HTGC

Business Context and Reporting Period

Company: Hercules Technology Growth Capital, Inc. (HTGC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: HTGC is an internally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). It provides debt and equity growth capital to technology-related companies at various stages of development, primarily focusing on structured debt with warrants. The company also operates a Small Business Investment Company (SBIC) subsidiary.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: Total investment portfolio value decreased by approximately $128.9 million (22%) from December 31, 2008, to June 30, 2009. This decline was driven by a net unrealized depreciation of $26.6 million, early loan payoffs of $105.5 million, and normal principal repayments of $62.0 million, partially offset by new debt investments of $68.2 million.
• Debt Reduction: Total liabilities decreased by $88.5 million. The company fully paid off its $89.6 million Credit Facility (Citigroup/Deutsche Bank) in the first quarter of 2009. Outstanding borrowings under the Wells Facility were minimal ($0.4 million), while SBA Debentures remained stable at $130.6 million.
• Liquidity: Cash and cash equivalents increased by $20.1 million to $37.4 million, reflecting strong operating cash flows ($116.6 million) driven by principal repayments and early payoffs.
• Operating Results: While Net Investment Income increased year-over-year due to higher yields and fee income, the company reported a net loss for the six-month period due to significant unrealized depreciation and realized losses on portfolio exits.

Guidance, Outlook, and Risks

• Investment Strategy: Management has adopted a "slow and steady" approach, substantially curtailing new investment activity in the current quarter to preserve working capital and support existing portfolio companies amidst the severe economic recession and credit market disruption.
• Portfolio Quality: The weighted average investment grading of the debt portfolio deteriorated to 2.70 (on a 1-5 scale) from 2.39 at year-end 2008. There were 16 companies graded 3 and 6 companies graded 4 as of June 30, 2009. Four loans were on non-accrual status with a fair value of approximately $6.0 million.
• Subsequent Events & Realized Losses:
  • Active Response Group, Inc.: Assets purchased in July 2009; HTGC anticipates a realized loss of approximately $8.6 million in Q3 2009.
  • SiCortex, Inc.: Select assets purchased in July 2009; HTGC anticipates a realized loss of approximately $5.0 million in Q3 2009.
• Capital Markets: The company secured a commitment letter in July 2009 for a new $20.0 million revolving credit facility with Union Bank, subject to due diligence and documentation.
• Dividends: The Board declared a quarterly dividend of $0.30 per share, payable September 14, 2009. The company aims to distribute approximately 98% of annual taxable income.

Key Facts for Investor Verification

• Unrealized Depreciation: Verify the magnitude of the $26.6 million unrealized depreciation and the specific portfolio companies driving the write-downs, particularly in the Communications & Networking and Software sectors.
• Non-Accrual Loans: Confirm the status of the four loans on non-accrual status ($6.0 million fair value) and the likelihood of recovery or further impairment.
• Subsequent Realized Losses: Monitor the realization of the anticipated $13.6 million in losses from Active Response Group and SiCortex in the upcoming quarter.
• Liquidity Position: Assess the sufficiency of the $37.4 million cash balance and the $49.6 million available borrowing capacity under the Wells Facility to fund unfunded commitments of $25.0 million and ongoing operations.
• NAV vs. Market Price: Note the significant discount of the market price ($8.40) to the Net Asset Value ($10.27) as of June 30, 2009.