Hercules Capital Inc (HTGC) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Hercules Technology Growth Capital Incorporations Second Quarter 2006 Financial Results Conference Call. [OPERATOR INSTRUCTIONS] I will now turn the call over to Christina Carrabino with Hercules Investor Relations Group to introduce today's speakers. You may go ahead Ms. Carrabino.

Thank you, operator, and thanks to all of you for joining us today. I am joined today by Manuel Henriquez, President and CEO and David Lund, Vice President Finance. Our second quarter 2006 financial results were released just after today's market closed. They can be accessed from our website at www.HerculesTech.com. An audio replay of this 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 your attention to the safe harbor disclosure in our press release regarding forward-looking information. Today's conference call may include forward looking statements and projects 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, our President and CEO. Please go ahead Manuel.

Well thank you, Christina and thank you everybody for joining us today. I'd like to take this moment and in brief comments to talk about the quarter and then to turn over the call to David to go over some more detailed financial summary of the quarter. At the end of the presentation we'd like to open up for questions.

Let me first start off by saying that we had a very solid positive quarter. We had record-breaking revenues for the quarter of $6.8 million, representing our seventh consecutive quarter of revenue growth. We had record net investment income of $2.5 million and our portfolio grew to $194 million at the end of Q2. Overall our total debt commitment since inception now exceed $347 million as of the end of Q2.

We recently declared a second quarter dividend of $0.30 per share, our fourth consecutive dividend since inception, payable to shareholders of record of August - excuse me, payable to shareholders on August 28th, to shareholders of record as of July 31st 2006. This brings our cumulative dividend declared and paid to date to $0.925 since we started paying our dividends.

I would like to update you on our RIC election and registered investment company election and status. You may have noticed, or noted in our earnings release today we began reporting as a RIC during the second quarter and expect to do so for the remainder of 2006. The RIC collection is an annual election and our first election will be made upon the filing of our 2006 tax returns. Dave will discuss the financial impact of the tax provision for the second quarter and further elaborate on the RIC status as well.

Now I would like to discuss the venture capital marketplace activities and funding activities by venture capitalists during the second quarter and the first half of 2006. We continued to see a very robust growth in venture capital, marketplace activities, and according to Thomson Financial and the National Venture Capital Association, fundraising by venture capitalists and buyout firms is on track to hit new record highs. During Q2, 2006, approximately 50 venture capital firms raised over $11.2 billion, this is a modest increase - sorry, the most since the first quarter 2001 and well beyond the 6.8 billion raised in Q1 2006.

In addition, according to Dow Jones Venture One, who recently reported that during the first half of 2006, approximately $13 billion was invested to over 1,200 venture capital-backed companies representing a year-over-year increase of 13%. The largest gain this year came from the healthcare sector where the investments grew to over 26% to $3.8 billion for the first half of the year. Given the recent investment activities by venture capitalists and our strong relationships with the venture capital community, we continued to see a robust pipeline of potential new investment opportunities throughout all stages of target companies' development.

As the only publicly traded multistage venture capital - venture debt investor, we distinguished ourselves from our competitors by our ability to provide one stop financing solutions to venture backed technology and life sciences companies by providing senior debt, subordinated debt, equipment loan and equity at all stages of the company's development. This, in addition to our low cost and permanent source of capital our extensive origination system and quick and efficient due diligence and investment process provides us with considerable competitive advantages as we expend our investments in technology and life sciences companies.

We are a very strong platform for completing technology and life sciences transactions because we can focus on sectors in stages appropriate to current market cycles rather than limiting ourselves based on fund timing, size and charter.

I now would like to turn the call over to David to review our two - Q2 2006 portfolio and operating results. David?

Thank you Manuel. Let me start by saying that we are proud of the results that we achieved for the second quarter. We continue to grow our investment portfolio quarter over quarter, our revenues increased for the seventh consecutive quarter and we grew net investment income by 21% over the first quarter. I will begin by discussing our second quarter portfolio and investment activity followed by our operating results. We continue to grow originations with new debt commitments of $38.5 million to six companies bringing gross originations from inception to date to $347 million to 50 companies. Our new debt fundings totaled $32.1 million, of which 24 million was invested in six new companies and we provided an additional $8.1 million to four existing companies.

I would like to remind our investors that as we enter the summer season, beginning with the second quarter, we generally see a slow down in origination with Q3 being the slowest quarter. As a result, the timing of the closing of our transactions is not always within our control as evidenced by the recent closing in early July of $16.5 million of new commitment. This reinforces what we have previously stated, at times we may experience lumpiness in originations and fundings that we report in any given quarter.

Our new equity commitments totaled $2.25 million to three companies, of which we funded $750,000 of such commitment to two existing portfolio companies. The third commitment was to a new company that was funded after quarter end.

As of June 30, 2006 our unfunded debt commitments approximated $85.2 million to 18 portfolio companies. In addition, we executing non-binding term sheets which are subject to further negotiation and due diligence with 10 perspective portfolio companies representing approximately $74.5 million.

We continue to see a robust pipeline of quality companies as we head into the second half of the year. The fair value of our debt portfolio including warrants at June 30 2006 was approximately $188.1 million, representing investment in 46 active portfolio companies compared with $172.1 million at March 31, 2006 with investments in 41 portfolio companies. The change in our investment portfolio primarily reflects the fundings in the quarter of approximately $32.1 million, offset by $14.9 million of principal repayment. The principal repayments included [$6 point million] from repayments from two well performing companies who elected to repay their outstanding debt early.

We also recognized - we also exercised a warrant with an unrealized gain of approximately $1.4 million and sold the underlying shares during the quarter. The sale of the shares further reduced the value of the portfolio as the equity was converted to cash. The fair value of our equity portfolio at June 30, 2006 was $5.5 million with investments in nine portfolio companies compared with $4.7 million at March 31, 2006 with investments in seven portfolio companies.

We continued to manage the portfolio by investing our capital in high yielding assets. At June 30 we had invested 93.7% in debt investments, 3.5% in warrant value and 2.8% in equity investments. At June 30, 2006, the overall weighted average yield to maturity on our loan portfolio was approximately 12.8% as compared to 12.6% in the first quarter.

Moving on to our operating results for the second quarter, investment income continued to grow and reach a new high of $6.8 million, compared with $1.9 million in the second quarter of 2005 and 6.5 million in the first quarter of 2006. The modest revenue growth over the first quarter was the result of the average portfolio balance being approximately the same in the second quarter as it was in the first quarter. This steady balance was due to the timing of early loan repayments in both the first and second quarters.

Interest expense and loan fees were $1.6 million in the second quarter, down from 1.9 million in the first quarter. The decrease of approximately $300,000 was primarily due to our fully repaying the outstanding balance of $15 million under the Fairlawn Bridge Loan in May and paying $10 million under our CitiGroup Credit Facility in June. I would like to remind everyone that our loan with CitiGroup is at LIBOR plus 1.65%.

As you are aware, we raised approximately $34 million of net proceeds through out rights offering and used a portion of those proceeds to reduce our debt. We anticipate drawing additional funds under the CitiGroup Credit Facility as we continue to invest during the second half of the year.

Total operating expenses, excluding interest expense and loan fees, were $2.7 million, a modest increase of $200,000 from the first quarter. The increase was primarily related to Sarbanes-Oxley compliance and other operating expenses. As a result of the higher revenues and lower operating expenses, our net investment income before provision for income taxes was up 21% over the first quarter to $2.5 million, and up from an operating loss of $334,000 in the second quarter of 2005.

As you will have noted in the earnings release today, we recognized $1.6 million in realized capital gains. Approximately $1.2 million of this gain was the result of the sale of common stocks acquired upon the exercise of a warrant in one portfolio company. In addition, we realized a gain of approximately $400,000 from a contingent payment received from the sale of one portfolio company that was sold in the first quarter. This brings our realized gains for the first half of 2006 to $3.1 million.

The net decrease in unrealized depreciation on investments was approximately $1.5 million in the second quarter. As I mentioned, during the second quarter we exercised a warrant and sold the underlying stock. As a result of this transaction the unrealized gain became a realized gain, thereby creating a decrease in the unrealized depreciation.

As Manuel mentioned, we expect to be regulated as a RIC for the 2006 tax year and began reporting our operations as a RIC during the second quarter. As a result we recognized a tax benefit of approximately $800,000 in the second quarter related to the reversal of approximately $1.8 million for the tax provision of the first quarter of 2006. This was offset by evaluation allowance of approximately $1 million on deferred tax asset and an estimated cash expense related to RIC elections.

Net income during the second quarter was a record $3.4 million or $0.26 per share, reflecting the operating results discussed above. Net income for the six months ending June 30, 2006 was approximately $5.9 million, or $0.52 per share. Our second quarter income - taxable income was approximately $4.2 million or $0.31 per share based on 13.6 million shares outstanding at the end of the quarter.

In terms of liquidity and capital resources during the second quarter, our net assets were approximately $153.3 million, or $11.24 per share. As of June 30, 2006 we had an outstanding balance of $61 million under our credit facility with CitiGroup, leaving $64 million available subject to existing terms and advance rates. We are currently finalizing our renewal terms with CitiGroup to extend the credit facility for another year under the same terms and conditions as we have today.

Currently, we have $67 million of variable loans in our portfolio with interest rates attached to the prime rate. As a result, we are appropriately hedged against our floating rate loan with CitiGroup.

We had $23.2 million in cash at the end of the second quarter. As a reminder, we successfully completed our transferable rights offering in April with net proceeds of approximately 3 -- $34 million. This offering was oversubscribed by approximately 1 million shares, which reflect our investor's continued support of Hercules and our ability to raise capital to fund future investments.

The quality of our loan portfolio remains strong. At June 30, 2006 the weighted average was 2.21 on a scale of 1 to 5, with 1 being the highest quality, compared to 2.04 at the end of the first quarter. Our policy is to reduce the grading on our portfolio companies as they approach the time in which they will require additional equity capital. Various companies in the portfolio will require additional funding in their term and we have therefore downgraded those companies until the funding is complete.

In this day's earnings release we've provided a breakdown of our portfolio at fair value as of June 30, 2006. 51% of our portfolio is in technology companies while 32% is in biopharmaceutical companies and 7% is in medical device companies.

Before I turn the call back to Manuel, I would like to add that the third quarter is typically the slowest quarter for the venture lending as a company. Boards of -- and executives of companies do not regularly meet during this time and as such deals tend to be delayed.

With that I will now turn the call back to Manuel. -- oops, back to the operator.

Operator, we're ready for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Shawn [Destino]. Please proceed sir.

Hi David, Hi Manuel. Congrats on a nice solid quarter.

Thanks Shawn.

I got kind of a laundry list so you can cut me off and maybe I can get back in queue. We'll start with liquidity versus pipeline, my quick math and I may be wrong, you've got about $87 million of liquidity on the line plus cash. I count $160 million of commitment and nonbinding term sheets, obviously not 100% of that is going to close, but can you just give us - give me some feel for where you think you stand. Third quarter is probably slow so that pushes this all out, but are you in - do you still think you're in good shape to kind of get through the rest of the year without another infusion of capital.

Well certainly, I mean obviously the infusion of the capital is highly contingent upon our continued pace of origination. We feel very, very good about the visibility we have into the remaining six months of the year and just to remind you that we continue to expect to see just sort of a redemption as a repayment of principal.

The other thing is I want to remind you that although we have a significant and growing unfounded commitment, we don't expect a lot of that commitment to be drawn next quarter. Generally we draw now between the next 2 to maybe 2.5 quarters to keep that in perspective.

In addition to the new non-binding term sheets, I'd like to remind you as well that 75 to 80% of those will convert and then if that balance that converts into executed documents will fund only a small portion up on that conversion, generally a 30 to 40% we'll fund in that particular quarter, depending on when the quarter it gets done as well. So we feel pretty comfortable right now from what we're seeing from our pipeline and what we expect to see in terms of redemption and prepayment of principal to be able to fund the business through the remainder of calendar '06.

Now, I will like to tell you, that like most BDCs do, we do anticipate sometime in Q3 filing a shelf filing in order to have the ability to raise capital if we need to on a short term basis, but it's really sums of marketing addition at this point but we don't need to raise capital for the remainder of 2006 right now.

That's very helpful. Thanks. And then the $6.9 million of repayments on two companies, can I assume that those now represent two warrant positions in which you've got no principal outs on those investments and how many investments or how many warrants or equity kickers do you have like that at this point in which you really have no cost basis or no principal our to the original company?

We have approximately four or five companies that actually adhere to that. And again as a reminder, just because a company pays us off early does not mean - you should never assume that we do not maintain the equity participation in that company.

No, I understand that.

Yes. And I just - another clarification, our warrants typically have a lifecycle of five to seven years since inception of the investments so they continue to live on even though we've paid out early.

Okay. Two more. On the grade 3 and 4 investments, I realize that a good portion of those are because companies are coming up and needing new capital. Is that 100% of those or what - how much of that is actually companies that are impaired or aren't living up to your expectations?

Well, we don't have any impairment under the purest definition of the accounting rule. We have - just to be clear and reaffirm what we said earlier, we will always be more cautious than most of our other competitors do out there. We will always degrade a company as it approaches a round of financing until we have absolute visibility and frankly comfort that it will receive the appropriate capital in order to find and amortize our debt.

Now the second part of your question is, you look at the more grade 4 companies, which we have I think disclosed 3, grade 4. We have probably 1 of those is probably in a more distressed situation than not. The other two are actually very close to closing a round financing that we are aware of and frankly don't have a lot of near term concern with those companies. However, until those financing grounds close we will lower them to a rate of 4 until that occurs.

Yes, but I'd also like to point out that all the loans are currently performing. We don't have any non-performing loans at this time.

That's helpful. All right and last question is kind of a more of a -- just a [driving forward] question. Manuel you gave -- you went through the statistics on all of the capital that's being raised for venture capital. Is that 100% positive for you or does that have - is that a double edged sword when that much capital is being raised? Do funds want to shove more equity into deals and therefore there's not a - always a place for your debt product?

That's - I want to say layman's perspective. The answer to that statement is that is what you expect it to be but it actually works completely opposite of that because as it -- the venture industry desire to put more money into the company inherently that underlying company is much more attractive to the investors and therefore the entrepreneurs now see that and some of the early stage investors now realize that. So there's actually a greater catalyst for impetus to actually put more debt into the company and try to minimize or reduce the amount of pure equity going in. So it increases the tension between the equity and the entrepreneurs to a higher level and we come in being somewhat neutral to both the VCs and to the entrepreneurs and providing additional layer of capital to minimize dilution that the legacy investors we have in the deal and of course the management teams remain incented. So it's actually a good thing.

It simply means that companies are now seeing a higher level of confidence of securing additional rounds of financing.

That's actually a really useful answer. Thank you very much.

Your next question comes from the line of Henry Coffey. Please proceed sir.

Hi, Henry Coffey. Can you give me some - actually first a very simple calculation. If I look at your equity and assets can I simply double your equity and then make a guess that that's what's remaining in terms of your actual leverage capacity?

That's certainly a good and safe shorthand version of doing that. That's right Henry.

And it looks like you've got the capacity for about $300 million of additional assets and you're saying at about $83 million of new loans. That $300 million would be total-ish.

That's right. Of course that excludes the FDIC -- as you know, that's still pending.

And what's the status of your S - your situation with the [inaudible]?

Well we certainly continue to remain, I guess, diligent on getting approved form the SBA. We had a conversation with the SBA as early as this week and the direct answer is they give us indications that late August, early September, I guess to be conservative, I'll continue to push that out to probably October.

So some time in - by the fourth quarter.

We certainly are eagerly optimistic that that is the case.

And I heard you made the comment you felt that given your debt capacity and the money you can get from the SBA in loan repayments, you thought you could get all the way through next year without an equity rate?

Well I certainly said that given the activities that we're seeing right now that we believe we can make it through '06 without having to do an equity raise. However if we continue to see the opportunities in the marketplace that we're seeing, we may decide to - given that our markets are attractive to potentially do a small capital raise this year, but nothing of any significant size that we need to do.

And finally, can you give me a quick walkthrough on the difference between taxable earnings and reported gap results -- obviously it looks like on a taxable basis, at least in this quarter you're earning the dividends.

Yes, that's right Henry. And it's been a very positive obvious event for us in this quarter. The biggest thing is the recognition of the - our deferred revenue. We are now allowed to - we will be recognizing our deferred revenue on a slightly accelerated basis from our book or GAAP basis recognition. That - not a significant but probably about a 5% if you were to kind of build a model to that. Faster than what we do on a GAAP basis.

And then that taxable figure also includes realized gains?

It includes realized gains. That's correct. And it's also adjusted for the FAS 123 stock option.

Right, great. Well thank you. Good solid quarter.

Thanks Henry. I appreciate it.

Your next question comes from the line of Greg Mason, please proceed sir.

Good afternoon guys. First, I wanted to talk about the origination expectation going forward. If you've got this pipeline, what is the remaining 60 to 70% that doesn't fund right away? What is the lag on that? Are we talking a couple quarters or can it be a year, what kind of lag is it [inaudible - cross talk]

There's a lot of elements into that and you have to really understand the various types of financings that we do. As we said at the presentation in the narrative section. We talked about the ability to do senior debt. We do senior debt security like revolvers with line of credits. Those are of course very asset based instruments based on accounts receivable and qualified eligible accounts receivable. So that's one component of it.

We have acquisition lines that are outstanding. Some companies that are contingent upon them identifying a target and a target that we then co-mutually agreed that is a accretive acquisition for the company to undertake to allow them to draw down our capital. And then there's simply growth capital, working capital loans that are [service of] the company's own realization of working capital needs. And so it really varies from the longest-term durability - or availability I should say of AR lines, meaning 12 months or so to the more expectation of having six months or so availability time periods on the growth capital loans, for example.

Okay. And then what - as part of the run-off in the portfolio you've got a normal amortization of the loan. How should we be looking at that going forward? Is it a percentage or is it on a year expected life of the loan, how should we look at that?

Sure, the best way to look at it and I guess the most simple way of modeling I should say is the following. You should continue to assume that the average maturity of our debt is 36 months. The duration of the term of the debt is 36 months. You then have to say what is the expected average or the effective average interest rate only period where we don't receive any initial repayment of principal and we grant the company a simple interest only period. And that's typically between six to maybe eight months and that really oscillates quite a bit between five and eight months depending on which quarter and the maturity of the portfolio.

So you can assume for just modeling purposes, assume a six-month average interest only period. That means the remaining term of the loan, the 30 months, you would amortize the remaining principal over a straight-line basis over that 30-month period of time.

Okay. And if you could talk about this quarter, G&A expenses were a little higher than at least what we had expected here. Was there any one-time items in that number or what should - how should we think about G&A going forward?

G&A was only up $200,000 for the quarter, prior quarter. Its relatively consistent and the biggest part of that is we're incurring costs related to Sarbanes-Oxley. I think that this quarter is probably a typical quarter for us right at this point in time as we continue to grow the portfolio and add people.

All right. And then the loan fee expenses. Was that related to the pay down of the Fairlawn Bridge Facility?

The loan fee expenses are amortized - there's the slight acceleration that we had from Fairlawn.

Okay.

But then there's also the standard amortization of the loan fees that we have with -- at Fairlawn as well as the amortization of the CitiGroup fees. And as I mentioned, we are renewing that presently and we'll have that completed, anticipated to be completed by the end of this month.

Okay, so really no significant one-time lumpy stuff in those loan fees?

No. No.

Okay. And then the allowance for deferred tax assets, the $1 million that you're keeping, didn't write off this quarter, can you explain that to me in a little more detail.

Yes, at the end of last year we had deferred revenue and we - when we were able to determine that we were going to qualify for a RIC this quarter, we had to expense that - those deferred revenues. So this deferred tax asset on - that was charged on those revenues. And so that was approximately $800,000 and then we had an additional expense of approximately $200,000 related to RIC elections that we would be making. And again that's an estimate we're completing the tax return as we speak.

Okay. And then just one last kind of clean up question. I missed it. I think you said something that -- you had closed 16.5 million in July and what was the funding on that? Did I hear that right?

Yes, we did - we funded 16.5 million in July.

You funded 16.5 million.

Yes.

Okay. Great. Thanks guys, great quarter.

Your next question comes from the line of Sean Gelston. Please proceed sir.

Hey, good afternoon guys. Good quarter. How much do you expect to save in annual interest expense from having repaid the Fairlawn loan and borrowing at the lower rate with CitiGroup?

Well, first of all Fairlawn's been a great partner. And they have been - they have stuck with us and they've been early investors in working with us closely but certainly had a higher coupon rate loan than we had with Citibank. And so the Delta - the CitiBank is LIBOR plus 165 and Fairlawn was basically LIBOR plus low 600, approximately. So you're saving anywhere between 400 to 500 basis points on the deal.

Okay. And what does that amount to in terms of a dollar figure on an annual basis?

Unfortunately I don't have that figure in front of me. We haven't calculated that pro forma number.

But it's significant?

Certainly. I mean simple math would say if I have $60 million outstanding and I'm saving 500 basis points on the loan, I mean you can do the math form that. And that's kind of the magnitude. And you saw that the impact in Q2 alone was approximately $300,000 of savings in terms of delta of paying back from Citibank and paying entirely converting some of the Fairlawn credit facility.

So the Citibank line is - continues to be a very attractively priced credit facility and Citibank also continues to be a very good partner for us, which we're also anticipate growing that credit facility and also renewing that credit facility here shortly.

Great. That's all I had. Thanks a lot Manuel.

Thank you.

Thank you Shawn.

Your next question comes form the line of Mark Roberts. Please proceed sir.

Thank you. Good afternoon. On the investments that have closed, have you done a table or can you give us what the total realized return has been on the capital invested?

We can certainly - we disclosed, as we just did in this call, the $3.1 million of approximately realized gains to date on those investments. Are those the one you're referring to?

Yes.

So we don't disclose the aggregate or the individual total gain on each company which of course would be the fee income realized and interest income and gain realized on those deals. But I think we - you saw our disclosure on one particular transaction [Akim] where we issued a press release out earlier this month where we disclosed that we had a net realized gain of an IRR north of 45% or so.

Okay. And my last question is - and you've answered this question before, but I didn't write it down in my notes. Do you take warrants or some sort of equity option on every transaction or a majority -- can you give me a sense of what percentage that amounts to?

Sure, inception to-date the answer is 100% we warrant participation in all of our deals. And just to be clear, we don't necessarily talk a lot about this, we don't get asked this statement a lot but I'll clarify it here for you. Not only do we take equity participation in the form of a warrant for all of our deals, we also augment that or enhance that further by a - the majority of our transactions also have the ability, the contractual ability for us to invest in an equity round as well, lock into the transaction at our choice.

So there's a double potential built in accretion where we secure the ability to invest the next equity round of financing at our option, if that is an attractive step up evaluation and the company's performing very, very well. You'll see us exercise that provision and we've done so now on a handful of companies. Five or six companies so far we've done that. But you are absolutely right in your statement that in such of the date, all the transaction we've done have equity participation that we've done in the form of warrants.

Now, I will caution to say that as we continue to build out our portfolio. As we indicated in Q2, I'm sorry in Q3, and Q4 and Q1 earlier, that we are now looking to build out our early stage investment efforts into series A, series B company and we're also looking to build out the other end of the barbell, meaning the late stage more mature companies. Some of those late stage more mature companies may in fact have some element of a lower warrant coverage but may have a component of a pick interest for example. But we have not done any of those as of yet.

Okay, well that raises another question. Do you also have a focus on particular industry sectors that you're wanting to build up as a percentage of the profile or are you going to continue with the mix, more towards biotechnology?

Well, just to caution, the portfolio is fairly balanced, 60/40 right now. We have about 60% in IT and 40% in life sciences and healthcare industry. I will tell you that we tend to emulate the venture capital industry flows as they invest in different sectors. We are looking - we are actually de-emphasizing certain subsectors in the IT side and we're consciously looking at some subsectors on the life sciences side. We think that some of the life sciences subsectors today may be slightly overvalued on a private basis and we think some of the IT sectors are undervalued today. And we have some - maybe - lowly represented in some of the sub IT sectors today.

We've been fairly aggressively looking at semiconductors and communication opportunities so far but we've not found a significant amount of transactions that we like in that area, but we're seeing a lot of traffic in that area today.

All right. Thank you.

Your next question comes from the line of Mike Crawford. Please proceed sir.

Good afternoon. First on the portfolio quality, you said there's three companies graded 4, two of which are simply approaching the next round. Last quarter I believe there was a - well it was $3 million of investments graded 4. Was that just one company?

Yes, it was.

And is that company now graded differently?

No, one of the companies - one of the companies on Q1 that was rated 4 is still at Q2 rated 4 company today and we are in the throws and I mean throws, just within weeks of having that company complete its next capitalization.

Okay.

And then the other two companies rated 4, one of them is are cautious - being more cautious right now with that new company and then one of those companies, right now is in a middle of a financing or acquisition discussion. Until that is completed we are more cautious to lower rates - rating 4 until something becomes imminent. Until something is completed we are guardedly monitoring that situation until it's completed.

Okay thanks. And then just to maybe go through how the model works when something does break down. If it - if a round slips then I guess it would move into 5 and then if you guys had to move in to protect your assets you might hope to recoup a good chunk of it, certainly something.

Well we certainly have shown a historical track record so far on having the ability to recoup. I mean just as a matter of perspective. We've now done approximately $250 million of commitments since inception, we've only had a realized loss of approximately $2 million or so to date. And a realized gain, by the way, of 3.1 million. So on a net basis, we're still ahead of the game in that perspective.

But your comment, and the next thing I want to caution, it is highly unlikely that a company will go from a rate of 2 to a rate of 5. That should never happen, it could if there's some underlying fraud or something at the company. But it would be a very extreme situation that would occur. These companies downgrade over time as they approach a round of financing and they approach certain development milestones within the underlying portfolio companies that we track very closely.

Now, the second part of your question is, you can assume safely that oftentimes we have a blanket lien on all the assets of the company and in certain situations, like life sciences companies, we have what is called a negative pledge on the intellectual properties. But that may change, depending on the situation of the company where we actually may rise further in to the security of the company and secure a greater asset base of the company and we are diligent and I mean very diligent in getting engaged with the company when it becomes a questionable or distressed situation. We will take very immediate action in working with the management teams and working with the venture capital investors to either look at raising the new round of financing, assisting the venture capitals and the management team on adjusting and cutting back the burn rates. Or working with them to find a potential buyer for the underlying technology of that company.

And as such, you can see anywhere between a 10% to 30% potential loss ratio if even zero. It really varies case to case. But we are materially involved in working with the management teams and their underlying investors on work out situations.

Okay thank you. And then I don't - to the extent you can comment on some of the companies in the portfolio. 1) You made, I guess in this quarter, in July, you made - you did a debt transaction with a public company. That's a little baby universe, right? That's a little different form what you've done in the past?

Well, we've done now approximately three public company investments of that sort. Most of these companies -- I think actually maybe four now that I think about it. Most of these companies have been, at one point or other, backed by venture capitalists where we have a very strong legacy knowledge or relationships with either the management teams or those companies or they frankly become very good investment opportunities. As you see in our N-2 and our 10-Ks we will invest selectively in private - sorry, in public orphans, or fallen angel companies that we think that they're undervalued from a public market point of view.

Okay, great. And then the last one, I don't know if you can answer this, but your largest I guess investment is in this WageWorks, which just hired a new CFO, were you at all instrumental in party of that decision or would you - would you say this is someone that was hired to help start the process towards making the filing to go public?

Well, we certainly cant comment on which company is filing to go public and which company is doing certain M&A activities and what have you. But I think that companies often do as they continue to mature and groom themselves for a liquidity event, they will oftentimes augment or enhance their management teams for liquidity events that they may be anticipating. And just to be cautious here, it is very typical to see early stage companies continue to enhance their management teams as they continue to generate revenues and become much more meaningful growing concerns from just simply a product development company. So the typical change out of management is something that we see all the time in companies.

Okay, great. Thank you.

We do have a follow up question from Henry Coffey. Please proceed sir.

Yes, I'm sorry Manuel, I lost power for a minute in there. Did I understand - what is your status of your loan with Fairlawn?

The loan with Fairlawn is fully paid off.

Okay. That - and when did that - that's what I thought I heard just as the power went out. What - when was that loan fully paid off?

We paid that off in the early part of May.

Okay, thank you.

Thanks Henry.

[OPERATOR INSTRUCTIONS] There are no questions at this time.

Okay. Well thank you for your continuing interest in Hercules Technology Growth Capital. We'll be traveling the next couple weeks visiting investors and I would recommend that you contact either Christina directly and/or the various industry analysts who are covering us today at AG Edwards, Ferris Baker Watts, and JMP Securities if you would like to arrange a meeting with management and we would be delighted to meet with you. And again, I'd like thank all of our investors for their continued support and belief in Hercules.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.