Hercules Capital Inc (HTGC) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the Hercules Technology Growth Capital Incorporated Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will open the call to your questions. Instructions to asking questions will be explained at that time. I will now turn the call over to Mike Knapp with Hercules' Investor Relations Group to introduce today's speakers. You may go ahead Mr. Knapp.

Thanks, Megan. And thanks to all of you for joining us today. I'm joined today by Manuel Henriquez, President and CEO, Dennis Wolf, Chief Financial Officer, and David Lund, the Company's Vice President of Finance and Senior Corporate Controller.

The Company's second quarter results were just released just after today's market close. It can be accessed from our website at www.herculestech.com. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Hercules Technology Growth Capital and that any unauthorized broadcast of this call, in any form, is strictly prohibited. An audio replay of the call will be available through our website, or by using the telephone numbers and pass code provided in our press release.

I would also like to call to your attention the Safe Harbor Disclosure in our press release regarding forward-looking information. Today's conference call may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake any obligation to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit www.sec.gov, or visit our website at www.herculestech.com.

I will now turn the call over to Manuel Henriquez, Hercules' President and CEO.

Manuel?

Thanks Mike. And thanks to all of you for joining us today. We are pleased and excited to be reporting our first earnings and conference call, and we look forward to all those to come. We will be relatively brief in this call as we have just seen many of you on the road show. For those of you who are new to Hercules' story, we welcome you and look forward to getting to know you in the quarters ahead. I will spend a few minutes discussing our second quarter highlights and investment activities. Then, Dave will take you through the second quarter operating results, after which we will be happy to take your questions.

We had a number of important highlights in the second quarter of 2005. We are pleased to complete our initial public offering, raising approximately $71 million of net proceeds. Our new commitments during the second quarter totaled $80.5 million to nine companies. New debt fundings in the second quarter totaled $53.3 million to ten companies. We also had a new equity investment of $1 million to existing portfolio company, which makes the total new fundings for the period $54.3 million.

Our total funded capital at the end of the second quarter was $87 million. In addition, we had unfunded commitments of approximately $36.2 million. Taken together, our total commitments, both funded and unfunded, were $123.2 million to 19 companies since inception (ph). In Q2, reported net income of $710,000. Our balance sheet shows net assets of $113.2 million, net unrealized depreciation of $1 million, representing a net asset value per share of $11.55.

Turning to our portfolio and investment activity in the second quarter. We finalized binding loan documents and commitments representing a total of $80.5 million to nine companies, which also includes companies that had signed term sheets in the prior quarter. We had previously reported $85.5 million in commitments in Q2. This commitment included $5 million that was closed in the prior quarter but funded in Q2. Total new fundings for the period were $54.3 million. We funded a total of $53.3 million in debt commitments to nine companies and invested $1 million in preferred equi (ph) securities to an existing portfolio company.

Total invested value at the end of the second quarter stood at $87.3 million, representing 19 companies, up 10 companies sequentially. This compares with $32.6 million in the prior quarter. In Q2, the overall weighted average yield-to-maturity on our loan portfolio was 12.7%. Sorry, 12.87%, excuse me.

New investments or fundings during the second quarter of 2005 included the following - $29 million or 54% in biopharmaceutical and medical device companies. These companies were as follows - $9 million to Merimac (ph) Pharmaceuticals, $5 million to Teritech (ph) Pharmaceuticals, $10 million to Lab-O-Pharm, $1 million to Aviana (ph), a medical device company, and $4 million to Power Medical Interventions (ph), also a medical device company.

In addition, we funded $24.3 million, or 46%, to technology companies. These companies were as follows - $5 million to Icona Communications, a communications and networking company, $4 million to Sports Vision, an interactive software company, $12.3 million to WageWorks, a consumer and business products company, and $3 million to insideSoftware, a business applications software company.

Our portfolio mix is expected to change quarter-to-quarter.

Now to discuss our portfolio grading. In Q2, we had Grade 2 invested sold $75.8 million, or 87%, of the total portfolio. Grade 3 investments totaled $6.8 million, or 8%, of the total portfolio. And, Grade 4 investments totaled 4.7, or 5%, of the total portfolio. As of June 30, 2005, our weighted-average invested rating was 2.19 or, essentially unchanged, with the first quarter rating of 2.18%.

There's also a couple of recent financing events that we would like to share with you. First, we are pleased to announce that on August 1, 2005, the Company through one of its wholly-owned affiliates increased its capital resources by closing $100 million credit facility with CitiGroup Global Markets Realty Corp, and affiliate of CitiGroup, Inc. We expect this significant capital resource to provide us with the flexibility to take advantage of future market opportunities and to provide us with a stronger balance sheet going forward.

In addition, on August 1, 2005, we amended our $25 million credit facility with AukuBanc (ph), a subsidiary of Faralon Capital, to extend the facilities maturity to April 2006. The original extension fee under the agreement was waived and the interest rate was revised to the 12-month LIBOR plus 5.6% through the end of this year. As of January 1, 2006, this rate would become fixed at 13.5%.

I'd like to turn the call over to Dave to review the Q2 operating results.

Dave?

Thank you Manuel. For the second quarter, investment income was $1.9 million. Operating expenses were $2.2 million, which included $877,000 in loan and interest fees related to our credit facility with Opmeem (ph), and $56,000 of stock-based compensation expenses recognized in accordance with FASB-123R, resulting in a net operating loss of $334,000.

In addition, net unrealized gains on investments were approximately $1 million, resulting in a net increase in net assets from operations of $710,000.

Moving on to liquidity and capital resources, on June 11, 2005, we completed the initial public offering of our common stock, raising approximately $71 million of net proceeds. At June 30, 2005, net assets were $113.2 million. Our net asset value per share was $11.55 based on approximately 9.8 million outstanding.

During June 2005, we received notice from the Small Business Administration, or SBA, that our application to operate as a small business investment company, or SBIC, has been accepted and we expect final approval from the SBA during the fourth quarter. This acceptance permits us to operate as an SBIC and allows us to submit investments for funding approval by the SBA prior to final licensing.

We believe our association with the SBA will provide an additional resource to capital and strengthen our financial position. The company is required to maintain regulatory asset coverage of at least 200%. At June 30, 2004, 2005, our regulatory asset coverage was greater than 550%.

Operator, we are now ready to take questions.

(Operator instructions)

We will pause for a moment to compile a list of questions. And your first question comes from the line of Donald D. Destino with JMP Securities.

Hey guys.

Hey John. How are you?

I'm well thanks. A couple of questions. Number one, the yield-to-maturity at June 30th was a little higher than I expected, or that I had modeled going forward. Can you talk a little about what you're seeing out there on the competitive landscape and if it's a little better than you expected or about where you expect it to be?

I think that the competitive landscape continues to be what we thought it would be as we said during the road show. We continue as a new company, continue to build our brand and continue to get brand recognition. But it certainly it continues to be at the pace that we expect it to be at our current stage of development as a company. In terms of the yield-to-maturity, I think that we're seeing slightly higher fee income than your models are probably had out there and that is something that I'm not sure is sustainable but certainly the current market we're seeing the ability to see some fee expansion taking place right now.

Actually, that leads into my next question, which is the deferred fees were just about $1.7 million. Can you, is it possible to get, I know that the net number, and there was some amortization there, is it possible to get kind of what the gross add to deferred fees was for the quarter? You know, put another way, if you accounted for things kind of like some of your competitors do in which they book the origination fees as income, you know, what would the apples-to-apples comparison be? How much would we add if we wanted to be less conservative on the income recognition?

Don, our, the investment income that we had from fees during the quarter was the 192, almost $193,000, which includes new origination as well as amortization of some of the previously booked fees.

As a reminder, Don, we recognize all of the fees that upon the inception of a loan, over the life of a loan.

No. I understand that. The question I'm asking is some of your, some of the people that might be considered peers, aren't that conservative. And, therefore, in recognize those origination fees upon, you know, upon receiving them. So what I was, so what I was getting at is if we knew what the gross number was, or the fees booked in the quarter, we could kind of compare and say what earnings would be if you recognized earnings like, you know, a less conservative company.

Right. As you know, we don't necessarily provide guidance in terms of that. But, a simple rule of thumb that you can use is gross originations at 1%, you know, initial fee, is probably a very good rule of thumb to use. But, again, without necessarily giving any guidance that's probably what I'd guide have you point to is use a 1% as kind of that main factor.

Okay. And then, this is a little bit of a housekeeping question but the extension of the Faralon loan is obviously going to change the amortization of the fees on that loan. Can you give a little guidance as to what the expense will be going forward on that loan, I mean, assuming flat LIBOR, I guess?

We would have about $500,000 of expense to accrete, accrue, over the course of approximately the next nine months.

So, is that, is it fair, am I thinking about this right, that I can compare that $500,000 to the $800,000 some that you recognized in the second quarter?

No. What we had in terms of fees in the second quarter was actually $433,000. There was $444,000 of interest as well.

Okay. So, going forward, what will be the total expense load of the Faralon loan on a quarterly basis - amortization of fees and interest?

Okay. So we will, on a quarterly basis, we will be amortizing the balance of the million, less the 433 that we've recognized, approximately $567,000, over the course of the next nine months.

Okay. So, that fee component will come down.

That's correct.

And then, could you go through the loans that are not Grade 2 and just, and kind of give us an idea of what's going on there?

Sure. As we had indicated during our, at the road show, because our companies are backed by venture capital firms by equity shops, and because these companies are like some of the middle-market credits that you may be used to seeing, our companies acquire additional rounds of financings in order to continue to develop their business models. As such, what we do is, in terms of being cautionary, once a company is approaching the next financing event, we automatically look over the credit rating, which means, internally, that particular company, or what we define as credit, becomes a much more watched company as they finalize the next round of financing. So, you'll see, customarily, us lowering credit ratings and once the company raises the next round of financing, we will once again we'll re-up that credit rating.

Now, to more specifics of your question, we are actually seeing some softening, as you're seeing in the overall marketplace, on the enterprise software application space. We have one company in particular in the enterprise application space that we're seeing a continual lengthening of their sales cycles to the ultimate customers and as such the company is not realizing the revenues we had anticipated originally. And, therefore, it is actually burning a little more money than it should be. That said, we are in close contact with the company and we actually communicate with the company on a weekly to bi-weekly basis to get a progress report on what's going on there.

Alright. Thanks. That's helpful.

(Operator instructions).

And at this time we have no further questions.

Okay. Thanks. First of all, thank you everybody. And thanks for your interest in Hercules Technology Growth Capital. I want to note that we intend to be as communicative as possible with our investors and our analysts and we appreciate your questions and comments as we build our new investor relations program. We are planning marketing trips at least once per quarter and we hope to see you, to see many of you, as soon as possible.

I would like to arrange a meeting, if you would like to arrange a meeting, or have additional questions, please contact Deborah Stapleton or Mike Knapp at Stapleton Communications at 650-470-0200. And again, thanks and goodbye for now.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.