206 |   |                                |   | 100.0 | % |   | $ | 1,880,373 |   |   |   | 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 September 30, 2019 and December 31, 2018 is shown as follows: 

 

|           | September 30, 2019         |      |   | December 31, 2018              |   |
|----------------|----------------------------|-----------|--------|--------------------------------|--------|
| (in thousands) | Investments at

Fair Value |      |   | Percentage of

Total Portfolio |   |   | Investments at

Fair Value |   |   | Percentage of

Total Portfolio |   |
| United States  | $                          | 1,914,701 |   |                           |   | 85.1 | % |   | $ | 1,668,027 |   |   |   | 88.8 | % |
| United Kingdom |                       | 178,985   |   |                           |   | 8.0 | % |   |   | 89,016 |   |   |   | 4.7 | % |
| Australia      |                       | 51,286    |   |                           |   | 2.3 | % |   |   | 35,190 |   |   |   | 1.9 | % |
| Netherlands    |                       | 37,590    |   |                           |   | 1.7 | % |   |   | 35,854 |   |   |   | 1.9 | % |
| Ireland        |                       | 35,231    |   |                           |   | 1.6 | % |   |   | 24,750 |   |   |   | 1.3 | % |
| Cayman Islands |                       | 18,032    |   |                           |   | 0.8 | % |   |   | 19,650 |   |   |   | 1.0 | % |
| Sweden         |                       | 7,143     |   |                           |   | 0.3 | % |   |   | 5,556 |   |   |   | 0.3 | % |
| Germany        |                       | 4,238     |   |                           |   | 0.2 | % |   |   | — |   |   |   | 0.0 | % |
| Canada         |                       | —   |   |                           |   | 0.0 | % |   |   | 859 |   |   |   | 0.0 | % |
| Switzerland    |                       | —   |   |                           |   | 0.0 | % |   |   | 1,471 |   |   |   | 0.1 | % |
| Total          | $                          | 2,247,206 |   |                           |   | 100.0 | % |   | $ | 1,880,373 |   |   |   | 100.0 | % |

 

The following table shows the fair value of the Company’s portfolio by industry sector at September 30, 2019 and December 31, 2018: 

 

|                                      | September 30, 2019         |      |   | December 31, 2018                   |   |
|-------------------------------------------|----------------------------|-----------|--------|-------------------------------------|--------|
| (in thousands)                            | Investments at

Fair Value |      |   | Percentage of

Total Portfolio |   |   | Investments at

Fair Value |   |   | Percentage of

Total Portfolio |   |
| Drug Discovery & Development          | $                          | 710,862   |   |                                |   | 31.7 | % |   | $ | 539,977 |   |   |   | 28.7 | % |
| Software                                  |                       | 586,509   |   |                                |   | 26.1 | % |   |   | 548,952 |   |   |   | 29.2 | % |
| Internet Consumer & Business Services |                       | 422,510   |   |                                |   | 18.8 | % |   |   | 329,512 |   |   |   | 17.5 | % |
| Healthcare Services, Other                |                       | 104,585   |   |                                |   | 4.7 | % |   |   | 60,142 |   |   |   | 3.2 | % |
| Medical Devices & Equipment           |                       | 101,378   |   |                                |   | 4.5 | % |   |   | 121,420 |   |   |   | 6.5 | % |
| Diversified Financial Services            |                       | 78,492    |   |                                |   | 3.5 | % |   |   | 39,491 |   |   |   | 2.1 | % |
| Sustainable and Renewable Technology      |                       | 77,518    |   |                                |   | 3.4 | % |   |   | 110,303 |   |   |   | 5.9 | % |
| Information Services                      |                       | 59,260    |   |                                |   | 2.6 | % |   |   | 30,940 |   |   |   | 1.6 | % |
| Drug Delivery                             |                       | 46,009    |   |                                |   | 2.0 | % |   |   | 40,519 |   |   |   | 2.2 | % |
| Media/Content/Info                        |                       | 21,765    |   |                                |   | 1.0 | % |   |   | 21,666 |   |   |   | 1.2 | % |
| Semiconductors                            |                       | 10,607    |   |                                |   | 0.5 | % |   |   | 899 |   |   |   | 0.0 | % |
| Electronics & Computer Hardware       |                       | 7,188     |   |                                |   | 0.3 | % |   |   | 15,763 |   |   |   | 0.8 | % |
| Consumer & Business Products          |                       | 6,573     |   |                                |   | 0.3 | % |   |   | 6,179 |   |   |   | 0.3 | % |
| Surgical Devices                          |                       | 5,120     |   |                                |   | 0.2 | % |   |   | 3,088 |   |   |   | 0.2 | % |
| Biotechnology Tools                       |                       | 5,020     |   |                                |   | 0.2 | % |   |   | 6,279 |   |   |   | 0.3 | % |
| Communications & Networking           |                       | 3,785     |   |                                |   | 0.2 | % |   |   | 4,871 |   |   |   | 0.3 | % |
| Specialty Pharmaceuticals                 |                       | 25        |   |                                |   | 0.0 | % |   |   | 24 |   |   |   | 0.0 | % |
| Diagnostic                                |                       | —   |   |                                |   | 0.0 | % |   |   | 348 |   |   |   | 0.0 | % |
| Total                                     | $                          | 2,247,206 |   |                                |   | 100.0 | % |   | $ | 1,880,373 |   |   |   | 100.0 | % |

No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of September 30, 2019 and December 31, 2018. 

46

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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 September 30, 2019, approximately 84.8% of the Company’s debt investments were in a senior secured first lien position, with 46.2% secured by a first priority security in all of the assets of the portfolio company, including its intellectual property, 29.1% 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, 0.9% of the Company’s debt investments were senior secured by the equipment of the portfolio company and 8.6% 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, 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 14.5% of the Company’s debt investments were secured by a second priority security interest in the portfolio company’s assets, and 0.7% were unsecured.

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 September 30, 2019, the Company had three debt investments on non-accrual with a cumulative investment cost and approximate fair value of $9.2 million and $2.2 million, respectively. At December 31, 2018, the Company had two debt investments on non-accrual with cumulative investment cost of approximately $2.7 million and fair value of zero. The increase in the cost of debt investments on non-accrual between December 31, 2018 and September 30, 2019 is the result of the addition of two debt investments, partially offset by the removal of one debt investment that was on non-accrual at December 31, 2018 which resulted in a realized loss of approximately $2.5 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 the Company to portfolio companies and other third parties. Loan commitment and facility 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 $42.1 million of unamortized fees at September 30, 2019, of which approximately $34.6 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $7.5 million was deferred contingent upon the occurrence of a funding or milestone.At December 31, 2018, the Company had approximately $36.3 million of unamortized fees, of which approximately $31.1 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $5.2 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 $1.4 million and $1.6 million in one-time fee income during the three months ended September 30, 2019 and 2018, respectively. The Company recorded approximately $4.6 million and $6.4 million in one-time fee income during the nine months ended September 30, 2019 and 2018, 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 September 30, 2019, the Company had approximately $32.0 million in exit fees receivable, of which approximately $29.2 million was included as a component of the cost basis of the Company’s current debt investments and approximately $2.8 million was a deferred receivable related to expired commitments. At December 31, 2018, the Company had approximately $25.6 million in exit fees receivable, of which approximately $23.3 million was included as an offset to the cost basis of the Company’s current debt investments and approximately $2.3 million was deferred related to expired commitments.

47

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The Company has debt investments in its portfolio that contain a PIK provision. Contractual PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on an accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. The Company recorded approximately $2.2 million and $2.4 million in PIK income during the three months ended September 30, 2019 and 2018, respectively. The Company recorded approximately $6.6 million and $7.0 million in PIK income during the nine months ended September 30, 2019and 2018, 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 nine months ended September 30, 2019 and 2018. 

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 September 30, 2019, the 2022 Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes, and 2022 Convertible Notes were quoted for 1.000, 1.010, 1.012, and 1.024 per dollar at par value, respectively. At September 30, 2019, the 2025 Notes and 2033 Notes were trading on the NYSE for $25.23 and $26.65 per unit at par value, respectively. The par value at underwriting for the 2025 Notes and 2033 Notes was $25.00 per unit. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair values of the SBA debentures, and July 2024 Notes were approximately $153.5 million, and $106.2 million, respectively, compared to the principal amounts of $149.0 million, and $105.0 million, respectively, as of September 30, 2019. The fair value of the outstanding borrowings under the Union Bank Facility and the Wells Facility is equal to their principal outstanding balances as of September 30, 2019. 

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 September 30, 2019 and December 31, 2018:  

 

| (in thousands)          |   |               |      |   |      | Identical Assets |    |      | Observable Inputs |   |      | Unobservable Inputs |   |        |
|-------------------------|--------|--------------------|-----------|--------|-----------|------------------|---------|-----------|-------------------|--------|-----------|---------------------|--------|--------|
| Description             |   | September 30, 2019 |      |   | (Level 1) |             |    | (Level 2) |              |   | (Level 3) |                |
| SBA Debentures          |   | $                  | 153,524   |   |      | $                | — |      |              | $      | —   |                |   | $      | 153,524 |   |  |
| 2022 Notes              |   |               | 150,030   |   |      |             | — |      |              |   | 150,030   |                |   |   | — |   |  |
| July 2024 Notes         |   |               | 106,220   |   |      |             | — |      |              |   | —   |                |   |   | 106,220 |   |  |
| 2025 Notes              |   |               | 75,690    |   |      |             | — |      |              |   | 75,690    |                |   |   | — |   |  |
| 2033 Notes              |   |               | 42,640    |   |      |             | — |      |              |   | 42,640    |                |   |   | — |   |  |
| 2027 Asset-Backed Notes |   |               | 201,914   |   |      |             | — |      |              |   | 201,914   |                |   |   | — |   |  |
| 2028 Asset-Backed Notes |   |               | 252,920   |   |      |             | — |      |              |   | 252,920   |                |   |   | — |   |  |
| 2022 Convertible Notes  |   |               | 235,451   |   |      |             | — |      |              |   | 235,451   |                |   |   | — |   |  |
| Wells Facility          |   |               | —   |   |      |             | — |      |              |   | —   |                |   |   | — |   |  |
| Union Facility          |   |               | 11,585    |   |      |             | — |      |              |   | —   |                |   |   | 11,585 |   |  |
| Total                   |   | $                  | 1,229,974 |   |      | $                | — |      |              | $      | 958,645   |                |   | $      | 271,329 |   |  |

 

48

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| (in thousands)          |   |              |    |   |      | Identical Assets |    |      | Observable Inputs |   |      | Unobservable Inputs |   |
|-------------------------|--------|-------------------|---------|--------|-----------|------------------|---------|-----------|-------------------|--------|-----------|---------------------|--------|
| Description             |   | December 31, 2018 |    |   | (Level 1) |             |    | (Level 2) |              |   | (Level 3) |                |        |
| SBA Debentures          |   | $                 | 150,387 |   |      | $                | — |      |              | $      | —   |                |   | $ | 150,387 |   |  |
| 2022 Notes              |   |              | 146,385 |   |      |             | — |      |              |   | 146,385   |                |   |   | — |   |  |
| 2024 Notes              |   |              | 84,445  |   |      |             | — |      |              |   | 84,445    |                |   |   | — |   |  |
| 2025 Notes              |   |              | 72,150  |   |      |             | — |      |              |   | 72,150    |                |   |   | — |   |  |
| 2033 Notes              |   |              | 37,360  |   |      |             | — |      |              |   | 37,360    |                |   |   | — |   |  |
| 2027 Asset-Backed Notes |   |              | 201,188 |   |      |             | — |      |              |   | 201,188   |                |   |   | — |   |  |
| 2022 Convertible Notes  |   |              | 217,672 |   |      |             | — |      |              |   | 217,672   |                |   |   | — |   |  |
| Wells Facility          |   |              | 13,107  |   |      |             | — |      |              |   | —   |                |   |   | 13,107 |   |  |
| Union Facility          |   |              | 39,849  |   |      |             | — |      |              |   | —   |                |   |   | 39,849 |   |  |
| Total                   |   | $                 | 962,543 |   |      | $                | — |      |              | $      | 759,200   |                |   | $ | 203,343 |   |  |

 

4. Borrowings 

Outstanding Borrowings 

At September 30, 2019 and December 31, 2018, the Company had the following available and outstanding borrowings: 

 

|                    | September 30, 2019 |      |   | December 31, 2018 |   |
|-------------------------|--------------------|-----------|--------|-------------------|--------|
| (in thousands)          | Total Available    |      |   | Principal         |   |   | Carrying Value (1) |   |   | Total Available |   |   | Principal |   |   | Carrying Value (1) |   |
| SBA Debentures (2)      | $                  | 149,000   |   |              | $      | 149,000 |   |   | $ | 148,038 |   |   | $ | 149,000 |   |   | $ | 149,000 |   |   | $ | 147,655 |   |
| 2022 Notes              |               | 150,000   |   |              |   | 150,000 |   |   |   | 148,383 |   |   |   | 150,000 |   |   |   | 150,000 |   |   |   | 147,990 |   |
| 2024 Notes (3)          |               | —   |   |              |   | — |   |   |   | — |   |   |   | 83,510 |   |   |   | 83,510 |   |   |   | 81,852 |   |
| July 2024 Notes         |               | 105,000   |   |              |   | 105,000 |   |   |   | 103,723 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| 2025 Notes              |               | 75,000    |   |              |   | 75,000 |   |   |   | 72,875 |   |   |   | 75,000 |   |   |   | 75,000 |   |   |   | 72,590 |   |
| 2033 Notes              |               | 40,000    |   |              |   | 40,000 |   |   |   | 38,474 |   |   |   | 40,000 |   |   |   | 40,000 |   |   |   | 38,427 |   |
| 2027 Asset-Backed Notes |               | 200,000   |   |              |   | 200,000 |   |   |   | 197,241 |   |   |   | 200,000 |   |   |   | 200,000 |   |   |   | 197,265 |   |
| 2028 Asset-Backed Notes |               | 250,000   |   |              |   | 250,000 |   |   |   | 247,333 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| 2022 Convertible Notes  |               | 230,000   |   |              |   | 230,000 |   |   |   | 226,223 |   |   |   | 230,000 |   |   |   | 230,000 |   |   |   | 225,051 |   |
| Wells Facility (4)      |               | 75,000    |   |              |   | — |   |   |   | — |   |   |   | 75,000 |   |   |   | 13,107 |   |   |   | 13,107 |   |
| Union Bank Facility (4) |               | 200,000   |   |              |   | 11,585 |   |   |   | 11,585 |   |   |   | 100,000 |   |   |   | 39,849 |   |   |   | 39,849 |   |
| Total                   | $                  | 1,474,000 |   |              | $      | 1,210,585 |   |   | $ | 1,193,875 |   |   | $ | 1,102,510 |   |   | $ | 980,466 |   |   | $ | 963,786 |   |

 

 

| (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 September 30, 2019 and December 31, 2018, the total available borrowings under the SBA debentures were $149.0 million. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

| (3) | The 2024 Notes were fully repaid on January 14, 2019 and February 4, 2019. |
|-----|----------------------------------------------------------------------------|

| (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 debt issuance costs associated with line-of-credit arrangements. Debt issuance costs, net of accumulated amortization, were as follows as of September 30, 2019 and December 31, 2018:

 

| (in thousands)          |   | September 30, 2019 |    |   | December 31, 2018 |   |
|-------------------------|--------|--------------------|---------|--------|-------------------|--------|
| SBA Debentures          |   | $                  | 962     |   |              | $      | 1,345 |   |
| 2022 Notes              |   |               | 1,110   |   |              |   | 1,379 |   |
| 2024 Notes (2)          |   |               | — |   |              |   | 1,686 |   |
| July 2024 Notes         |   |               | 1,277   |   |              |   | — |   |
| 2025 Notes              |   |               | 2,125   |   |              |   | 2,410 |   |
| 2033 Notes              |   |               | 1,526   |   |              |   | 1,573 |   |
| 2027 Asset-Backed Notes |   |               | 2,759   |   |              |   | 2,735 |   |
| 2028 Asset-Backed Notes |   |               | 2,667   |   |              |   | — |   |
| 2022 Convertible Notes  |   |               | 2,155   |   |              |   | 2,823 |   |
| Wells Facility (1)      |   |               | 417     |   |              |   | 100 |   |
| Union Bank Facility (1) |   |               | 1,637   |   |              |   | 165 |   |
| Total                   |   | $                  | 16,635  |   |              | $      | 14,216 |   |

 

| (1) | As the Wells Facility and Union Bank Facility are line-of-credit arrangements, the debt issuance costs associated with these instruments are included within Other assets on the Consolidated Statement of Assets and Liabilities in accordance with ASC Subtopic 835-30. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The 2024 Notes were fully redeemed on January 14, 2019 and February 4, 2019. |
|-----|------------------------------------------------------------------------------|

49

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Long-Term SBA Debentures 

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program in which HT III can borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $74.5 million in HT III as of September 30, 2019, 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 September 30, 2019. As the Company is past its investment period for HT III, it will no longer make any future commitments to new portfolio companies. The Company will only satisfy contractually agreed follow-on fundings to existing portfolio companies and may seek to early pay-off a portion or all of the outstanding debentures as per the available liquidity in HT III.

As of September 30, 2019, HT III has paid the SBA commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of September 30, 2019, the Company held investments in HT III in 43 companies with a fair value of approximately $213.3 million, accounting for approximately 9.5% of the Company’s total investment portfolio at September 30, 2019. HT III held approximately $223.7 million in tangible assets which accounted for approximately 9.7% of the Company’s total assets at September 30, 2019.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. SBICs are subject to a variety of regulations and oversight by the SBA concerning the size and nature of the companies in which they may invest as well as the structures of those investments. Through the Company’s wholly owned subsidiary HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT III is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. HT III was in compliance with the terms of the SBIC’s leverage as of September 30, 2019 as a result of having sufficient capital as defined under the SBA regulations.

The average amount of debentures outstanding for the three and nine months ended September 30, 2019 for HT III were approximately $149.0 million with an average interest rate of approximately 3.46% and 3.42%, respectively. 

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the SBA debentures are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 1,287  |   |                            | $      | 1,658 |   |   | $ | 3,820 |   |   | $ | 5,113 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 128    |   |                            |   | 270 |   |   |   | 383 |   |   |   | 586 |   |
| Total interest expense and fees                |   | $                                | 1,415  |   |                            | $      | 1,928 |   |   | $ | 4,203 |   |   | $ | 5,699 |   |
| Cash paid for interest expense                 |   | $                                | 2,561  |   |                            | $      | 3,499 |   |   | $ | 5,080 |   |   | $ | 6,942 |   |

The Company reported the following SBA debentures outstanding principal balances as of September 30, 2019 and December 31, 2018: 

 

| (in thousands)

Issuance/Pooling Date |   | Maturity Date     |   | Interest Rate (1) |   |   | September 30, 2019 |   |    | December 31, 2018 |   |
|---------------------------------------|--------|-------------------|--------|-------------------|--------|--------|--------------------|--------|---------|-------------------|--------|
| September 22, 2010                    |   | September 1, 2020 |   | 3.50%             |   |   | $                  | 10,000 |    |              | $      | 10,000 |   |
| 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                  |   |              |   |              |   |   |               | $      | 149,000 |              |   | $ | 149,000 |   |

 

| (1) | Interest rate includes annual charge. |
|-----|---------------------------------------|

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.

50

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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 September 30, 2019, the Company was in compliance with the terms of the 2022 Notes Indenture.

As of September 30, 2019 and December 31, 2018, the components of the carrying value of the 2022 Notes were as follows:

 

| (in thousands)                            |   | September 30, 2019 |    |   | December 31, 2018 |   |
|-------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Principal amount of debt                  |   | $                  | 150,000 |   |              | $      | 150,000 |   |
| Unamortized debt issuance cost            |   |               | (1,110  | )      |              |   | (1,379 | ) |
| Original issue discount, net of accretion |   |               | (507    | )      |              |   | (631 | ) |
| Carrying value of 2022 Notes              |   | $                  | 148,383 |   |              | $      | 147,990 |   |

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2022 Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |    |   | Nine Months Ended September 30, |   |         |
|------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|---------|
| (in thousands)                                 |   | 2019                             |    |   | 2018                            |   |    | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 1,734   |   |                            | $      | 1,734   |   |   | $ | 5,202 |   |   | $ | 5,203 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 90      |   |                            |   | 90      |   |   |   | 270 |   |   |   | 261 |   |
| Accretion of original issue discount           |   |                             | 41      |   |                            |   | 41      |   |   |   | 123 |   |   |   | 123 |   |
| Total interest expense and fees                |   | $                                | 1,865   |   |                            | $      | 1,865   |   |   | $ | 5,595 |   |   | $ | 5,587 |   |
| 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. 

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. 

51

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On October 24, 2017, the Board of Directors approved a redemption of $75.0 million of outstanding aggregate principal amount of the 2024 Notes, which were redeemed on November 23, 2017.On February 9, 2018, the Board of Directors approved a redemption of $100.0 million of outstanding aggregate principal amount of the 2024 Notes, which were redeemed on April 2, 2018. Further, on December 7, 2018, the Board of Directors approved a full redemption, in two equal transactions, of $83.5 million of the outstanding aggregate principal amount of the 2024 Notes. The 2024 Notes were fully redeemed on January 14, 2019 and February 4, 2019.

As of September 30, 2019 and December 31, 2018, the components of the carrying value of the 2024 Notes were as follows:

 

| (in thousands)                              |   | September 30, 2019 |    |   | December 31, 2018 |   |
|---------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Principal amount of debt                    |   | $                  | — |   |              | $      | 83,510 |   |
| Unamortized debt issuance cost              |   |               | — |   |              |   | (1,686 | ) |
| Original issue premium, net of amortization |   |               | — |   |              |   | 28 |   |
| Carrying value of 2024 Notes                |   | $                  | — |   |              | $      | 81,852 |   |

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2024 Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |    |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | — |   |                            | $      | 1,305 |   |   | $ | 210 |   |   | $ | 5,525 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | — |   |                            |   | 110 |   |   |   | 1,686 |   |   |   | 2,831 |   |
| Amortization of original issue premium         |   |                             | — |   |                            |   | (13 | ) |   |   | 110 |   |   |   | (40 | ) |
| Total interest expense and fees                |   | $                                | — |   |                            | $      | 1,402 |   |   | $ | 2,006 |   |   | $ | 8,316 |   |
| Cash paid for interest expense                 |   | $                                | — |   |                            | $      | 1,305 |   |   | $ | 1,305 |   |   | $ | 6,553 |   |

July 2024 Notes

On July 16, 2019, the Company issued $105.0million in aggregate principal amount (the “July 2024 Notes”) to qualified institutional investors in a private placement. The sale of the July 2024 Notes generated net proceeds of approximately $103.7 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $1.3 million. 

The July 2024 Notes have a fixed interest rate of 4.77% and are due on July 16, 2024, unless redeemed, purchased or prepaid prior to such date by the Company or its affiliates in accordance with their terms. Interest on the July 2024 Notes will be due semiannually and the July 2024 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. 

As of September 30, 2019 and December 31, 2018, the components of the carrying value of the July 2024 Notes were as follows:

 

| (in thousands)                    |   | September 30, 2019 |    |   | December 31, 2018 |   |
|-----------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Principal amount of debt          |   | $                  | 105,000 |   |              | $      | — |   |
| Unamortized debt issuance cost    |   |               | (1,277  | )      |              |   | — |   |
| Carrying value of July 2024 Notes |   | $                  | 103,723 |   |              | $      | — |   |

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the July 2024 Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |    |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 1,050   |   |                            | $      | — |   |   | $ | 1,050 |   |   | $ | — |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 49      |   |                            |   | — |   |   |   | 49 |   |   |   | — |   |
| Total interest expense and fees                |   | $                                | 1,099   |   |                            | $      | — |   |   | $ | 1,099 |   |   | $ | — |   |
| Cash paid for interest expense                 |   | $                                | — |   |                            | $      | — |   |   | $ | — |   |   | $ | — |   |

As of September 30, 2019, the Company was in compliance with the terms of the note purchase agreement governing the July 2024 Notes.

52

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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 $72.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $2.6 million.

The 2025 Notes will mature on April 30, 2025, unless previously repurchased in accordance with their terms. The 2025 Notes bear interest at a rate of 5.25% per year payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2018 and trade on the NYSE under the symbol “HCXZ”. The 2025 Notes are the Company’s direct unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.

The Company may redeem some or all of the 2025 Notes at any time, or from time to time, at the redemption price set forth under the terms of the indenture after April 30, 2021. No sinking fund is provided for the 2025 Notes. The 2025 Notes were issued in denominations of $25 and integral multiples of $25 thereof. As of September 30, 2019, the Company was in compliance with the terms of the 2025 Notes Indenture.

As of September 30, 2019 and December 31, 2018, the components of the carrying value of the 2025 Notes were as follows:

 

| (in thousands)                 |   | September 30, 2019 |   |   | December 31, 2018 |   |
|--------------------------------|--------|--------------------|--------|--------|-------------------|--------|
| Principal amount of debt       |   | $                  | 75,000 |   |              | $      | 75,000 |   |
| Unamortized debt issuance cost |   |               | (2,125 | )      |              |   | (2,410 | ) |
| Carrying value of 2025 Notes   |   | $                  | 72,875 |   |              | $      | 72,590 |   |

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2025 Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 984    |   |                            | $      | 983 |   |   | $ | 2,953 |   |   | $ | 1,695 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 95     |   |                            |   | 69 |   |   |   | 285 |   |   |   | 126 |   |
| Total interest expense and fees                |   | $                                | 1,079  |   |                            | $      | 1,052 |   |   | $ | 3,238 |   |   | $ | 1,821 |   |
| Cash paid for interest expense                 |   | $                                | 984    |   |                            | $      | 1,028 |   |   | $ | 2,953 |   |   | $ | 1,028 |   |

2033 Notes

On September 24, 2018, the Company issued $40.0 million in aggregate principal amount of 6.25% notes due 2033 (the “2033 Notes”). The 2033 Notes were issued pursuant to the Sixth Supplemental Indenture to the Base Indenture, dated September 24, 2018 (the “2033 Notes Indenture”), between the Company and U.S. Bank, National Association, as trustee. The sale of the 2033 Notes generated net proceeds of approximately $38.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $1.6 million.

The 2033 Notes will mature on October 30, 2033, unless previously repurchased in accordance with their terms. The 2033 Notes bear interest at a rate of 6.25% per year payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on October 30, 2018 and trade on the NYSE under the symbol “HCXY.”

The 2033 Notes are the Company’s direct unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.

The Company may redeem some or all of the 2033 Notes at any time, or from time to time, at the redemption price set forth under the terms of the indenture after October 30, 2023. No sinking fund is provided for the 2033 Notes. The 2033 Notes were issued in denominations of $25 and integral multiples of $25 thereof. As of September 30, 2019, the Company was in compliance with the terms of the 2033 Notes Indenture.

53

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As of September 30, 2019 and December 31, 2018, the components of the carrying value of the 2033 Notes were as follows:

 

| (in thousands)                 |   | September 30, 2019 |   |   | December 31, 2018 |   |
|--------------------------------|--------|--------------------|--------|--------|-------------------|--------|
| Principal amount of debt       |   | $                  | 40,000 |   |              | $      | 40,000 |   |
| Unamortized debt issuance cost |   |               | (1,526 | )      |              |   | (1,573 | ) |
| Carrying value of 2033 Notes   |   | $                  | 38,474 |   |              | $      | 38,427 |   |

 

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2033 Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 625    |   |                            | $      | 49 |   |   | $ | 1,875 |   |   | $ | 49 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 27     |   |                            |   | 2 |   |   |   | 81 |   |   |   | 2 |   |
| Total interest expense and fees                |   | $                                | 652    |   |                            | $      | 51 |   |   | $ | 1,956 |   |   | $ | 51 |   |
| Cash paid for interest expense                 |   | $                                | 625    |   |                            | $      | — |   |   | $ | 1,875 |   |   | $ | — |   |

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”). The 2021 Asset-Backed Notes were sold by Hercules Capital Funding Trust 2014-1 (the “2014 Securitization Issuer”) 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 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain of the Company’s portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has an 18-month reinvestment period during which time principal collections may be reinvested into additional eligible loans. Interest on the 2021 Asset-Backed Notes is paid, to the extent of funds available, at a fixed rate of 3.524% per annum. The 2021 Asset-Backed Notes have a stated maturity of April 16, 2021.

In July 2018, changes in the payment schedule of obligors in the 2021 Asset-Backed Notes collateral pool triggered a rapid amortization event in accordance with the sale and servicing agreement for the 2021 Asset-Backed Notes. Due to this event, the 2021 Asset-Backed Notes were fully repaid as of October 16, 2018.

For the three and nine months ended September 30, 2019 and 2018, 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 September 30, |    |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | — |   |                            | $      | 66 |   |   | $ | — |   |   | $ | 689 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | — |   |                            |   | 297 |   |   |   | — |   |   |   | 410 |   |
| Total interest expense and fees                |   | $                                | — |   |                            | $      | 363 |   |   | $ | — |   |   | $ | 1,099 |   |
| Cash paid for interest expense                 |   | $                                | — |   |                            | $      | 146 |   |   | $ | — |   |   | $ | 823 |   |

2027 Asset-Backed Notes 

 

On November 1, 2018, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of $200.0 million in aggregate principal amount of fixed rate asset-backed notes (the “2027 Asset-Backed Notes”).

The 2027 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2018-1 (the “2018 Securitization Issuer”) pursuant to a note purchase agreement, dated as of October 25, 2018, by and among the Company, Hercules Capital Funding 2018-1 LLC, as trust depositor, the 2018 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, and are backed by a pool of senior loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. The securitization has a reinvestment period with a scheduled termination date of October 20, 2020 during which time principal collections may be reinvested into additional eligible loans. Interest on the 2027 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.605% per annum. The 2027 Asset-Backed Notes have a stated maturity of November 22, 2027.

At both September 30, 2019 and December 31, 2018, the 2027 Asset-Backed Notes had an outstanding principal balance of $200.0 million. 

54

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For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2027 Asset-Backed Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 2,303  |   |                            | $      | — |   |   | $ | 6,908 |   |   | $ | — |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 70     |   |                            |   | — |   |   |   | 208 |   |   |   | — |   |
| Total interest expense and fees                |   | $                                | 2,373  |   |                            | $      | — |   |   | $ | 7,116 |   |   | $ | — |   |
| Cash paid for interest expense                 |   | $                                | 2,303  |   |                            | $      | — |   |   | $ | 6,908 |   |   | $ | — |   |

 

Under the terms of the 2027 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2027 Asset-Backed Notes and through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2027 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. At September 30, 2019, there was approximately $6.5 million of restricted cash. There was approximately $11.6 million of restricted cash as of December 31, 2018. 

As of September 30, 2019, the Company was in compliance with the terms of the note purchase agreement governing the 2027 Asset-Backed Notes.

2028 Asset-Backed Notes 

 

On January 22, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of $250.0 million in aggregate principal amount of fixed rate asset-backed notes (the “2028 Asset-Backed Notes”).

The 2028 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2019-1 (the “2019 Securitization Issuer”) pursuant to a note purchase agreement, dated as of January 14, 2019, by and among the Company, Hercules Capital Funding 2019-1 LLC, as trust depositor, the 2019 Securitization Issuer, and Guggenheim Securities, LLC, as initial purchaser, MUFG Securities Americas Inc., as a co-manager, Wells Fargo Securities, LLC., as a co-manager, and are backed by a pool of senior loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2028 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.703% per annum. The 2028 Asset-Backed Notes have a stated maturity of February 22, 2028.

At September 30, 2019, the 2028 Asset-Backed Notes had an outstanding principal balance of $250.0 million. There was no outstanding principal balance for the 2028 Asset-Backed Notes at December 31, 2018. 

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the 2028 Asset-Backed Notes are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |         |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|---------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |    | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 2,939  |   |                            | $      | — |   |   | $ | 8,132 |   |   | $ | — |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 67     |   |                            |   | — |   |   |   | 185 |   |   |   | — |   |
| Total interest expense and fees                |   | $                                | 3,006  |   |                            | $      | — |   |   | $ | 8,317 |   |   | $ | — |   |
| Cash paid for interest expense                 |   | $                                | 2,939  |   |                            | $      | — |   |   | $ | 7,805 |   |   | $ | — |   |

 

Under the terms of the 2028 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2028 Asset-Backed Notes and through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2028 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. At September 30, 2019, there was approximately $8.4 million of restricted cash. There were no funds segregated as restricted cash related to the 2028 Asset-Backed Notes at December 31, 2018.

As of September 30, 2019, the Company was in compliance with the terms of the note purchase agreement governing the 2028 Asset-Backed Notes.

55

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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 September 30, 2019, 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 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 4.77%. 

As of September 30, 2019 and December 31, 2018, the components of the carrying value of the 2022 Convertible Notes were as follows:

 

| (in thousands)                            |   | September 30, 2019 |    |   | December 31, 2018 |   |
|-------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Principal amount of debt                  |   | $                  | 230,000 |   |              | $      | 230,000 |   |
| Unamortized debt issuance cost            |   |               | (2,155  | )      |              |   | (2,823 | ) |
| Original issue discount, net of accretion |   |               | (1,622  | )      |              |   | (2,126 | ) |
| Carrying value of 2022 Convertible Notes  |   | $                  | 226,223 |   |              | $      | 225,051 |   |

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For the three and nine months ended September 30, 2019 and 2018, the components of interest expense, fees and cash paid for interest expense for the 2022 Convertible Notes were as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 2,516  |   |                            | $      | 2,516 |   |   | $ | 7,547 |   |   | $ | 7,547 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 223    |   |                            |   | 223 |   |   |   | 669 |   |   |   | 669 |   |
| Accretion of original issue discount           |   |                             | 168    |   |                            |   | 168 |   |   |   | 504 |   |   |   | 504 |   |
| Total interest expense and fees                |   | $                                | 2,907  |   |                            | $      | 2,907 |   |   | $ | 8,720 |   |   | $ | 8,720 |   |
| Cash paid for interest expense                 |   | $                                | 5,031  |   |                            | $      | 5,031 |   |   | $ | 10,062 |   |   | $ | 10,063 |   |

As of September 30, 2019, the Company was in compliance with the terms of the indentures governing the 2022 Convertible Notes.

Credit Facilities

As of September 30, 2019 and December 31, 2018, 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. 

On January 11, 2019, Hercules Funding II entered into the Seventh Amendment, to the Wells Facility, or the Wells Facility Seventh Amendment. The Wells Facility Seventh Amendment, among other things, amends certain key provisions of the Wells Facility to reduce the current interest rate to LIBOR plus 3.00% with a natural floor of 3.00%. The Wells Facility Seventh Amendment also extends the maturity date to January 2023, unless terminated sooner in accordance with its terms. In addition, the Wells Fargo Capital Finance, LLC has committed $75.0 million in credit capacity with an accordion feature, in which the Company can increase the credit line up to an aggregate of $125.0 million, funded by additional lenders and with the agreement of Wells Fargo and subject to other customary conditions.The Wells Facility has an advance rate of 55% against eligible debt investments, and it 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 0.00% to 0.375% depending on the average monthly outstanding balance under the facility relative to the maximum amount of commitments at such time. 

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, and a minimum tangible net worth ratio. 

On July 2, 2019, Hercules Funding II entered into the Eighth Amendment to the Wells Facility, or the Wells Facility Eighth Amendment. The Wells Facility Eighth Amendment amends certain provisions of the Wells Facility to, among other things, revise certain provisions thereof to further permit a third party special servicer to act as servicer after an event of default instead of the Company with respect to split-funded notes receivable owned by Hercules Funding II and an affiliate thereof (including Hercules Funding IV LLC).

As of September 30, 2019, the Company has no borrowings outstanding on the facility. The Company had borrowings outstanding of $13.1 million on the facility at December 31, 2018.

For the three and nine months ended September 30, 2019 and 2018, the components of interest expense and related fees and cash paid for interest expense for the Wells Facility are as follows:

 

|                                           |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 22     |   |                            | $      | 244 |   |   | $ | 416 |   |   | $ | 990 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 66     |   |                            |   | 44 |   |   |   | 219 |   |   |   | 133 |   |
| Total interest expense and fees                |   | $                                | 88     |   |                            | $      | 288 |   |   | $ | 635 |   |   | $ | 1,123 |   |
| Cash paid for interest expense                 |   | $                                | 95     |   |                            | $      | 345 |   |   | $ | 430 |   |   | $ | 823 |   |

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Union Bank Facility 

On February 20, 2019, the Company, through a special purpose wholly owned subsidiary, Hercules Funding IV LLC (“Hercules Funding IV”), 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 May 5, 2016 (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 February 20, 2019 were incurred and relate to the Prior Union Bank Facility.

Under the Union Bank Credit Facility, the lenders have made commitments of $200.0 million. Borrowings under the Union Bank Credit Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.70%, and the facility matures on February 20, 2023. The Union Bank 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 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. The Union Bank Facility generally has an advance rate of 55% against eligible debt investments. The Union Bank Facility is secured by all of the assets of Hercules Funding IV.

The Union Bank Facility requires payment of a non-use fee during the revolving credit availability period of 0.50% depending on the average monthly outstanding balance under the facility relative to the maximum amount of commitments at such time. 

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 IV, including covenants relating to certain changes of control of the Company and Hercules Funding IV. 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 $700.0 million plus 90% of the cumulative amount of equity raised after December 31, 2018. As of September 30, 2019, the minimum tangible net worth covenant increased to $785.9 million as a result of the equity raised after December 31, 2018. See “Note 6 - Stockholder’s Equity.” 

On June 28, 2019, Hercules Funding IV entered into the First Amendment, or the Union Bank Facility Amendment, to the Union Bank Facility. The Union Bank Facility Amendment amends certain provisions of the Union Bank Facility to, among other things, (i) delete the financial covenant with respect to maintaining minimum portfolio funding liquidity, (ii) add a covenant prohibiting Hercules Funding IV from acquiring or owning unfunded commitments to makers of certain notes receivable, and (iii) revise certain provisions thereof to further permit a third party special servicer to act as servicer after an event of default instead of the Company with respect to split-funded notes receivable owned by Hercules Funding IV and an affiliate thereof (including Hercules Funding II). 

As of September 30, 2019, the Company has borrowings outstanding of $11.6 million on the facility. The Company had borrowings outstanding of $39.8 million on the facility at December 31, 2018. 

For the three and nine months ended September 30, 2019 and 2018, 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 September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)                                 |   | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Interest expense                               |   | $                                | 188    |   |                            | $      | 700 |   |   | $ | 1,077 |   |   | $ | 1,265 |   |
| Amortization of debt issuance cost (loan fees) |   |                             | 199    |   |                            |   | 92 |   |   |   | 606 |   |   |   | 243 |   |
| Total interest expense and fees                |   | $                                | 387    |   |                            | $      | 792 |   |   | $ | 1,683 |   |   | $ | 1,508 |   |
| Cash paid for interest expense                 |   | $                                | 461    |   |                            | $      | 793 |   |   | $ | 1,096 |   |   | $ | 1,074 |   |

 

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.

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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 September 30, 2019, the Company declared and paid a distribution of $0.34 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 September 30, 2019, 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 2019 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 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 nine months ended September 30, 2019 was approximately $110.0 million or $1.11 per share. Taxable net realized gains for the same period were $15.6 million or approximately $0.16 per share. Taxable income for the nine months ended September 30, 2018 was approximately $83.1 million or $0.93 per share. Taxable net realized gains for the same period were $7.2 million or approximately $0.08 per share.

For the nine months ended September 30, 2019, the Company paid approximately $1.4 million of tax expense and had $835,000 accrued but unpaid tax expense as of the balance sheet date. For the nine months ended September 30, 2018, the Company paid approximately $676,000 of tax expense and had $100,000 accrued but unpaid tax expense as of the balance sheet date.

The Company intends to timely distribute to its stockholders substantially all of our annual taxable income for each year, except that it may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax. 

6. Stockholders’ Equity 

On September 7, 2017, the Company entered into an At-The-Market, or ATM equity distribution agreement, or the Prior Equity Distribution Agreement, with JMP Securities LLC, or JMP. The Prior Equity Distribution Agreement, 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. 

59

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On May 6, 2019, the Company terminated the Prior Equity Distribution Agreement and entered into a new ATM equity distribution agreement, or 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. TheEquity 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. 

There were no shares of common stock sold under the Equity Distribution Agreement during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company sold approximately 2.0 million shares of common stock, of which 679,000 shares and 1.3 million shares were issued under the Prior Equity Distribution Agreement and the Equity Distribution Agreement, respectively. For the same period, the Company received total accumulated net proceeds of approximately $25.1 million, including $311,000 of offering expenses, from these sales, of which $8.5 million, including offering expense of $146,000, was received under the Prior Equity Distribution Agreement and $16.6 million, including offering expense of $165,000, was received under the Equity Distribution Agreement.

During the three and nine months ended September 30, 2018, the Company sold 2.4 million and 5.0 million shares of common stock for total accumulated net proceeds of approximately $30.9 million and $62.3 million, respectively, including $540,000 and $1.4 million of offering expenses, respectively, under the Prior Equity Distribution Agreement.  

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 September 30, 2019, approximately 10.7 million shares remain available for issuance and sale under the Equity Distribution Agreement.

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.

On December 17, 2018, the Board of Directors authorized a stock repurchase plan permitting the Company to repurchase up to $25.0 million of its common stock until June 18, 2019, after which the plan expired. The Company had no common stock repurchases during 2019. During the year ended December 31, 2018, the Company repurchased 376,466 shares of its common stock at an average price per share of $10.77 and a total cost of approximately $4.1 million.

On June 17, 2019, the Company closed its underwritten public offering of 5.8 million shares of common stock, including an over-allotment option to purchase an additional 750,000 shares of common stock (“June 2019 Equity Offering”). The offering generated net proceeds, before expenses, of $70.5 million, including the underwriting discount and commissions of $2.2 million.

The Company has issued stock options for common stock subject to future issuance, of which 519,418 and 481,032 were outstanding at September 30, 2019 and December 31, 2018, 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”) 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 May 13, 2018, the Board of Directors further amended and restated the 2004 Plan and renamed it the Hercules Capital, Inc. Amended and Restated 2018 Equity Incentive Plan (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, increased the number of shares available for issuance to eligible participants by an additional 6.7 million shares. Unless sooner terminated by the Board, the 2018 Equity Incentive Plan will terminate on the day before the tenth anniversary of the date the 2018 Equity Incentive Plan was initially adopted in 2018 by the Board. On May 13, 2018, the Board of Directors adopted the 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. These shares generally vest 33% one year after the date of grant and ratably over the succeeding 24 months.

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On May 29, 2018, the Company filed an exemptive application with the SEC and an amendment to the application on September 27, 2018, with respect to the 2018 Equity Incentive Plan and the Director Plan for exemptive relief from certain provisions of the 1940 Act. On January 30, 2019, the Company received approval from the SEC on its request for exemptive relief that permits it to issue restricted stock to non-employee directors under the Director Plan and restricted stock and restricted stock units to certain of its employees, officers, and directors (excluding non-employee directors) under the 2018 Equity Incentive Plan. The exemptive order also allows participants in the Director Plan and the 2018 Equity Incentive Plan to (i) elect to have the Company withhold shares of its common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”) and/or (ii) permit the holders of restricted stock to elect to have the Company withhold shares of its stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual employee would be able to make a cash payment to satisfy applicable tax withholding at the time of option exercise or vesting on restricted stock. 

The following table summarizes the common stock options activities for the nine months ended September 30, 2019 and 2018:

 

|                                     | Nine Months Ended September 30, |    |        |
|------------------------------------------|---------------------------------|---------|--------|
|                                     | 2019                            |    |   | 2018 |   |  |
|                                     | Common

Stock

Options          |    |   | Weighted

Average

Exercise Price |   |   | Common

Stock

Options |   |   | Weighted

Average

Exercise Price |   |
| Outstanding at December 31,              |                            | 481,032 |   |   | $ | 13.40 |   |   |   | 590,525 |   |   | $ | 13.60 |   |
| Granted                                  |                            | 111,000 |   |   | $ | 12.91 |   |   |   | 94,000 |   |   | $ | 12.65 |   |
| Exercised                                |                            | (14,113 | )      |   | $ | 11.39 |   |   |   | (63,769 | ) |   | $ | 11.05 |   |
| Forfeited                                |                            | (5,836  | )      |   | $ | 12.79 |   |   |   | (51,437 | ) |   | $ | 13.22 |   |
| Expired                                  |                            | (52,665 | )      |   | $ | 14.82 |   |   |   | (34,650 | ) |   | $ | 14.34 |   |
| Outstanding at September 30,             |                            | 519,418 |   |   | $ | 13.21 |   |   |   | 534,669 |   |   | $ | 13.72 |   |
| Shares Expected to Vest at September 30, |                            | 195,404 |   |   | $ | 13.43 |   |   |   | 163,654 |   |   | $ | 13.58 |   |

 

All options may be exercised for a period ending seven to ten years after the date of grant. At September 30, 2019, options for approximately 519,418 shares were outstanding at a weighted average exercise price of approximately $13.21 per share with weighted average of remaining contractual term of 4.91 years and an aggregate intrinsic value of $275,000. At September 30, 2019, options for approximately 324,014shares were exercisable at a weighted average exercise price of approximately $13.43per share with weighted average of remaining contractual term of 4.09years and an aggregate intrinsic value of $193,000.

The Company determined that the fair value of options granted under the 2018 Equity Incentive Plan during the nine months ended September 30, 2019 and 2018 was approximately $40,000 and $44,000, respectively. During the nine months ended September 30, 2019 and 2018, approximately $35,000 and $42,000 of share-based cost due to stock option grants was expensed, respectively. As of September 30, 2019, there was approximately $76,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.10 years.

The Company follows ASC Topic 718 to account for stock options granted. Under ASC Topic 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rate and expected option life. 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 nine months ended September 30, 2019 and 2018 is as follows: 

 

|                     |   | Nine Months Ended September 30, |   |
|--------------------------|--------|---------------------------------|--------|
|                     |   | 2019                            |   |   | 2018 |   |
| Expected Volatility      |   | 18.40%                          |   |   | 21.19% |   |
| Expected Dividends       |   | 10%                             |   |   | 10% |   |
| Expected term (in years) |   |                            | 4.5    |   |   |   | 4.5 |   |
| Risk-free rate           |   | 1.33% - 2.62%                   |   |   | 2.19% - 2.97% |   |

 

During the nine months ended September 30, 2019 and 2018, the Company granted 134,247 shares and 334,995 shares, respectively, of restricted stock awards pursuant to the 2018 Equity Incentive Plan and the Director Plan. The Company determined that the fair values, based on grant date close price, of restricted stock awards granted under the 2018 Equity Incentive Plan and the Director Plan during the nine months ended September 30, 2019 and 2018 were approximately $1.7 million and $4.4 million, respectively. As of September 30, 2019, there were approximately $2.1 million of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 2.24 years. 

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The following table summarizes the activities for the Company’s unvested restricted stock awards for the nine months ended September 30, 2019 and 2018:

 

|                      | Nine Months Ended September 30, |     |
|---------------------------|---------------------------------|----------|
|                      | 2019                            |     |   | 2018 |   |
|                      | Restricted

Stock Awards        |     |   | Weighted Average

Grant Date

Fair Value |   |   | Restricted

Stock Awards |   |   | Weighted Average

Grant Date

Fair Value |   |
| Unvested at December 31,  |                            | 380,870  |   |   | $ | 12.95 |   |   |   | 261,245 |   |   | $ | 12.43 |   |
| Granted                   |                            | 134,247  |   |   | $ | 12.79 |   |   |   | 334,995 |   |   | $ | 13.04 |   |
| Vested                    |                            | (193,176 | ) |   | $ | 12.84 |   |   |   | (170,264 | ) |   | $ | 12.55 |   |
| Forfeited                 |                            | (134,247 | ) |   | $ | 13.04 |   |   |   | (3,085 | ) |   | $ | 11.70 |   |
| Unvested at September 30, |                            | 187,694  |   |   | $ | 12.88 |   |   |   | 422,891 |   |   | $ | 12.87 |   |

During the nine months ended September 30, 2019 and 2018, the Company granted approximately 1,029,836 shares and 411,689 shares, respectively, of restricted stock units pursuant to the 2018 Equity Incentive Plan. The Company also granted approximately 124,708 shares and 75,184 shares, respectively, of distribution equivalent units pursuant to the 2018 Equity Incentive Plan. The Company determined that the fair values, based on grant date close price, of restricted stock units granted under the 2018 Equity Incentive Plan during the nine months ended September 30, 2019 and 2018, were approximately $15.2 million and $6.4 million, respectively. As of September 30, 2019, there were approximately $6.0 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 2.13 years. 

The following table summarizes the activities for the Company’s unvested restricted stock units for the nine months ended September 30, 2019 and 2018:

 

|                                 | Nine Months Ended September 30, |      |
|--------------------------------------|---------------------------------|-----------|
|                                 | 2019                            |      |   | 2018 |   |
|                                 | Restricted

Stock Units         |      |   | Weighted Average

Grant Date

Fair Value |   |   | Restricted

Stock Units |   |   | Weighted Average

Grant Date

Fair Value |   |
| Unvested at December 31,             |                            | 732,533   |   |   | $ | 13.50 |   |   |   | 594,322 |   |   | $ | 12.99 |   |
| Granted                              |                            | 1,029,836 |   |   | $ | 13.11 |   |   |   | 411,689 |   |   | $ | 13.04 |   |
| Distribution Equivalent Unit Granted |                            | 124,708   |   |   | $ | — |   |   |   | 75,184 |   |   | $ | 12.69 |   |
| Vested (1)                           |                            | (615,045  | ) |   | $ | 13.35 |   |   |   | (318,240 | ) |   | $ | 14.10 |   |
| Forfeited                            |                            | (624,349  | ) |   | $ | 13.34 |   |   |   | (14,085 | ) |   | $ | 13.40 |   |
| Unvested at September 30,            |                            | 647,683   |   |   | $ | 13.16 |   |   |   | 748,870 |   |   | $ | 13.48 |   |

 

| (1) | With respect to restricted stock units granted prior to January 1, 2019, receipt of the shares of the Company’s common stock underlying vested restricted stock units will be deferred for four years from grant date unless certain conditions are met. Accordingly, such vested restricted stock units will not be issued as common stock upon vesting until the completion of the deferral period. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

During the nine months ended September 30, 2019, the Company expensed approximately $7.7 million of compensation expense related to restricted stock awards and restricted stock units. The Company had approximately $6.2 million in compensation expense related to restricted stock awards and restricted stock units during the nine months ended September 30, 2018. 

On May 2, 2018, the Company granted long-term Retention Performance Stock Unit awards (the “Retention PSUs”) under the 2004 Plan and separate cash bonus awards with similar terms (the “Cash Awards”) to senior personnel. The awards are designed to provide incentives that increase along with the total shareholder return (“TSR”). On May 2, 2018, the target number of Retention PSUs granted to senior personnel was 1,299,757 in the aggregate and the target amount of the Cash Awards granted to senior personnel was $4.0 million in the aggregate. As of September 30, 2019, there were 487,409 Retention PSUs outstanding at target and the target amount of the Cash Awards was $3.0 million in the aggregate. The Retention PSUs and Cash Awards do not vest until the fourth anniversary “cliff vest” of the grant date (or a change in control of the Company, if earlier) and the Retention PSUs must generally be held and not disposed of until the fifth anniversary of the grant date, except in the event of death, disability or a change in control (the “Performance Period”). 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.

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As of September 30, 2019, all of Retention PSUs and Cash Awards were unvested and there were approximately $4.4 million of total unrecognized compensation costs related to the Retention PSUs. These costs are expected to be recognized over a weighted average remaining vesting period of 2.59 years. As of September 30, 2019, there was approximately $1.0million of accumulated compensation expense related to the Cash Awards. The accumulated expense related to the Cash Awards is included within the Consolidated Statement of Assets and Liabilities.

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 September 30, |    |   | Nine Months Ended September 30, |   |
|-----------------------------------------------------------------------|--------|----------------------------------|---------|--------|---------------------------------|--------|
| (in thousands, except per share data)                                 |   | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Numerator                                                             |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Net increase in net assets resulting from operations                  |   | $                                | 19,271  |   |                            | $      | 35,629 |   |   | $ | 128,987 |   |   | $ | 93,634 |   |
| Less: Distributions declared-common and restricted shares             |   |                             | (35,555 | )      |                            |   | (29,710 | ) |   |   | (97,606 | ) |   |   | (82,806 | ) |
| Undistributed earnings                                                |   |                             | (16,284 | )      |                            |   | 5,919 |   |   |   | 31,381 |   |   |   | 10,828 |   |
| Undistributed earnings-common shares                                  |   |                             | (16,284 | )      |                            |   | 5,894 |   |   |   | 31,313 |   |   |   | 10,770 |   |
| Add: Distributions declared-common shares                             |   |                             | 35,490  |   |                            |   | 29,577 |   |   |   | 97,388 |   |   |   | 82,356 |   |
| Numerator for basic and diluted change in net assets per common share |   | $                                | 19,206  |   |                            | $      | 35,471 |   |   | $ | 128,701 |   |   | $ | 93,126 |   |
|                                                                  |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Denominator                                                           |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic weighted average common shares outstanding                      |   |                             | 104,314 |   |                            |   | 95,460 |   |   |   | 99,615 |   |   |   | 89,100 |   |
| Common shares issuable                                                |   |                             | 341     |   |                            |   | 211 |   |   |   | 428 |   |   |   | 112 |   |
| Weighted average common shares outstanding assuming dilution          |   |                             | 104,655 |   |                            |   | 95,671 |   |   |   | 100,043 |   |   |   | 89,212 |   |
|                                                                  |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Change in net assets per common share                                 |   |                             |    |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                 |   | $                                | 0.18    |   |                            | $      | 0.37 |   |   | $ | 1.29 |   |   | $ | 1.04 |   |
| Diluted                                                               |   | $                                | 0.18    |   |                            | $      | 0.37 |   |   | $ | 1.29 |   |   | $ | 1.04 |   |

 

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 nine months ended September 30, 2019 and 2018, the effect of the 2022 Convertible Notes under the treasury stock method was anti-dilutive and, accordingly, was 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 September 30, 2019, 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 3.6 million shares of 2022 Convertible Notes, 25,396 shares of unvested common stock options, no shares of unvested restricted stock units, and no shares of unvested Retention PSUs. For the nine months ended September 30, 2019, 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 3.8 million shares of 2022 Convertible Notes, 30,110 shares of unvested common stock options, no shares of unvested restricted stock units, and no shares of unvested Retention PSUs. 

 

For the three and nine months ended September 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 3.2 million and 4.0 million shares related to 2022 Convertible Notes, 37,015 shares and 60,756 shares of unvested common stock options, no shares of unvested restricted stock units, and no shares and 18,952 shares of unvested Retention PSUs, respectively.

At both September 30, 2019 and December 31, 2018, the Company was authorized to issue 200.0 million shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote.

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9. Financial Highlights 

Following is a schedule of financial highlights for the nine months ended September 30, 2019 and 2018:  

 

|                                                                                        | Nine Months Ended September 30, |      |
|---------------------------------------------------------------------------------------------|---------------------------------|-----------|
|                                                                                        | 2019                            |      |   | 2018 |   |
| Per share data (1):                                                                         |                            |      |   |   |   |   |   |
| Net asset value at beginning of period                                                      | $                               | 9.90      |   |   | $ | 9.96 |   |
| Net investment income                                                                       |                            | 1.03      |   |   |   | 0.88 |   |
| Net realized gain (loss) on investments                                                     |                            | 0.14      |   |   |   | (0.12 | ) |
| Net unrealized appreciation (depreciation) on investments                                   |                            | 0.12      |   |   |   | 0.29 |   |
| Total from investment operations                                                            |                            | 1.29      |   |   |   | 1.05 |   |
| Net increase (decrease) in net assets from capital share transactions (1)                   |                            | 0.11      |   |   |   | 0.21 |   |
| Distributions of net investment income (6)                                                  |                            | (0.95     | ) |   |   | (0.93 | ) |
| Distributions of capital gains (6)                                                          |                            | (0.03     | ) |   |   | — |   |
| Stock-based compensation expense included in investment income (2)                          |                            | 0.06      |   |   |   | 0.09 |   |
| Net asset value at end of period                                                            | $                               | 10.38     |   |   | $ | 10.38 |   |
|                                                                                        |                            |      |   |   |   |   |   |
| Ratios and supplemental data:                                                               |                            |      |   |   |   |   |   |
| Per share market value at end of period                                                     | $                               | 13.37     |   |   | $ | 13.16 |   |
| Total return (3)                                                                            |                            | 29.94     | % |   |   | 7.59 | % |
| Shares outstanding at end of period                                                         |                            | 104,636   |   |   |   | 96,751 |   |
| Weighted average number of common shares outstanding                                        |                            | 99,615    |   |   |   | 89,100 |   |
| Net assets at end of period                                                                 | $                               | 1,085,681 |   |   | $ | 1,004,180 |   |
| Ratio of total expense to average net assets (4)                                            |                            | 12.25     | % |   |   | 10.82 | % |
| Ratio of net investment income before investment gains and losses to average net assets (4) |                            | 13.43     | % |   |   | 11.62 | % |
| Portfolio turnover rate (5)                                                                 |                            | 22.82     | % |   |   | 33.97 | % |
| Weighted average debt outstanding                                                           | $                               | 1,145,027 |   |   | $ | 801,712 |   |
| Weighted average debt per common share                                                      | $                               | 11.49     |   |   | $ | 9.00 |   |

 

| (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 nine months ended September 30, 2019 and 2018 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) | The ratios are calculated based on weighted average net assets for the relevant period and are annualized. |
|-----|------------------------------------------------------------------------------------------------------------|

| (5) | The portfolio turnover rate for the nine months ended September 30, 2019 and 2018 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 as of September 30, 2019 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 September 30, 2019, the Company had approximately $167.5 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 $213.5 million of non-binding term sheets outstanding at September 30, 2019. 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. 

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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 September 30, 2019, 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) |    |
| SeatGeek, Inc.                  |   | $                         | 37,000  |   |
| Tricida, Inc.                   |   |                      | 35,000  |   |
| The Wing                        |   |                      | 30,000  |   |
| Oak Street Health               |   |                      | 20,000  |   |
| Codiak Biosciences, Inc         |   |                      | 15,000  |   |
| Clarabridge, Inc.               |   |                      | 5,000   |   |
| X4 Pharmaceuticals, Inc.        |   |                      | 5,000   |   |
| Nuvolo Technologies Corporation |   |                      | 3,000   |   |
| Campaign Monitor Limited        |   |                      | 2,979   |   |
| Lendio, Inc.                    |   |                      | 2,500   |   |
| Businessolver.com, Inc.         |   |                      | 2,168   |   |
| Dashlane, Inc.                  |   |                      | 2,000   |   |
| Greenphire, Inc.                |   |                      | 2,000   |   |
| ThreatConnect, Inc.             |   |                      | 1,800   |   |
| The CM Group LLC                |   |                      | 1,750   |   |
| FPX, LLC                        |   |                      | 1,000   |   |
| Cloud 9 Software                |   |                      | 500     |   |
| Yipit, LLC                      |   |                      | 425     |   |
| Salsa Labs, Inc.                |   |                      | 350     |   |
| Total                           |   | $                         | 167,472 |   |

 

| (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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The Company’s contractual obligations as of September 30, 2019 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)                 |   | $                                     | 1,210,585 |   |   | $ | 10,000 |   |   | $ | 344,250 |   |   | $ | 291,335 |   |   | $ | 565,000 |   |
| Lease and License Obligations (4) |   |                                  | 14,197    |   |   |   | 3,174 |   |   |   | 5,872 |   |   |   | 3,639 |   |   |   | 1,512 |   |
| Total                             |   | $                                     | 1,224,782 |   |   | $ | 13,174 |   |   | $ | 350,122 |   |   | $ | 294,974 |   |   | $ | 566,512 |   |

 

| (1) | Excludes commitments to extend credit to the Company’s portfolio companies. |
|-----|-----------------------------------------------------------------------------------|

| (2) | Includes $149.0 million in principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $105.0 million of the July 2024 Notes, $75.0 million of the 2025 Notes, $40.0 million of the 2033 Notes, $200.0 million of the 2027 Asset-Backed Notes, $250.0 million of the 2028 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes, and $11.6 million outstanding under the Union Bank Credit Facility as of September 30, 2019. There were no outstanding borrowings under the Wells Facility as of September 30, 2019. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 including short-term leases. |
|-----|-----------------------------------------------------------|

Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense, including short-term leases, amounted to approximately $764,000 and $2.0 million during the three and nine months ended September 30, 2019. Total rent expense amounted to approximately $522,000 and $1.5 million during the three and nine months ended September 30, 2018. The Company recognizes an operating lease liability and a ROU asset for all leases, with the exception of short-term leases. The lease payments on short-term leases are recognized as rent expense on a straight-line basis. The discount rate applied to measure each ROU asset and lease liability is based on the Company’s weighted average cost of debt. The Company considers the general economic environment and its credit rating and factors in various financing and asset specific adjustments to ensure the discount rate applied is appropriate to the intended use of the underlying lease. While some of the leases contained options to extend and terminate, it is not reasonably certain that either option will be utilized and therefore, only the payments in the initial term of the leases were included in the lease liability and ROU asset.

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The following table sets forth information related to the measurement of the Company’s operating lease liabilities as of September 30, 2019:

 

| (in thousands)                                                         |   | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|------------------------------------------------------------------------|--------|----------------------------------|--------|--------|---------------------------------|--------|
| Total operating lease cost                                             |   | $                                | 719    |   |                            | $      | 1,869 |   |
| Cash paid for amounts included in the measurement of lease liabilities |   | $                                | 536    |   |                            | $      | 2,126 |   |

 

|                                             |   | As of September 30, 2019 |   |
|--------------------------------------------------|--------|--------------------------|--------|
| Weighted-average remaining lease term (in years) |   |                     | 5.10   |   |
| Weighted-average discount rate                   |   |                     | 5.48   | % |

 

The following table shows future minimum lease payments under the Company’s operating leases and a reconciliation to the operating lease liability as of September 30, 2019: 

 

| (in thousands)                  |   |   |   |   |
|---------------------------------|--------|--------|--------|--------|
| Remainder of 2019               |   | $      | 545    |   |
| 2020                            |   |   | 2,795  |   |
| 2021                            |   |   | 2,903  |   |
| 2022                            |   |   | 3,001  |   |
| 2023                            |   |   | 2,342  |   |
| Thereafter                      |   |   | 2,205  |   |
| Total lease payments            |   |   | 13,791 |   |
| Less: imputed interest          |   |   | (1,869 | )      |
| Total operating lease liability |   | $      | 11,922 |   |

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 February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. No adjustment was necessary at January 1, 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company elected to apply the transition provisions as of January 1, 2019, the date of adoption, and recorded lease right-of-use assets and related liabilities on its Consolidated Statement of Assets and Liabilities of $9.4 million related to its operating leases. The Company has no finance leases. There was no change to the Company’s Consolidated Statement of Operations or Cash Flows.

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 adopted this standard effective January 1, 2019, which did not have a material impact, on its consolidated financial statements and related disclosures for the periods presented.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement”, which is intended to improve the effectiveness of fair value measurement disclosures. The amendment, among other things, affects certain disclosure requirements related to transfers between level 1 and level 2 of the fair value hierarchy, and level 3 fair value measurements as they relate to valuation process, unrealized gains and losses, measurement uncertainty, and significant unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. As permitted, the Company partially adopted the standard effective July 1, 2019, which did not have a 

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material impact, on its consolidated financial statements and related disclosures for the periods presented. The Company intends to adopt ASU 2018-13 in full for the interim period beginning after December 15, 2019 and does not believe that it will have a material impact on its consolidated financial statements and disclosures.

In August 2018, the Securities and Exchange Commission (“SEC”) issued Final Rule Release No. 33-10532 - “Disclosure Update and Simplification.” This rule amends various SEC disclosure requirements that have been determined to be redundant, duplicative, overlapping, outdated, or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in stockholders' equity. This final rule is effective on November 5, 2018. The Company has adopted these amendments as currently required and these are reflected in its consolidated financial statements and related disclosures. Certain prior year information has been adjusted to conform with these amendments.

12. Subsequent Events

On October 23, 2019, the Board of Directors declared a cash distribution of $0.32 per share to be paid on November 18, 2019 to stockholders of record as of November 11, 2019. 

In addition to the cash distribution, on October 23, 2019, the Board of Directors declared a supplemental cash distribution of $0.03 per share to be paid on November 18, 2019to stockholders of record as of November 11, 2019.

 

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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|--------------|---------------------------------------------------------------------------------------------|

Forward-Looking Statements 

The matters discussed in this report, as well as in future oral and written statements by management of Hercules Capital, Inc., that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward- looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to: 

|   | • | our current and future management structure; |
|--------|----------|----------------------------------------------|

|   | • | our future operating results; |
|--------|----------|-------------------------------|

|   | • | our business prospects and the prospects of our prospective portfolio companies; |
|--------|----------|----------------------------------------------------------------------------------|

|   | • | the impact of investments that we expect to make; |
|--------|----------|---------------------------------------------------|

|   | • | our informal relationships with third parties including in the venture capital industry; |
|--------|----------|------------------------------------------------------------------------------------------|

|   | • | the expected market for venture capital investments and our addressable market; |
|--------|----------|---------------------------------------------------------------------------------|

|   | • | the dependence of our future success on the general economy and its impact on the industries in which we invest; |
|--------|----------|------------------------------------------------------------------------------------------------------------------|

|   | • | our ability to access debt markets and equity markets; |
|--------|----------|--------------------------------------------------------|

|   | • | the ability of our portfolio companies to achieve their objectives; |
|--------|----------|---------------------------------------------------------------------|

|   | • | our expected financings and investments; |
|--------|----------|------------------------------------------|

|   | • | our regulatory structure and tax status; |
|--------|----------|------------------------------------------|

|   | • | our ability to operate as a BDC, 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. |
|--------|----------|-------------------------------------------|

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A— “Risk Factors” of Part II of this quarterly report on Form 10-Q, Item 1A— “Risk Factors” of our annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019 and under “Forward-Looking Statements” of this Item 2. 

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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, Bethesda, MD, 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 total return by generating current income from our debt investments and capital appreciation from our warrant and equity-related investments. Our primary business objectives are to increase our net income, net operating income and NAV by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains. Our equity ownership in our portfolio companies may exceed 25% of the voting securities of such companies, which represents a controlling interest under the 1940 Act. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide directly to venture capital-backed companies in technology-related industries is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. 

 

We also make investments in qualifying small businesses through HT III, which is our wholly owned SBIC. HT III holds approximately $223.7 million in tangible assets which accounted for approximately 9.7% of our total assets at September 30, 2019.

 

We have qualified as and have elected to be treated for tax purposes as a RIC under Subchapter M of the Code. Pursuant to this election, we generally will not be subject to corporate-level taxes on any income and gains that we distribute as dividends for federal income tax purposes to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in Subchapter M of the Code. For example, as a RIC we must earn 90% or more of our gross income during each taxable year from qualified sources, typically referred to as “good income,” as well as satisfy certain quarterly asset diversification and annual income distribution requirements. 

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, 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.

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Portfolio and Investment Activity 

The total fair value of our investment portfolio was approximately $2.2 billion at September 30, 2019 and $1.9 billion at December 31, 2018. The fair value of our debt investment portfolio at September 30, 2019 was approximately $2.1 billion, compared to a fair value of approximately $1.7 billion at December 31, 2018. The fair value of the equity portfolio at September 30, 2019 was approximately $148.4 million, compared to a fair value of approximately $120.2 million at December 31, 2018. The fair value of the warrant portfolio at September 30, 2019 was approximately $18.9 million, compared to a fair value of approximately $26.7 million at December 31, 2018. 

Portfolio Activity 

Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. From time to time, unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments are subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the two succeeding quarters from close. Not all debt commitments represent future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and thus do not represent future cash requirements. 

Prior to entering into a contractual commitment, we generally issue a non-binding term sheet to a prospective portfolio company. Non-binding term sheets are subject to completion of our due diligence and final investment committee approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. These non-binding term sheets generally convert to contractual commitments in approximately 90 days from signing. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements. 

Our portfolio activity for the nine months ended September 30, 2019 and the year ended December 31, 2018 was comprised of the following:  

 

| (in millions)                                |   | September 30, 2019 |    |   | December 31, 2018 |   |
|----------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Debt Commitments (1)                         |   |               |    |   |              |   |   |   |
| New portfolio company                        |   | $                  | 823.4   |   |              | $      | 969.2 |   |
| Existing portfolio company                   |   |               | 350.8   |   |              |   | 184.0 |   |
| Total                                        |   | $                  | 1,174.2 |   |              | $      | 1,153.2 |   |
| Funded and Restructured Debt Investments (2) |   |               |    |   |              |   |   |   |
| New portfolio company                        |   | $                  | 468.4   |   |              | $      | 641.6 |   |
| Existing portfolio company                   |   |               | 299.7   |   |              |   | 258.2 |   |
| Total                                        |   | $                  | 768.1   |   |              | $      | 899.8 |   |
| Funded Equity Investments                    |   |               |    |   |              |   |   |   |
| New portfolio company                        |   | $                  | 5.1     |   |              | $      | 53.4 |   |
| Existing portfolio company                   |   |               | 11.7    |   |              |   | 7.6 |   |
| Total                                        |   | $                  | 16.8    |   |              | $      | 61.0 |   |
| Unfunded Contractual Commitments (3)         |   |               |    |   |              |   |   |   |
| Total                                        |   | $                  | 167.5   |   |              | $      | 139.0 |   |
| Non-Binding Term Sheets                      |   |               |    |   |              |   |   |   |
| New portfolio company                        |   | $                  | 186.0   |   |              | $      | 55.5 |   |
| Existing portfolio company                   |   |               | 27.5    |   |              |   | — |   |
| Total                                        |   | $                  | 213.5   |   |              | $      | 55.5 |   |

 

| (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 nine months ended September 30, 2019, we received approximately $424.5 million in aggregate principal repayments. Of the approximately $424.5 million of aggregate principal repayments, approximately $58.5 million were scheduled principal payments and approximately $366.0 million were early principal repayments related to 28 portfolio companies. Of the approximately $366.0 million early principal repayments, approximately $22.2 million were early repayments due to merger and acquisition transactions for two portfolio companies, that are no longer portfolio companies.

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Total portfolio investment activity (inclusive of unearned income and excluding activity related to taxes payable, and escrow receivables) as of and for the nine months ended September 30, 2019 and the year ended December 31, 2018 was as follows:

 

| (in millions)                                                                        |   | September 30, 2019 |    |   | December 31, 2018 |   |
|--------------------------------------------------------------------------------------|--------|--------------------|---------|--------|-------------------|--------|
| Beginning portfolio                                                                  |   | $                  | 1,880.4 |   |              | $      | 1,542.2 |   |
| New fundings and restructures                                                        |   |               | 784.9   |   |              |   | 960.7 |   |
| Warrants not related to current period fundings                                      |   |               | 0.5     |   |              |   | 0.1 |   |
| Principal payments received on investments                                           |   |               | (58.5   | )      |              |   | (90.1 | ) |
| Early payoffs                                                                        |   |               | (366.0  | )      |              |   | (486.6 | ) |
| Accretion of loan discounts and paid-in-kind principal                               |   |               | 32.0    |   |              |   | 34.9 |   |
| Net acceleration of loan discounts and loan fees due to

early payoff or restructure |   |               | (6.9    | )      |              |   | (13.5 | ) |
| New loan fees                                                                        |   |               | (12.2   | )      |              |   | (13.8 | ) |
| Sale of investments                                                                  |   |               | (21.1   | )      |              |   | (5.9 | ) |
| Loss on investments due to write offs                                                |   |               | 3.1     |   |              |   | (25.1 | ) |
| Net change in unrealized appreciation (depreciation)                                 |   |               | 11.0    |   |              |   | (22.5 | ) |
| Ending portfolio                                                                     |   | $                  | 2,247.2 |   |              | $      | 1,880.4 |   |

As of September 30, 2019, we held warrants or equity positions in four companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings. All four 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 $50.0 million, although we may make investments in amounts above or below that range. As of September 30, 2019, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from approximately 7.8% to approximately 15.7%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.

Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the investment. In addition, our loans may include an interest-only period ranging from three to eighteen months or longer. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities and any accrued but unpaid interest become due at the maturity date. 

Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. We had approximately $42.1 million of unamortized fees at September 30, 2019, of which approximately $34.6 million was included as an offset to the cost basis of our current debt investments and approximately $7.5 million was deferred contingent upon the occurrence of a funding or milestone. At December 31, 2018, we had approximately $36.3 million of unamortized fees, of which approximately $31.1 million was included as an offset to the cost basis of our current debt investments and approximately $5.2 million was deferred contingent upon the occurrence of a funding or milestone.

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 September 30, 2019, we had approximately $32.0 million in exit fees receivable, of which approximately $29.2 million was included as a component of the cost basis of our current debt investments and approximately $2.8 million was a deferred receivable related to expired commitments. At December 31, 2018, we had approximately $25.6 million in exit fees receivable, of which approximately $23.3 million was included as a component of the cost basis of our current debt investments and approximately $2.3 million was a deferred receivable related to expired commitments.

 

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. 

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Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments. We recorded approximately $2.2 million and $2.4 million in PIK income during the three months ended September 30, 2019 and 2018, respectively.We recorded approximately $6.6 million and $7.0million in PIK income in the nine months ended September 30, 2019 and 2018 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 12.4% and 12.7% during the three months ended September 30, 2019 and 2018, 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 13.4% and 13.5% for the three months ended September 30, 2019 and 2018, 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 12.1% and 12.3% during the three months ended September 30, 2019 and 2018, 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 29.9% and 7.6% during the nine months ended September 30, 2019 and 2018, respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the distribution. The total return does not reflect any sales load that must be paid by investors. See “Note 9 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report.

Portfolio Composition 

Our portfolio companies are primarily privately held companies and public companies which are active in sectors characterized by high margins, high growth rates, consolidation and product and market extension opportunities. As of September 30, 2019, approximately 85.8% of the fair value of our portfolio was composed of investments in five industries: 31.7% was composed of investments in the drug discovery & development industry, 26.1% was composed of investments in the software industry, 18.8% was composed of investments in the internet consumer & business services industry, 4.7% was composed of investments in the healthcare services, other industry, and 4.5% was composed of investments in the medical devices & equipment industry. 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 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 nine months ended September 30, 2019 and the year ended December 31, 2018, our ten largest portfolio companies represented approximately 26.6% and 28.2% of the total fair value of our investments in portfolio companies, respectively. At September 30, 2019 and December 31, 2018, we had six and seven investments, respectively, that represented 5% or more of our net assets. At September 30, 2019, we had six equity investments representing approximately 58.7% 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, 2018, we had five equity investments which represented approximately 53.0% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. No single portfolio investment represents more than 10% of the fair value of our total investments as of September 30, 2019 and December 31, 2018.

As of September 30, 2019, approximately 97.6% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime or LIBOR-based interest rate floor. Changes in interest rates, including Prime and LIBOR rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates.

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 September 30, 2019, we held warrants in 118 portfolio companies, with a fair value of approximately $18.9 million. The fair value of our warrant portfolio decreased by approximately $7.8 million, as compared to a fair value of $26.7 million at December 31, 2018 primarily related to the decrease in portfolio companies.

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Our existing warrant holdings would require us to invest approximately $74.7 million to exercise such warrants as of September 30, 2019. 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 29.14x 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 September 30, 2019 and December 31, 2018, respectively: 

 

| (in thousands)          |   | September 30, 2019  |   |                                      | December 31, 2018 |   |
|-------------------------|--------|---------------------|--------|-------------------------------------------|-------------------|--------|
| 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                  |   | $                                         | 237,875           |   |   |   | 11.4 | % |   | 13 |   | $ | 311,597 |   |   |   | 18.0 | % |
| 2                       |   | 55                  |   |                                      | 1,331,227         |   |   |   | 64.0 | % |   | 43 |   |   | 885,123 |   |   |   | 51.1 | % |
| 3                       |   | 25                  |   |                                      | 479,034           |   |   |   | 23.1 | % |   | 25 |   |   | 474,926 |   |   |   | 27.3 | % |
| 4                       |   | 3                   |   |                                      | 29,650            |   |   |   | 1.4 | % |   | 7 |   |   | 60,267 |   |   |   | 3.5 | % |
| 5                       |   | 2                   |   |                                      | 2,117             |   |   |   | 0.1 | % |   | 2 |   |   | 1,579 |   |   |   | 0.1 | % |
|                    |   | 95                  |   | $                                         | 2,079,903         |   |   |   | 100.0 | % |   | 90 |   | $ | 1,733,492 |   |   |   | 100.0 | % |

As of September 30, 2019 and December 31, 2018, our debt investments had a weighted average investment grading of 2.17 and 2.18 on a cost basis, respectively. 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.

At September 30, 2019, we had three debt investments on non-accrual with a cumulative investment cost and fair value of approximately $9.2 million and $2.2 million, respectively. At December 31, 2018, we had two debt investments on non-accrual with cumulative investment cost of approximately $2.7 million and zero fair value. The increase in the cost of debt investments on non-accrual between September 30, 2019 and December 31, 2018 is the result of the addition of two debt investments, partially offset by the removal of one debt investment that was on non-accrual at December 31, 2018 which resulted in a realized loss of approximately $2.5 million. 

Results of Operations 

Comparison of the three and nine months ended September 30, 2019 and 2018

Investment Income

Interest Income 

Total investment income for the three months ended September 30, 2019 was approximately $69.2 million as compared to approximately $52.6 million for the three months ended September 30, 2018. Total investment income for the nine months ended September 30, 2019 was approximately $197.3 million as compared to approximately $150.9 million for the nine months ended September 30, 2018.

Interest income for the three months ended September 30, 2019 totaled approximately $64.2 million as compared to approximately $49.1 million for the three months ended September 30, 2018. Interest income for the nine months ended September 30, 2019 totaled approximately $181.4 million as compared to approximately $137.9 million for the nine months ended September 30, 2018. The increase in interest income for the three and nine months ended September 30, 2019 as compared to the same periods ended September 30, 2018 is primarily attributable to an increase in recurring interest income caused by an increase in the weighted average principal outstanding of loans.

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Of the $64.2million in interest income for the three months ended September 30, 2019, approximately$61.4 million represents recurring income from the contractual servicing of our loan portfolio and approximately $2.8million 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 $47.7 million and $1.4 million, respectively, of the $49.1 million interest income for the three months ended September 30, 2018. 

Of the $181.4 million in interest income for the nine months ended September 30, 2019, approximately $175.3 million represents recurring income from the contractual servicing of our loan portfolio and approximately $6.1 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 $131.9 million and $6.0 million, respectively, of the $137.9 million interest income for the nine months ended September 30, 2018.

The following table shows the PIK-related activity for the nine months ended September 30, 2019 and 2018, at cost: 

 

|                                                                                 |   | Nine Months Ended September 30, |    |
|--------------------------------------------------------------------------------------|--------|---------------------------------|---------|
| (in thousands)                                                                       |   | 2019                            |    |   | 2018 |   |
| Beginning PIK interest receivable balance                                            |   | $                               | 12,717  |   |   | $ | 15,487 |   |
| PIK interest income during the period                                                |   |                            | 6,558   |   |   |   | 6,992 |   |
| PIK accrued (capitalized) to principal but not

recorded as income during the period |   |                            | — |   |   |   | (1,472 | ) |
| Payments received from PIK loans                                                     |   |                            | (4,482  | ) |   |   | (9,473 | ) |
| Realized gain (loss)                                                                 |   |                            | — |   |   |   | — |   |
| Ending PIK interest receivable balance                                               |   | $                               | 14,793  |   |   | $ | 11,534 |   |

 

The slight decrease in PIK interest income during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 is due to a decrease in the weighted average principal outstanding of loans which bear PIK interest.

Fee Income 

Fee income from commitment, facility and loan related fees for the three months ended September 30, 2019 totaled approximately $5.0 million as compared to approximately $3.5 million for the three months ended September 30, 2018. Fee income from commitment, facility and loan related fees for the nine months ended September 30, 2019 totaled approximately $15.9 million as compared to approximately $12.9 million for the nine months ended September 30, 2018. The increase in fee income for both of the three and nine months ended September 30, 2019 is primarily due to an increase in the acceleration of unamortized fees, one-time fees due to early repayments, and a higher loan balance which generates more fee income.

Of the $5.0 million in fee income for the three months ended September 30, 2019, approximately $2.3 million represents income from recurring fee amortization and approximately $2.7 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $1.4 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $1.6 million and $1.9 million, respectively, of the $3.5 million in income for the three months ended September 30, 2018.

Of the $15.9 million in fee income for the nine months ended September 30, 2019, approximately $7.0 million represents income from recurring fee amortization and approximately $8.9 million represents income related to the acceleration of unamortized fees due to early repayments, including one-time fees of $4.6 million for the period. Income from recurring fee amortization and the acceleration of unamortized fees due to early loan repayments represented $4.7 million and $8.2 million, respectively, of the $12.9 million in income for the nine months ended September 30, 2018.

In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the three and nine months ended September 30, 2019 or 2018.

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 $30.4 million and $23.3 million during the three months ended September 30, 2019 and 2018, respectively. Our operating expenses totaled approximately $94.1 million and $72.7 million during the nine months ended September 30, 2019 and 2018, respectively.

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Interest and Fees on our Borrowings 

Interest and fees on our borrowings totaled approximately $15.0 million and $11.0 million for the three months ended September 30, 2019 and 2018, respectively, and approximately $45.7 million and $34.8 million during the nine months ended September 30, 2019 and 2018, respectively. Interest and fee expense during the three and nine months ended September 30, 2019, as compared to the same periods ended September 30, 2018, increased due to the issuance of 2027 Asset-Backed Notes in November 2018 and the issuance of our 2028 Asset-Backed Notes in January 2019, as well as interest related to our 2033 Notes and 2025 Notes.

We had a weighted average cost of debt, comprised of interest and fees, of approximately 5.1% and 5.6% for the three months ended September 30, 2019 and 2018, respectively, and a weighted average cost of debt of approximately 5.4% and 5.8% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the weighted average cost of debt for the three and nine months ended September 30, 2019, as compared to the same period ended September 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, taxes, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $6.4 million from $3.7 million for the three months ended September 30, 2019 and 2018, respectively. Our general and administrative expenses increased to $16.3 million from $11.4 million for the nine months ended September 30, 2019 and 2018. Subsequent to the events of March 12, 2019, we received broad document requests from the SEC and are fully cooperating with them. The increase in general and administrative expenses for both of the three and nine months ended September 30, 2019 is partially due to an increase in legal fees and related expenses associated with such cooperation, as well as the negotiation and settlement with our former Chairman and Chief Executive Officer. An increase in tax and rent expense are other drivers contributing to the increase in general and administrative expenses for both of the three and nine months ended September 30, 2019. 

Employee Compensation 

Employee compensation and benefits totaled $7.6 million for the three months ended September 30, 2019 as compared to $5.3 million for the three months ended September 30, 2018, and $23.4 million for the nine months ended September 30, 2019 as compared to $18.1 million for the nine months ended September 30, 2018. The increase between both of the three and nine months ended September 30, 2019 and 2018 was primarily due to increased variable compensation and payroll related expenses.

Employee stock-based compensation totaled $1.4 million for the three months ended September 30, 2019 as compared to $3.3 million for the three months ended September 30, 2018, and $8.7 million for the nine months ended September 30, 2019 as compared to $8.5 million for the nine months ended September 30, 2018. The decrease between the three months ended September 30, 2019 and 2018 was primarily due to a settlement with our former Chairman and Chief Executive Officer, and elimination of associated stock-based compensation expense. The slight increase between the nine months ended September 30, 2019 and 2018 was primarily related to increased stock-based compensation awards 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 nine months ended September 30, 2019 and 2018 is as follows: 

 

|                        | Three Months Ended September 30, |   |   | Nine Months Ended September 30, |   |
|-----------------------------|----------------------------------|--------|--------|---------------------------------|--------|
| (in thousands)              | 2019                             |   |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Realized gains              | $                                | 9,015  |   |                            | $      | 4,618 |   |   | $ | 23,957 |   |   | $ | 12,607 |   |
| Realized losses             |                             | (4,208 | )      |                            |   | (1,268 | ) |   |   | (10,324 | ) |   |   | (23,088 | ) |
| Net realized gains (losses) | $                                | 4,807  |   |                            | $      | 3,350 |   |   | $ | 13,633 |   |   | $ | (10,481 | ) |

 

During the three and nine months ended September 30, 2019, we recognized net realized gains of $4.8 million and $13.6 million, respectively, on the portfolio. During the three months ended September 30, 2019, we recorded gross realized gains of $9.0 million primarily from the sale our public equity holdings. These gains were partially offset by gross realized losses of $4.2 million primarily from the liquidation or write-off of our debt, equity, or warrant positions during the period.

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During the nine months ended September 30, 2019, we recorded gross realized gains of $23.9 million primarily from the sale of public equity positions and sale of our holdings due to merger and acquisition transactions. These gains were offset by gross realized losses of $10.3 million primarily from the liquidation or write-off of our debt, equity, or warrant positions during the period.

During the three and nine months ended September 30, 2018, we recognized net realized gains of $3.3 million and net realized losses of $10.5 million, respectively, on the portfolio. During the three months ended September 30, 2018, we recorded gross realized gains of $4.6 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $1.3 million primarily from the liquidation or write-off of our equity and warrant positions during the period.

During the nine months ended September 30, 2018, we recorded gross realized gains of $12.6 million primarily from the sale or acquisition of our holdings. These gains were offset by gross realized losses of $23.1 million primarily from the liquidation or write-off of our debt, equity and warrant positions during the period.

The net unrealized appreciation and depreciation of our investments is based on the fair value of each investment determined in good faith by our Board of Directors. The following table summarizes the change in net unrealized appreciation or depreciation of investments for the three and nine months ended September 30, 2019 and 2018:

 

|                                                                                         | Three Months Ended September 30, |    |   | Nine Months Ended September 30, |   |
|----------------------------------------------------------------------------------------------|----------------------------------|---------|--------|---------------------------------|--------|
| (in thousands)                                                                               | 2019                             |    |   | 2018                            |   |   | 2019 |   |   | 2018 |   |
| Gross unrealized appreciation on portfolio investments                                       | $                                | 12,341  |   |                            | $      | 14,366 |   |   | $ | 100,827 |   |   | $ | 53,133 |   |
| Gross unrealized depreciation on portfolio investments                                       |                             | (33,595 | )      |                            |   | (9,317 | ) |   |   | (79,526 | ) |   |   | (53,684 | ) |
| Reversal of prior period net unrealized appreciation (depreciation) upon a realization event |                             | (4,211  | )      |                            |   | (2,018 | ) |   |   | (10,278 | ) |   |   | 25,573 |   |
| Net unrealized appreciation (depreciation) on debt, equity, and warrant investments          |                             | (25,465 | )      |                            |   | 3,031 |   |   |   | 11,023 |   |   |   | 25,022 |   |
| Other net unrealized appreciation (depreciation)                                             |                             | 1,056   |   |                            |   | (54 | ) |   |   | 1,158 |   |   |   | 954 |   |
| Total net unrealized appreciation (depreciation) on investments                              | $                                | (24,409 | )      |                            | $      | 2,977 |   |   | $ | 12,181 |   |   | $ | 25,976 |   |

 

During the three months ended September 30, 2019, we recorded $24.4 million of net unrealized depreciation, of which $25.5 million was net unrealized depreciation from our debt, equity and warrant investments. We recorded $5.8 million of net unrealized depreciation on our debt investments which was primarily related to $9.9 million of net unrealized depreciation on the debt portfolio partially offset by $4.1 million of unrealized appreciation due to the reversal of unrealized depreciation upon pay-off or write-off of our portfolio companies.

We recorded $13.9 million of net unrealized depreciation on our equity investments and $5.8 million of net unrealized depreciation on our warrant investments during the three months ended September 30, 2019. This net unrealized depreciation of $19.7 million was primarily attributable to $11.5 million of unrealized depreciation on the equity and warrant portfolio and $8.4 million of unrealized depreciation due to the reversal of unrealized appreciation upon acquisition or liquidation of our equity and warrant investments.  

During the nine months ended September 30, 2019, we recorded $12.2 million of net unrealized appreciation, of which $11.0 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $1.9 million of net unrealized depreciation on our debt investments which was primarily related to $8.3 million of unrealized depreciation on the debt portfolio and partially offset by $6.4 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon pay-off or write-off of our portfolio companies.

We recorded $19.1 million of net unrealized appreciation on our equity investments and $6.2 million of net unrealized depreciation on our warrant investments during the nine months ended September 30, 2019. This net unrealized appreciation of $12.9 million was primarily attributable to $29.6 million of unrealized appreciation on the equity and warrant portfolio partially offset by the $16.7 million of unrealized depreciation due to the reversal of unrealized appreciation upon acquisition or liquidation of our equity and warrant investments.

During the three months ended September 30, 2018, we recorded $3.0 million of net unrealized appreciation which was mainly from our debt, equity and warrant investments. We recorded $3.5 million of net unrealized appreciation on our debt investments which was attributable to $4.2 million of unrealized appreciation on the debt portfolio, partially offset by $0.7 million of unrealized depreciation primarily due to the reversal of unrealized appreciation upon pay-off or write-off of our portfolio companies.

We recorded $1.5 million of net unrealized appreciation on our equity investments and $1.9 million of net unrealized depreciation on our warrant investments during the three months ended September 30, 2018. This net unrealized depreciation of $0.4 million was primarily attributable to $1.3 million of unrealized depreciation due to the reversal of unrealized appreciation upon 

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acquisition or liquidation of our equity and warrant investments. This is partially offset by $0.9 million of unrealized appreciation on the equity and warrant portfolio investments.

During the nine months ended September 30, 2018, we recorded $26.0 million of net unrealized appreciation, of which $25.0 million was net unrealized appreciation from our debt, equity and warrant investments. We recorded $19.3 million of net unrealized appreciation on our debt investments which was primarily related to $24.7 million of unrealized appreciation primarily due to the reversal of unrealized depreciation upon pay-off or write-off of our portfolio companies. This unrealized appreciation was partially offset by $5.3 million of unrealized depreciation on the debt portfolio. 

We recorded $5.6 million of net unrealized appreciation on our equity investments and $0.1 million of net unrealized appreciation on our warrant investments during the nine months ended September 30, 2018. This net unrealized appreciation of $5.7 million was due to $4.8 million of unrealized appreciation on the equity and warrant portfolio and $0.9 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. 

Income and Excise Taxes 

We account for income taxes in accordance with the provisions of ASC Topic 740 Income Taxes, under which income taxes are provided for amounts currently payable and for amounts deferred based upon the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances may be used to reduce deferred tax assets to the amount likely to be realized. Based upon our previous election and anticipated continued qualification to be subject to taxation as a RIC, we are typically not subject to a material level of federal income taxes. We intend to timely distribute to our stockholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax.

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

For the three months ended September 30, 2019, we had a net increase in net assets resulting from operations of approximately $19.3 million and for the three months ended September 30, 2018, we had a net increase in net assets resulting from operations of approximately $35.6 million. For the nine months ended September 30, 2019, we had a net increase in net assets resulting from operations of approximately $129.0 million and for the nine months ended September 30, 2018, we had a net increase in net assets resulting from operations of approximately $93.6 million.

Both the basic and fully diluted net change in net assets per common share were $0.18 per share and $1.29 per share for the three and nine months ended September 30, 2019, respectively. Both the basic and fully diluted net change in net assets per common share were $0.37 per share and $1.04 per share for the three and nine months ended September 30, 2018, respectively.

For the purpose of calculating diluted earnings per share for three and nine months ended September 30, 2019 and 2018, 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 nine months ended September 30, 2019 and 2018 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, July 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 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 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 $225.5million, 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.

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On February 24, 2017, we redeemed the $110.4 million remaining outstanding balance of our 2019 Notes in full.

On September 7, 2017, we entered into the Prior Equity Distribution Agreement. The Prior Equity Distribution Agreement, 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 October 23, 2017, we issued $150.0 million in aggregate principal amount of the 2022 Notes pursuant to the 2022 Notes Indenture. 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 2025 Notes Indenture. The sale of the 2025 Notes generated net proceeds of approximately $72.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $2.6 million.

On May 25, 2018, we entered into 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 the June 2018 Equity Offering. The offering generated net proceeds, before expenses, of $81.3 million, including the underwriting discount and commissions of $2.6 million.

On July 13, 2018, we completed repayment of the remaining outstanding HT II debentures and subsequently surrendered the SBA license with respect to HT II.

On July 31, 2018, we entered into a further amendment to the Wells Facility to extend the maturity date and fully repay the pro-rata portion of outstanding balances of Alostar Bank of Commerce and Everbank Commercial Finance Inc., thereby resigning both as lenders and terminating their commitments thereunder.

On September 20, 2018, we issued $40.0 million in aggregate principal amount of the 2033 Notes pursuant to the 2033 Notes Indenture. The sale of the 2033 Notes generated net proceeds of approximately $38.4 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $1.6 million.

On November 1, 2018, we issued $200.0 million in aggregate principal amount of the 2027 Asset-Backed Notes. The sale of the 2027 Asset-Backed Notes generated net proceeds of approximately $197.0 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $3.0 million.

On December 7, 2018, our Board of Directors approved a full redemption, in two equal transactions, of $83.5 million of the outstanding aggregate principal amount of the 2024 Notes. The 2024 Notes were fully redeemed on January 14, 2019 and February 4, 2019.

On December 17, 2018, our Board of Directors authorized a stock repurchase plan permitting us to repurchase up to $25.0 million of our common stock until June 18, 2019, after which the plan expired. We had no common stock repurchases during 2019. During the year ended December 31, 2018, we repurchased 376,466 shares of our common stock at an average price per share of $10.77 and a total cost of approximately $4.1 million.

On January 11, 2019, Hercules Funding II entered into the Wells Facility Seventh Amendment. The Wells Facility Seventh Amendment, among other things, amends certain key provisions of the Wells Facility to reduce the current interest rate to LIBOR plus 3.00% with a natural floor of 3.00% and extends the maturity date to January 2023. In addition, the Wells Fargo Capital Finance, LLC has committed $75.0 million in credit capacity under a $125.0 million accordion credit facility, subject to borrowing base, leverage and other restrictions.

On January 22, 2019, we issued $250.0 million in aggregate principal amount of the 2028 Asset-Backed Notes. The sale of the 2028 Asset-Backed Notes generated net proceeds of approximately $247.1 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions were approximately $2.9 million.

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On February 20, 2019, we, through a special purpose whollyowned subsidiary, Hercules Funding IV, as borrower, entered the Union Bank Facility. The Union Bank Facility replaced the Prior Union Bank Facility. Any references to amounts related to the Union Bank Facility prior to February 20, 2019 were incurred and relate to the Prior Union Bank Facility.Under the Union Bank Credit Facility, the lenders have made commitments of $200.0 million.

On May 6, 2019, 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 our common stock from time to time through JMP, as our 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 nine months ended September 30, 2019, we sold 679,000 shares of common stock under the Prior Equity Distribution Agreement and 1.3 million shares of common stock under the Equity Distribution Agreement. As of September 30, 2019, approximately 10.7 million shares remain available for issuance and sale under the Equity Distribution Agreement. 

On June 17, 2019, we closed the June 2019 Equity Offering. The offering generated net proceeds, before expenses, of $70.5 million, including the underwriting discount and commissions of $2.2 million.

On June 28, 2019, Hercules Funding IV entered into the Union Bank Facility Amendment to the Union Bank Facility. The Union Bank Facility Amendment amends certain provisions of the Union Bank Facility to, among other things, (i) delete the financial covenant with respect to maintaining minimum portfolio funding liquidity, (ii) add a covenant prohibiting Hercules Funding IV from acquiring or owning unfunded commitments to makers of certain notes receivable, and (iii) revise certain provisions thereof to further permit a third party special servicer to act as servicer after an event of default instead of us with respect to split-funded notes receivable owned by Hercules Funding IV and an affiliate thereof (including Hercules Funding II).

On July 2, 2019, Hercules Funding II entered into the Wells Facility Eighth Amendment. The Wells Facility Eighth Amendment amends certain provisions of the Wells Facility to, among other things, revise certain provisions thereof to further permit a third party special servicer to act as servicer after an event of default instead of us with respect to split-funded notes receivable owned by Hercules Funding II and an affiliate thereof (including Hercules Funding IV).

On July 16, 2019, we issued $105.0 million in aggregate principal amount of July 2024 Notes. The sale of the July 2024 Notes generated net proceeds of approximately $103.7 million. Aggregate estimated offering expenses in connection with the transaction, including the underwriter’s discount and commissions, were approximately $1.3 million. 

At September 30, 2019, we had $149.0 million of SBA debentures, $150.0 million of 2022 Notes, $105.0 million of July 2024 Notes, $75.0 million of 2025 Notes, $40.0 million of 2033 Notes, $200.0 million of 2027 Asset-Backed Notes, $250.0 million of 2028 Asset-Backed Notes, and $230.0 million of 2022 Convertible Notes payable, along with no outstanding borrowings on the Wells Facility, and $11.6 million of borrowings outstanding on the Union Bank Facility. 

At September 30, 2019, we had $284.4 million in available liquidity, including $21.0million in cash and cash equivalents. We had available borrowing capacity of $75.0 million under the Wells Facility and $188.4 million under the Union Bank Facility, both subject to existing terms, borrowing base, advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts. 

At September 30, 2019, we had $74.5 million of capital outstanding in restricted accounts related to our SBIC. With our net investment of $74.5 million in HT III, we have the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval. At September 30, 2019, we have issued $149.0 million in SBA guaranteed debentures in our SBIC subsidiaries. As we are past our investment period for HT III, we will no longer make any future commitments to new portfolio companies. We will only satisfy contractually agreed follow-on fundings to existing portfolio companies and may seek to early pay-off a portion or all of the outstanding debentures as per the available liquidity in HT III.

At September 30, 2019, we had approximately $14.9million of restricted cash, which consists of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized 2027 Asset-Backed Notes and 2028 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 with any excess distributed to us or available for our general operations. 

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During the nine months ended September 30, 2019, 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, (iii) debt offerings along with borrowings on our credit facilities, and (iv) equity offerings.

During the nine months ended September 30, 2019, our operating activities used $226.8 million of cash and cash equivalents, compared to $115.4 million used during the nine months ended September 30, 2018. This $111.4 million increase in cash used in operating activities is primarily related to an increase of $78.7 million investment purchases and decrease of $79.5 million in principal and fee payments received on investments.

During the nine months ended September 30, 2019, our investing activities used approximately $484,000 of cash, compared to $325,000 used during the nine months ended September 30, 2018. The $159,000 increase in cash used in investing activities was due to an increase in purchase of capital equipment.

During the nine months ended September 30, 2019, our financing activities provided $217.3 million of cash, compared to $66.3 million provided during the nine months ended September 30, 2018. The net change of $151.0 million increase in cash provided by financing activities was primarily due to the issuance of 2028 Asset-backed notes of $250.0 million, and issuance of the July 2024 Notes of $105.0 million, partially offset by $122.3 million increase in repayment of the credit facilities. 

As of September 30, 2019, net assets totaled $1.1 billion, with a NAV per share of $10.38. We intend to continue to operate in order to generate cash flows from operations, including income earned from investments in our portfolio companies. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. 

The SBCAA, which was signed into law in March 2018, decreased the minimum asset coverage ratio in Section 61(a) of the 1940 Act for business development companies from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested persons). On September 4, 2018 and December 6, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved the application to us of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, effective December 7, 2018, the asset coverage ratio under the 1940 Act applicable to us decreased from 200% to 150%, permitting us to incur additional leverage. As of September 30, 2019, our asset coverage ratio under our regulatory requirements as a BDC was 202.1% excluding our SBA debentures as a result of our exemptive order from the SEC that allows us to exclude all SBA leverage from our asset coverage ratio. As a result of the SEC exemptive order, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 150%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total asset coverage when including our SBA debentures was 189.5% at September 30, 2019.

Refer to “Note 4 – Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this report for a discussion of our borrowings. 

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 September 30, 2019, we had approximately $167.5 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 $213.5 million of non-binding term sheets outstanding to five new companies 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 

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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.

Contractual Obligations 

The following table shows our contractual obligations as of September 30, 2019: 

 

|                              |   | 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)                 |   | $                                     | 1,210,585 |   |   | $ | 10,000 |   |   | $ | 344,250 |   |   | $ | 291,335 |   |   | $ | 565,000 |   |  |
| Lease and License Obligations (4) |   |                                  | 14,197    |   |   |   | 3,174 |   |   |   | 5,872 |   |   |   | 3,639 |   |   |   | 1,512 |   |  |
| Total                             |   | $                                     | 1,224,782 |   |   | $ | 13,174 |   |   | $ | 350,122 |   |   | $ | 294,974 |   |   | $ | 566,512 |   |  |

 

| (1) | Excludes commitments to extend credit to our portfolio companies. |
|-----|-------------------------------------------------------------------|

| (2) | Includes $149.0 million principal outstanding under the SBA debentures, $150.0 million of the 2022 Notes, $105.0 million of the July 2024 Notes, $75.0 million of the 2025 Notes, $40.0 million of the 2033 Notes, $200.0 million of the 2027 Asset-Backed Notes, $250.0 million of the 2028 Asset-Backed Notes, $230.0 million of the 2022 Convertible Notes, and $11.6 million under the Union Bank Credit Facility as of September 30, 2019. There were no outstanding borrowings under the Wells Facility as of September 30, 2019. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 including short-term leases. |
|-----|-----------------------------------------------------------|

Certain premises are leased or licensed under agreements which expire at various dates through June 2027. Total rent expense, including short-term leases, amounted to approximately $764,000 and $2.0 million during the three and nine months ended September 30, 2019 and approximately $522,000 and $1.5 million during the three and nine months ended September 30, 2018.

Indemnification Agreements

We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements are intended to provide our directors and executive officers the maximum indemnification permitted under Maryland law and the 1940 Act. Each indemnification agreement provides that we shall indemnify the director or executive officer who is a party to the agreement, or an “Indemnitee,” including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, to the maximum extent permitted by Maryland law and the 1940 Act.

We and our executives and directors are covered by Directors and Officers Insurance, with the directors and officers being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.

Distributions

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 our distributions for a full taxable year. Of the distributions declared during the year ended December 31, 2018, 100% were distributions derived from our current and accumulated earnings and profits. 

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During thethree months ended September 30, 2019, we declared and paid a distribution of $0.34 per share. If we had determined the tax attributes of our distributions year-to-date as ofSeptember 30, 2019, 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 2019 distributions to stockholders will actually be. 

We maintain an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare a cash distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.

Shortly after the close of each calendar year information identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution, if any) will be provided to our stockholders subject to information reporting. To the extent our taxable earnings fall below the total amount of our distributions for any taxable year, a portion of those distributions may be deemed a tax return of capital to our stockholders.

We expect to qualify to be subject to tax as a RIC under Subchapter M of the Code. In order to be subject to tax as a RIC, we are required to satisfy certain annual gross income and quarterly asset composition tests, as well as make distributions to our stockholders each taxable year treated as dividends for federal income tax purposes of an amount at least equal to 90% of the sum of our investment company taxable income, determined without regard to any deduction for dividends paid, plus our net tax-exempt income, if any. Upon being eligible to be subject to tax as a RIC, we would be entitled to deduct such distributions we pay to our stockholders in determining the overall components of our “taxable income.” Components of our taxable income include our taxable interest, dividend and fee income, reduced by certain deductions, as well as taxable net realized securities gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes net unrealized appreciation or depreciation as such gains or losses are not included in taxable income until they are realized. In connection with maintaining our ability to be subject to tax as a RIC, among other things, we have made and intend to continue to make the requisite distributions to our stockholders each taxable year, which generally should relieve us from corporate-level U.S. federal income taxes.

As a RIC, we will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income and gains unless we make distributions treated as dividends for U.S. federal income tax purposes in a timely manner to our stockholders in respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. We will not be subject to this excise tax on any amount on which we incurred U.S. federal corporate income tax (such as the tax imposed on a RIC’s retained net capital gains). 

Depending on the level of taxable income earned in a taxable year, we may choose to carry over taxable income in excess of current taxable year distributions treated as dividends for U.S. federal income tax purposes from such taxable income into the next taxable year and incur a 4% excise tax on such taxable income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next taxable year under the Code is the total amount of distributions treated as dividends for U.S. federal income tax purposes paid in the following taxable year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next taxable year, distributions declared and paid by us in a taxable year may differ from our taxable income for that taxable year as such distributions may include the distribution of current taxable year taxable income, the distribution of prior taxable year taxable income carried over into and distributed in the current taxable year, or returns of capital.  

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act. 

We intend to timely distribute to our stockholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and, depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax. 

Critical Accounting Policies 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition. 

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Valuation of Investments 

The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. 

At September 30, 2019, approximately 97.0% 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 intend to continue to engage an independent valuation firm to provide us with valuation assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. Specifically, on a quarterly basis, we will identify portfolio investments with respect to which an independent valuation firm will assist in valuing. We select these portfolio investments based on a number of factors, including, but not limited to, the potential for material fluctuations in valuation results, credit quality and the time lapse since the last valuation of the portfolio investment by an independent valuation firm. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately, and solely, responsible for determining the fair value of our investments in good faith.

Refer to “Note 2 – Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this report for a discussion of our valuation policies for the three and nine months ended September 30, 2019.

Income Recognition 

See “— Changes in Portfolio” for a discussion of our income recognition policies and results during the three and nine months ended September 30, 2019. See “— Results of Operations” for a comparison of investment income for the three and nine months ended September 30, 2019 and 2018.

Stock Based Compensation 

We have issued and may, from time to time, issue stock options and restricted stock to employees under the 2018 Equity Incentive Plan and the Director Plan. We follow the guidelines set forth under ASC Topic 718 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.

Subsequent Events

On October 23, 2019, the Board of Directors declared a cash distribution of $0.32 per share to be paid on November 18, 2019 to stockholders of record as of November 11, 2019. 

In addition to the cash distribution, on October 23, 2019, the Board of Directors declared a supplemental cash distribution of $0.03 per share to be paid on November 18, 2019to stockholders of record as of November 11, 2019.

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| ITEM 3. | 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 September 30, 2019, approximately 97.6% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates with a floor. Our borrowings under the Credit Facilities bear interest at a floating rate and the borrowings under our SBA debentures, 2022 Notes, July 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes, and 2022 Convertible Notes bear interest at a fixed rate. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. 

Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2019, 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)          |   | Interest |   |   | Interest |   |   | Net    |   |   |   |   |   |
|------------------------------|--------|----------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|
| Basis Point Change |   | Income   |   |   | Expense  |   |   | Income |   |   | EPS    |   |
| (75)                         |   | $        | (6,790 | )      |     | $      | (7     | )      |   | $      | (6,783 | )      |   | $ | (0.07 | ) |
| (50)                         |   | $        | (4,867 | )      |     | $      | (5     | )      |   | $      | (4,862 | )      |   | $ | (0.05 | ) |
| (25)                         |   | $        | (2,615 | )      |     | $      | (2     | )      |   | $      | (2,613 | )      |   | $ | (0.03 | ) |
| 25                           |   | $        | 3,051  |   |     | $      | 2      |   |   | $      | 3,049  |   |   | $ | 0.03 |   |
| 50                           |   | $        | 6,346  |   |     | $      | 5      |   |   | $      | 6,341  |   |   | $ | 0.06 |   |
| 75                           |   | $        | 10,896 |   |     | $      | 7      |   |   | $      | 10,889 |   |   | $ | 0.10 |   |
| 100                          |   | $        | 15,646 |   |     | $      | 10     |   |   | $      | 15,636 |   |   | $ | 0.15 |   |
| 200                          |   | $        | 35,797 |   |     | $      | 19     |   |   | $      | 35,778 |   |   | $ | 0.34 |   |

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 nine months ended September 30, 2019, 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, July 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes, 2022 Convertible Notes and Credit Facilities that could affect the net increase in net assets resulting from operations, or net income. It also does not assume any repayments from borrowers. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio.

For additional information regarding the interest rate associated with each of our, SBA debentures, 2022 Notes, July 2024 Notes, 2025 Notes, 2033 Notes, 2027 Asset-Backed Notes, 2028 Asset-Backed Notes, 2022 Convertible Notes, and Credit Facilities, refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Outstanding Borrowings” in this quarterly report on Form 10-Q and “Note 4 – Borrowings” included in the notes to our consolidated financial statements appearing elsewhere in this report. 

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| ITEM 4. | CONTROLS AND PROCEDURES |
|--------------|-------------------------|

Disclosure Controls and Procedures 

Our chief executive and chief financial officers, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. As of the end of the period covered by this quarterly report on Form 10-Q, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Control over Financial Reporting 

There have been no changes in our internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

 

 

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PART II: OTHER INFORMATION

| ITEM 1. | LEGAL PROCEEDINGS |
|--------------|-------------------|

We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period. 

 

| ITEM  1A. | RISK FACTORS |
|----------------|--------------|

In addition to the risks discussed below, important risk factors that could cause results or events to differ from current expectations are described in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 21, 2019 (the “Annual Report”).

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy.

As a business development company, we may not acquire any assets other than “qualifying assets” as defined under the 1940 Act, unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Item 1. Business –Regulation” of our Annual Report. 

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 that we invest in qualified assets going forward. 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. Although we are exploring alternatives, such as entering into joint venture arrangements, to increase our flexibility to make investments in assets that are not qualifying assets, there can be no assurance that we will ultimately pursue such alternatives or that such alternatives will achieve this goal. 

As an internally managed business development company, we are dependent upon key management personnel for their time availability and for our future success, particularly Scott Bluestein, 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. Bluestein, 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. Bluestein 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. Bluestein or our senior management that restricts them from creating new investment vehicles subject to compliance with applicable law. We believe our future success will depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect. In connection with our recruiting, branding and marketing efforts, we may, among other things, make charitable contributions in amounts we believe to be immaterial and that do not exceed $500,000 in the aggregate in any year. We believe that many of these contributions help us raise our profile in the communities and benefit us in attracting and retaining talent and investment opportunities.

As an internally managed business development company, our compensation structure is determined and set by our Board of Directors. This structure currently includes salary and bonus and incentive compensation, which is issued through grants and subsequent vesting of restricted stock. We are not generally permitted by the 1940 Act to employ an incentive compensation structure 

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that directly ties performance of our investment portfolio and results of operations to compensation owing to our granting of restricted stock as incentive compensation.

Members of our senior management may receive offers of more flexible and attractive compensation arrangements from other companies, particularly from investment advisers to externally managed business development companies that are not subject to the same limitations on incentive-based compensation that we, as an internally managed business development company are subject to. We do not currently have agreements with certain members of our senior management that prohibit them from leaving and competing with our business and certain States limit our ability to have such agreements. A departure by one or more members of our senior management could have a negative impact on our business, financial condition and results of operations.

We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability or the value of our portfolio.

General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest-earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will generally accrue interest at fixed rates.

A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans and investments. In addition to potentially increasing the cost of our debt, increasing interest rates may also have a negative impact on our portfolio companies’ ability to repay or service their loans, which could enhance the risk of loan defaults. We expect that most of our current initial investments in debt securities will be at floating rate with a floor. However, in the event that we make investments in debt securities at variable rates, a significant increase in market interest rates could also result in an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. As of September 30, 2019, approximately 97.6% of our loans were at floating rates or floating rates with a floor and 2.4% of the loans were at fixed rates.

In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, in July 2017, the head of the United Kingdom Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. At this time, it is not possible to predict the effect of this announcement as there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate and our existing Credit Facilities to replace LIBOR with the new standard that is established.

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Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. 

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at September 30, 2019 that represent greater than 5% of our net assets: 

 

|                          | September 30, 2019 |   |
|-------------------------------|--------------------|--------|
| (in thousands)                | Fair Value         |   |   | Percentage of Net Assets |   |
| BridgeBio Pharma LLC          | $                  | 80,276 |   |   |   | 7.4 | % |
| Paratek Pharmaceuticals, Inc. |               | 72,176 |   |   |   | 6.6 | % |
| EverFi, Inc.                  |               | 71,787 |   |   |   | 6.6 | % |
| Oak Street Health             |               | 60,683 |   |   |   | 5.6 | % |
| Businessolver.com, Inc.       |               | 57,233 |   |   |   | 5.3 | % |
| Lithium Technologies, Inc.    |               | 54,705 |   |   |   | 5.0 | % |

|   | • | BridgeBio Pharma LLC is a clinical-stage biopharmaceutical company that discovers and develops drugs for patients with genetic diseases. |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Paratek Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of innovative therapies based upon its expertise in novel tetracycline chemistry. |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | EverFi, Inc. is a technology company that offers a web-based media platform to teach and certify students in the core concepts of financial literacy, from student loan defaults and sub-prime mortgages to credit card debt and rising bankruptcy rates. |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Oak Street Health operates primary care clinics and healthcare centers that provides healthcare facilities for Medicare eligible beneficiaries, and it serves patients in the United States. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Businessolver.com, Inc. is a technology company that provides a cloud-based SaaS platform for employee benefit administration designed to manage and monitor enrollment and payroll dashboards with real-time data. |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Lithium Technologies, Inc. is technology company that develops a software platform that helps customers to connect, engage, and understand their total community. |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected.

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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|--------------|-------------------------------------------------------------|

Dividend Reinvestment Plan

During the nine months ended September 30, 2019, we issued 132,040 shares of common stock to stockholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act. The aggregate value of the shares of our common stock issued under our dividend reinvestment plan was approximately $1.7 million.

 

| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
|--------------|---------------------------------|

Not Applicable 

 

| ITEM 4. | MINE SAFETY DISCLOSURES |
|--------------|-------------------------|

Not Applicable 

 

| ITEM 5. | OTHER INFORMATION |
|--------------|-------------------|

Not Applicable 

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| ITEM 6. | EXHIBITS |
|--------------|----------|

 

| ExhibitNumber | Description                                                                                                                                                                                                                                                                                                                                        |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  

10.1  |  

Eighth Amendment to Amended and Restated Loan and Security Agreement, dated as of July 2, 2019, by and among Hercules Funding II LLC, as borrower, Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), as the arranger and the administrative agent, and the lenders party thereto from time to time.(1)                   |
|  

10.2  |  

Intercreditor Agreement, dated as of July 2, 2019, by and among Wells Fargo Capital Finance, LLC, as arranger and administrative agent, MUFG Union Bank, N.A., as arranger and administrative agent, Hercules Funding II LLC, Hercules Funding IV LLC, Hercules Capital, Inc., and U.S. Bank National Association, as special servicer.(1) |
|  

10.3  |  

Separation Agreement, dated as of July 13, 2019, by and between Hercules Capital, Inc. and Manuel Henriquez.(2)

                                                                                                                                                                                                                     |
| 10.4          | Note Purchase Agreement, dated July 16, 2019, by and among Hercules Capital, Inc. and the Purchasers party thereto.(3)

                                                                                                                                                                                                                      |
| 10.5*         | Form of Amended and Restated Global Custody Agreement, by and between Hercules Capital, Inc. and MUFG Union Bank, N.A.                                                                                                                                                                                                                             |
| 31.1*         | Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                               |
|  

31.2* |  

Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  |
|  

32.1* |  

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  |
|  

32.2* |  

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  |
|          |                                                                                                                                                                                                                                                                                                                                               |

 

| * | Filed herewith. |
|---|-----------------|

| (1) | Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 3, 2019. |
|-----|------------------------------------------------------------------------------------------------------|

| (2) | Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on August 1, 2019. |
|-----|-----------------------------------------------------------------------------------------------------------|

| (3) | Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 16, 2019. |
|-----|-------------------------------------------------------------------------------------------------------|

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Schedule 12 – 14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

For the Nine Months Ended September 30, 2019

(in thousands)

 

| Portfolio Company                                                                                                                        |   | Investment (1) |   | Amount of Interest Credited to Income (2) |    |   | Realized Gain (Loss) |   |    | As of December 31, 2018 Fair Value |   |   | Gross Additions (3) |   |   | Gross Reductions (4) |    |   | Net Change in Unrealized Appreciation/ (Depreciation) |   |    | As of September 30, 2019 Fair Value |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------------------------------|---------|--------|----------------------|--------|---------|-----------------------------------------|--------|--------|--------------------------|--------|--------|---------------------------|---------|--------|-------------------------------------------------------|--------|---------|------------------------------------------|--------|
| Control Investments                                                                                                                      |   |                |   |                                           |    |   |                 |   |    |                                    |   |   |                     |   |   |                      |    |   |                                                  |   |    |                                     |   |   |   |   |   |   |   |   |
| Majority Owned Control Investments                                                                                                       |   |                |   |                                           |    |   |                 |   |    |                                    |   |   |                     |   |   |                      |    |   |                                                  |   |    |                                     |   |   |   |   |   |   |   |   |
| Gibraltar Business Capital, LLC (7)                                                                                                      |   | Unsecured Debt      |   | $                                              | 1,673   |   |                 | $      | — |                                    |   | $      | 14,401                   |   |   | $                         | 37      |   |                                                  | $      | — |                                     |   | $ | 367 |   |   | $ | 14,805 |   |
|                                                                                                                                     |   | Preferred Stock     |   |                                           | — |   |                 |   | — |                                    |   |   | 23,402                   |   |   |                      | — |   |                                                  |   | — |                                     |   |   | 8,450 |   |   |   | 31,852 |   |
|                                                                                                                                     |   | Common Stock        |   |                                           | — |   |                 |   | — |                                    |   |   | 1,688                    |   |   |                      | — |   |                                                  |   | — |                                     |   |   | 610 |   |   |   | 2,298 |   |
|                 Total Majority Owned Control Investments |   |                |   | $                                              | 1,673   |   |                 | $      | — |                                    |   | $      | 39,491                   |   |   | $                         | 37      |   |                                                  | $      | — |                                     |   | $ | 9,427 |   |   | $ | 48,955 |   |
| Other Control Investments                                                                                                                |   |                |   |                                           |    |   |                 |   |    |                                    |   |   |                     |   |   |                      |    |   |                                                  |   |    |                                     |   |   |   |   |   |   |   |   |
| Tectura Corporation(5)                                                                                                                   |   | Senior Debt         |   | $                                              | 1,446   |   |                 | $      | — |                                    |   | $      | 18,128                   |   |   | $                         | 483     |   |                                                  | $      | — |                                     |   | $ | (9,006 | ) |   | $ | 9,605 |   |
|                                                                                                                                     |   | Preferred Stock     |   |                                           | — |   |                 |   | — |                                    |   |   | —                  |   |   |                      | — |   |                                                  |   | — |                                     |   |   | — |   |   |   | — |   |
|                                                                                                                                     |   | Common Stock        |   |                                           | — |   |                 |   | — |                                    |   |   | —                  |   |   |                      | — |   |                                                  |   | — |                                     |   |   | — |   |   |   | — |   |
| Total Other Control Investments                                                                                                          |   | $                   | 1,446  |                                           |    | $      | —              |   |    | $                                       | 18,128 |   |                     | $      | 483    |                      |    | $      | —                                               |   |    | $                                        | (9,006 | ) |   | $ | 9,605 |   |
| Total Control Investments                                                                                                                |   | $                   | 3,119  |                                           |    | $      | —              |   |    | $                                       | 57,619 |   |                     | $      | 520    |                      |    | $      | —                                               |   |    | $                                        | 421    |   |   | $ | 58,560 |   |
|                                                                                                                                     |   |                |   |                                           |    |   |                 |   |    |                                    |   |   |                     |   |   |                      |    |   |                                                  |   |    |                                     |   |   |   |   |   |   |   |   |
| Affiliate Investments                                                                                                                    |   |                |   |                                           |    |   |                 |   |    |                                    |   |   |                     |   |   |                      |    |   |                                                  |   |    |                                     |   |   |   |   |   |   |   |   |
| Optiscan BioMedical, Corp.                                                                                                               |   | Preferred Warrants  |   | $                                              | — |   |                 | $      | — |                                    |   | $      | 178                      |   |   | $                         | — |   |                                                  | $      | — |                                     |   | $ | 35 |   |   | $ | 213 |   |
|                                                                                                                                     |   | Preferred Stock     |   |                                           | — |   |                 |   | — |                                    |   |   | 6,799                    |   |   |                      | 1,631   |   |                                                  |   | — |                                     |   |   | (583 | ) |   |   | 7,847 |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) (6)                                                                                 |   | Senior Debt         |   |                                           | 1,740   |   |                 |   | — |                                    |   |   | 11,404                   |   |   |                      | 1,610   |   |                                                  |   | — |                                     |   |   | (110 | ) |   |   | 12,904 |   |
|                                                                                                                                     |   | Common Stock        |   |                                           | — |   |                 |   | — |                                    |   |   | 3,115                    |   |   |                      | — |   |                                                  |   | — |                                     |   |   | (3,115 | ) |   |   | — |   |
| Total Affiliate Investments                                                                                                              |   | $                   | 1,740  |                                           |    | $      | —              |   |    | $                                       | 21,496 |   |                     | $      | 3,241  |                      |    | $      | —                                               |   |    | $                                        | (3,773 | ) |   | $ | 20,964 |   |
| Total Control and Affiliate Investments                                                                                                  |   | $                   | 4,859  |                                           |    | $      | —              |   |    | $                                       | 79,115 |   |                     | $      | 3,761  |                      |    | $      | —                                               |   |    | $                                        | (3,352 | ) |   | $ | 79,524 |   |

 

| (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 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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

91

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Schedule 12 – 14

HERCULES CAPITAL, INC.

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

As of September 30, 2019

(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%                                               |   | $                    | 15,000      |   |   | $      | 14,766  |      |   | $ | 14,805 |   |
|                                                       |   | Diversified Financial Services            |   | Preferred Series A Equity   |   |          |   |                                                                     |   |                 | 10,602,752  |   |   |   | 26,122  |      |   |   | 31,852 |   |
|                                                       |   | Diversified Financial Services            |   | Common Stock                |   |          |   |                                                                     |   |                 | 830,000     |   |   |   | 1,884   |      |   |   | 2,298 |   |
| Total Gibraltar Business Capital, LLC                      |   |                                      | $      | 42,772                      |   |          | $      | 48,955                                                                   |   |
| Total Majority Owned Control Investments (4.51%)*          |   |                                      | $      | 42,772                      |   |          | $      | 48,955                                                                   |   |
| Other Control Investments                                  |   |                                           |
| Tectura Corporation                                        |   | Internet Consumer & Business Services |   | Senior Secured Debt         |   | June 2021     |   | Interest rate FIXED 6.00%,

PIK Interest 3.00%                           |   | $                    | 21,407      |   |   | $      | 21,407  |      |   | $ | 9,605 |   |
|                                                       |   | 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                                  |   |                                      | $      | 22,547                      |   |          | $      | 9,605                                                                    |   |
| Total Other Control Investments (0.88%)*                   |   |                                      | $      | 22,547                      |   |          | $      | 9,605                                                                    |   |
| Total Control Investments (5.39%)*                         |   |                                      | $      | 65,319                      |   |          | $      | 58,560                                                                   |   |
|                                                       |   |                                      |   |                        |   |          |   |                                                                     |   |                 |        |   |   |   |    |      |   |   |   |   |
| Affiliate Investments                                      |   |                                           |
| Optiscan BioMedical, Corp.                                 |   | Medical Devices & Equipment           |   | Preferred Series B Equity   |   |          |   |                                                                     |   |                 | 61,855      |   |   | $      | 3,000   |      |   | $ | 393 |   |
|                                                       |   | Medical Devices & Equipment           |   | Preferred Series C Equity   |   |          |   |                                                                     |   |                 | 19,273      |   |   |   | 655     |      |   |   | 111 |   |
|                                                       |   | Medical Devices & Equipment           |   | Preferred Series D Equity   |   |          |   |                                                                     |   |                 | 551,038     |   |   |   | 5,257   |      |   |   | 3,282 |   |
|                                                       |   | Medical Devices & Equipment           |   | Preferred Series E Equity   |   |          |   |                                                                     |   |                 | 507,103     |   |   |   | 4,239   |      |   |   | 4,061 |   |
|                                                       |   | Medical Devices & Equipment           |   | Preferred Series E Warrants |   |          |   |                                                                     |   |                 | 74,424      |   |   |   | 572     |      |   |   | 213 |   |
| Total Optiscan BioMedical, Corp.                           |   |                                      | $      | 13,723                      |   |          | $      | 8,060                                                                    |   |
| Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.)       |   | Sustainable and Renewable Technology      |   | Senior Secured Debt         |   | October 2019  |   | Interest rate PRIME + 8.70% or Floor rate of 12.95%, 6.67% Exit Fee      |   | $                    | 10,000      |   |   | $      | 10,775  |      |   | $ | 10,696 |   |
|                                                       |   | Sustainable and Renewable Technology      |   | Senior Secured Debt         |   | October 2019  |   | PIK Interest 10.00%                                                      |   | $                    | 683         |   |   |   | 683     |      |   |   | 679 |   |
|                                                       |   | Sustainable and Renewable Technology      |   | Senior Secured Debt         |   | October 2019  |   | Interest rate PRIME + 10.70% or Floor rate of 15.70%, PIK Interest 2.00% |   | $                    | 1,555       |   |   |   | 1,555   |      |   |   | 1,529 |   |
|                                                       |   | Sustainable and Renewable Technology      |   | Common Stock                |   |          |   |                                                                     |   |                 | 380         |   |   |   | 61,502  |      |   |   | — |   |
|                                                       |   | Sustainable and Renewable Technology      |   | Common Warrants             |   |          |   |                                                                     |   |                 | 0.69        |   |   |   | — |      |   |   | — |   |
| Total Solar Spectrum Holdings LLC (p.k.a. Sungevity, Inc.) |   |                                      | $      | 74,515                      |   |          | $      | 12,904                                                                   |   |
| Total Affiliate Investments (1.93%)*                       |   |                                      | $      | 88,238                      |   |          | $      | 20,964                                                                   |   |
| Total Control and Affiliate Investments (7.32%)*           |   |                                      | $      | 153,557                     |   |          | $      | 79,524                                                                   |   |

 

| * | 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. |
|-----|------------------------------------------------------------------------------------------------------------------------------------|

92

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SIGNATURES 

Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

|                    |   | HERCULES CAPITAL, INC. (Registrant)                                |
|-------------------------|--------|--------------------------------------------------------------------|
|                    |   |                                                               |
| Dated: October 30, 2019 |   | /S/ SCOTT BLUESTEIN                                                |
|                    |   | Scott Bluestein                                                    |
|                    |   | President, Chief Executive Officer, and 

Chief Investment Officer |
|                    |   |
| Dated: October 30, 2019 |   | /S/ SETH H. MEYER                                             |
|                    |   | Seth H. Meyer                                                      |
|                    |   | Chief Financial Officer, and 

Chief Accounting Officer            |

 

93