Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Hercules Technology Growth Capital Q1 Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. And now it’s my pleasure to turn the call over to Linda Wells. Please go ahead.

Thank you, operator and good afternoon everyone. On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and Jessica Baron, Vice President of Finance and Chief Financial Officer. Hercules first quarter 2012 financial results are released just after today’s market close. They can be accessed from the company’s website at www.htgc.com. We have arranged for a replay of the call at Hercules' web page, or by using telephone number and passcode provided in today’s earnings release. I would also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence and other factors we identify from time-to-time in our filings with the Securities and Exchange Commission. Although, we believe that the assumptions on which these forward-looking statements are based on are reasonable, any of those assumptions can prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or visit the website, www.htgc.com. I would now like to turn the call over to Manuel Henriquez, Hercules’ Co-Founder, Chairman and CEO, Manuel?

Thank you, Linda and good afternoon everybody and thanks for joining us today. I would like to start the call by pointing out the major milestones that we have had on top of all the major ball-points that you’ve seen in our press release. One of our big accomplishments that I am very proud of is our team today issued and filed the 10-K -- excuse me, the 10-Q part of the earnings call. And I expect that throughout 2012 and beyond that that’s going to be our practice, and now we are going to try drive that into a little earlier in the call as well. I know lot of folks have been asking for that, and we’ve been listening. And I am proud to say that our team executed and delivered on that promise. So thank you for the accounting team and finance team for that hard effort and the work that they did. Now, back to the earnings call and some overview. As typical, I’ll start the agenda by giving a quick overview of the operations— summaries of the operations in Q1. I’ll give you some observations, discussion points on the environment, both on the competitive landscape, on the venture capital marketplace and where I think that we’re going. I’ll give some prospective on the outlook of 2012 and the overall marketplace. Keeping in mind to everybody, an obvious statement here, but it’s an election year and we have lovely issues to deal within the global markets with sovereign debt concerns between France, Greece and more countries in Europe that we have to deal with and be accounted for when look at our cost to capital equations. And then of course, I'll turn over the call to Jessica Baron, our newly-mentioned CFO, and then I’ll start covering…

Thank you Manuel, and thank you everyone for listening today. We filed our 10-K, as Manuel indicated, after the market closed today as well as our earnings press release. And here is a brief recap of our financial results for the first quarter of ‘12. We delivered $22.4 million in total investment income of revenues, a quarterly record and an increase of 16.7% when compared to $19.2 million for the first quarter of 2011. This year-over-year growth was driven by higher average outstanding balance of yielding assets during the quarter. The fair value of our yielding debt investment portfolio at quarter-end was $614.6 million, an increase of 38.1% from the same period a year ago. The effective yield on our portfolio investments during the first quarter was 14.6%, down from 15.6% in the fourth quarter of 2011, excluding the income acceleration impact from early payoffs in one-time events, the effective yields for the quarter was 13.7% or down 30 basis points compared to 14% in the last quarter. We’d like to reiterate that we expect a 50 to 100 basis point decline in our debt portfolio as effective yield during 2012. Excluding early path we expect, as Manuel indicated, in normal run rate for our portfolio 12.5% to 15.5%. I would also like to note that our big [ph] income, which is non cash revenue, which must in turned we paid out to our shareholders in dividends continues to represent a small component of less than 1.3% of our total investment income for the first quarter. Our cost of debt increased to $5 million in Q1 of ‘12, compared to $3.2 million incurred in Q1 of 2011. The increase is primarily due to the $1.6 million of interest and fee expense incurred on the $75 million of senior and unsecured…

[Operator Instructions] Our first questioner on queue is Jason Arnold with RBC Capital Markets.

I just want to ask you if you could update us on our favorite - on your favorite industries niches within venture tech that you're kind of seeing more opportunity in at present, and then perhaps vice versa, what you’re straying away from at present?

So as we indicated earlier, 2012 is a funny year. It’s an election year. With a looming change in administration your investor focuses are skewed with that always in the backdrop. So healthcare investing, for example, becomes a little more risky for the fear of reimbursement risk may change some of these underlying healthcare companies. So where we’re taking a kind of a wait-and-see, or a very conservative underwriting for healthcare investing until a change in administration is evident or not evident, at which point we will accelerate, deaccelerate those investment activities any further. So that’s an area where we remain shy on. On the clean tech side, we are not interested in looking at large capital-intensive models. And so any models that require government subsidies or government grants or some form of government assistance is something that we’re shying away from for the time being, and clearly a change in administration would also change the outlook for renewable energy investing. And not to say that the Republicans will not support levels of renewal investing, but it won’t be to the levels that the current administration is doing. You'll see probably a shift in much more national resources drilling and looking at enabling solutions in that area. On areas that are closely underinvested that we’re looking at that we find extremely attractive. With the advent of the Facebook idea looming and the amount of engine ad-serving they need, I would not be surprised to see additional acquisitions take place in the ad-serving marketplace. And kind of, in essence, in copying or emulating what Google did early on in its process of acquiring multiple ad-serving agents. So I think you’ll some additional investment and consolidation, ad-serving models out there. I think that semiconductor is an area that-- I think America has lost its competitive advantages on. It's too expensive to build foundries, and too expensive to design semis out there. So it’s an area that we're probably being a much more conservative look and see. We’re not necessarily very bullish on semiconductors. Software is a very strong growth area for us, we expect to see a very robust activity in software investments in 2012. And we will continue to invest in metal devices in 2012 as well, and select life sciences. I want to make sure people are going to understand, we’ll not walk it away from Life Sciences at all. We’re looking at balance of portfolio in Life Sciences with an increased activity in tech. So it’s a balancing act of going on by seeing higher activities in tech originations, and also allowing some more mature Life Sciences companies to migrate off the portfolio, as they should, and seek out other points of financing, as we mature in the life cycles.

And then just one quick follow-up, Manuel, I think you mentioned pricing of 12.5% to 13.5% on new investments, maybe you could talk about any changes in terms that you’re seeing-- and then, if any. And then, what you’re seeing kind of on the competitive front as well.

Sure. What I’ve seen isn't any real dramatic changes of terms. I think the things that you’re seeing, are companies would like to have a little more interest only than normal. That of course adds risk to that equation, and we'll evaluate that risk on a risk-reward basis, whether or not we want to underwrite the same risk, without getting more reward from it. It's all credit-dependent, or independent company evaluation process. So I think we are seeing elongated requests for interest-only periods. There is a point of time where we will not do, as we have turned down multiple deals in Q1. We've seen some of our competitors do what I consider to be utterly silly, or borderline ridiculous, doing 24 months, 30 month interest-only, deals of equity in my world. So I have no idea why you are doing a loan of legislated [ph] company has an 18 or 30 months interest-only, that’s approaching silliness. So I think we are seeing a little bit of our competitors kind of searching for deal resignations, and they are doing second-lien deals, senior stretched, very, very long interest only period. And we were very happy to pass on all those deals.

Our next questionnaire in queue is Greg Mason with Stifel, Nicolaus.

First Manuel, I appreciate you putting out the queue, it’s very helpful. In that queue you have about $60 million of SBIC debt left that’s got an over 6% yield. Do you expect to continue to recycle some of that expense of SBIC debt out for cheaper?

Yes, to answer to your question. We do expect to do that. In fairness of the team and staffs of the SBI, we work very diligently with them and we will do that later this year, but we will work with that staff before we do that. We are not interested at all in stepping in front of the staff until they are ready to do that. So the intent is yes, to cycle through the next tranche of $25 million and lowering that cost of capital further.

And then can you talk a little bit-- in your press release, you said book value declined due to the restricted stock grants. Can you give us maybe a little more color, is-- should we expect more of these, and how is that going to impact the stock-based comp expense in our models going forward?

Sure, well, couple of things. One, the decline is de minimis, but I’m not making excuses for it. The issue that triggered the most of it was back in 2007, 2008 I believe, I think it was the 2008 grants, if I remember correctly. While the overall B2C market was down, we actually issued stock at the $4.71, I believe—sorry, at $4.21, so a lot of our employees, rightly so, including myself, ended up exercising those options that we had. And I think we have little to none left of those, so that was one of the biggest impacts on driving that decline. On the restricted stock grant, one of the things that we've done is—[indiscernible] our Board of Directors has rightfully, to their credit, embraced a lot of the composition alignments, so we shifted composition policies to be almost skewed half in half in cash and half in stock to make sure that we have an alignment with shareholders, so you will see us have a more controlled cash comp expense and also have that issue with stock to create a greater alignment investing and also long-term retention with our employees.

Great, and Jessica, does that-- does the restricted stock grants, does that ultimately flow into the income statement through higher expenses?

Well, actually it is called out separately on the income statement for a non-cash compensation. And as Manuel indicated, and the typical-- it’s a seasonal step-up with the new vestings and the new grants occurring in the first quarter of the year.

What happens is the way we structured it, we have a one year cleft, so it’s not untypical for most companies like ourselves with the one year cleft-- so every March, April timeframe, you’ll see that clefts issue vest, and then it’s ratably - have ratably invested over the commensurate period of time on a monthly basis. The Q1 is acute.

And then one last question, I’ll hop back in the queue. I know that Aries is starting to hop into the VC space with their team list out. How does that impact you guys with the new player with a lot of capital potentially coming into the space? Does that impact you?

Well, let me be clear. I am a big fan of Mike and Aries, and I think he has done a great job in running that shop. And I think that Mike will maintain a discipline past the resignation [ph], so I applaud him for seeing the value in the venture debt category and also maintaining underwriting discipline. So I actually applaude having sophisticated players such as Aries coming in the asset class and really maintaining and underwriting disciplines. So I think it’s fantastic.

Next questioner in queue is Jonathan Bock with Wells Fargo.

Well, first question on yield compression. Can you speak to the competitive elements that are driving yields down? Is this banks' venture debt investors in general or additional competition from venture equity? What are the key elements here?

It's like I said in the fourth quarter earnings call, all lot of it is really driven by the venture industry wanting to pedal away high value warrants in exchange for reduced interest coverage. And we will do that in certain cases, but when you’re looking at a private company that is valued at $10 billion and they are asking you to take additional warrants on that, for me to look at an exit event that’s worthwhile for our investors, I'm looking at a $30 billion exit. And short of being at another Instagram, good luck with that. There is a point of the social networking asset class and a certain element to tech that I, frankly, think that are overvalued. And with that, we’re happy to say no. And so some players that are only willing to take lower yields, we’re going to simply wait out. And we’re not going to do it. But the banks themselves will always carry-- remain a strong threat there, but we’re not there - they just have their own niche, we have our own little niche that we play in. So it’s not driven so much for a competition, it's more bill [ph]structuring than anything else.

Next question on leverage. Post the April debt rates, can you talk about where you plan to take regulatory leverage over the next 2 to 3 quarters?

I'll sound like a broken record. This hasn't changed as long as I've founded this company. The cover level that I think that we should have is between 0.7 and 0.75 on a regulatory leverage side, which equates about 1.1 to 1.2, with SBIC.

Okay, so understanding then the 7% retail notes that you just issued, is it your intention that you are going to have a very strong 2Q and that’s why you raised that debt capital ahead of what could be considered to be a really strong quarter for starting to look at your term sheets.

Well, you know me better than that, I am not going to give you guidance on the quarter other than saying that I believe that net originations for us or net asset growth for us is probably going to be in the $40 million or $60 million range, that’s inclusive of the $40 million of early payouts. So, on a pro forma you’re looking at $80 million to $100 million off adjusting downward for the early payout of $40 million, that’s what I think we were going to be achieving to do. As to the capital raise, I will always raise capital in anticipation of need, especially in the election year, I would rather have dry powder that I carry, a negative spread on the income statement for a quarter 2 and be in a position to deploy that capital when others don’t have the capital. So we will always have excess liquidity in the balance sheet by one or 2 quarters as a matter of strategy.

And that also brings up one question, you mentioned about spread. When you look at the 7% cost of the notes and then perhaps supply that to your OpEx, which is about 4% of assets, can you talk us through how you’ll look at the cost of capital on these notes, particularly how that relates to the fact that new investment yields you are looking at right now are starting to decline?

Well, let's be clear. The new investment yields at $12.5 million to $13.5 million are unlevered. So we have to start with that equation first. So notwithstanding that comment, I look at cost of capital from a multitude of perspectives I have my SBIC, cost of capital which is running, as Jessica indicated in the earnings call, at 5.8% currently today, that will go down even further, I have the convertible bond offerings are at 6%, in cost of capital. I have the bay bond that’s referred to at 7%. And I have our equity that’s around an 8% - 8.25% yield rate You blend it all together, you are looking at somewhere at 7% to 7.25% weight of cost of capital. So cost of capital is something that every BDC should be looking at, and I think every BDC is looking at it. And we are not probably much different than other BDCs out there when you are looking at it. The only thing we don’t use right now is the short-term bank lines that are probably 200 basis points cheaper, but when you actually factor in the restrictions of single [indiscernible], geographic regions, other restrictions they may have, the [indiscernible] off the capital bank lines are actually higher.

Got it. And then one last question related to the portfolio division between late and mid stage investments. I’m sorry If I missed it. What is that division today and where are you currently looking to take that over the next few quarters?

I don’t know if we disclose that publicly in the queue and on the earnings report, so I don’t have that took my hands. I don’t think we publicly disclose that as of this juncture. We can look to do that in the future, so because we don't have that I want to run a foul Reg FD. I don’t have it in front me. So if I do something, I'll try to do it in a press release, so I don’t have Reg FD issues, but on one of the conferences I'm speaking to on surely, but I don’t have in front of me.

Next questioner in queue is Henry Coffey with Sterne Agee.

Manuel, historically you’ve always been able to kind of shuffle through the deck and find the right spot to be in company’s stage of life, and frequently industry to sort of, in essence, dodge banks. I’m assuming with all this talk about yield, we have seen you with that, that process is happening and where is this putting you in terms of life cycle of company?

So Henry, that's what happens when you've been covering us as long as you have, you actually have the benefit of history. That is correct. I’m using part of the play book of 2007 as I go into the outlook on 2008. I am not advocating a credit collapse, however, I am doing very similar load balancing and asset allocations that I applied in 2007, going 2008. So you’re assuming correct on picking up on that. We are purposely not defending certain credits. When I see banks eager to take us out of credits, what most people don't realize is that as the incumbent, you always have the vital last offer on these deals, and we’re choosing not to exercise that vital last offer. And that is because either we feel that we have overly concentrated credit risk in that asset, we feel that that sector may be cycling down or out of favor, or a multitude of different reasons that we choose not to defend an incumbency. So you have astutely picked up on a very important point of our portfolio management that we do here. That’s correct.

Now also, by the way, when you get my age, you get great rates at the movies. Also, how viable-- is there an evolution going on with your bank clients where we are getting closer, closer to the point where that could be healthy viable source of leverage, or is it still just kind of a secondary vehicle for you. I mean, there is someone out there that’s going to give you an active, secured amortizing term bank line that would allow you to-- as you did so well go through the ‘07, '08 cycle without a lot of distress, or is it still kind of a questionable source of leverage.

I've got to be honest, with my bank partners, I think our bank partners are quite good and quite healthy, and quite strong, I mean I am not worried about Wells Fargo, RBC or Union Bank. All 3 of them did fine, and survived just fine through the credit crisis. I think the issue for us is that we are seeing some - we are seeing some thawing of some terms here. The biggest concern for us in these credit lines is the advanced rates coupled with the [indiscernible] caps. I there is some evidence of softing on that issue. It is our intent to use those bank lines. But I think it tends is more and judicial format of BCs which uses bank lines as warehouse facilities and to an eventual conduit of some sort. As we all know the conduit market today, the CLO market, is not necessarily readily available yet. And that’s one of my hesitations to use short-term bank lines beyond that that use short-term nature. So I think they serve as viable purpose, but that I cannot use them to be a long-term source of funding.

So we still need to keep our eye on the CLO market for some really-- I mean it, I know you talked about yields and shifting demands, but the real issue seems to be finding healthy sources of attractively priced capital and then finding that and that-- we trust that you know how to fund the loan, so to speak.

Yes, you're exactly right. BDC, unlike other banks, always has the challenge of cost of capital. Banks today range from 1.8% to 3.4% cost of capital. So we have got to deal with that issue, but they also have the ability to have 7x, 8x leverage on the balance sheet. BDC as a whole have a dividend yield they have to pay out so that is a significant part of source of funding, and those dividend yields today range from 8% to 12%, so that makes it very expensive when [indiscernible] capital base has a cost of capital in that range. So what we’re doing, thanks to our partnership with the SBA, we were able to kind of manage that cost of capital on a blended basis, but it would be a disservice—until I see dividend yields back in the 6.5% range, that I'm going to get our cost of capital much lower than 100 basis points, if I'm lucky.

Our next questioner in queue is Douglas Harter with Credit Suisse.

I was wondering if you could talk about if you’re seeing any change in the conversion of commitments to fundings?

I wish I was. I’m still seeing, we’re still offer historical norms, 75% to 80% conversion of commitments funding. So I still think we’re managing down in the more than 65% to 70% range today. So, we’re still seeing 2 patterns that are continuing, we’re still seeing the rates should be lower than historical norms. And we’re still seeing the phenomena of things closing later in the quarter, and drawing less money at close, especially driven by a robust IPO and M&A market. So what is going on is now everyone's secured a bank line to have it as an insurance policy. And if they go public, they don’t need or if they get acquired, they don’t need it. But everybody wants to have it as an insurance policy on having these bank lines available from us in order to fund their business. So it’s a good problem to have.

Great. And then if you could also talk about. I think you said you’re looking to move down towards earlier stage companies. Can you talk about what that means from a cost perspective and a staffing perspective?

So, I think I initiated [ph] for the fourth quarter [indiscernible], we are in the midst of looking at a higher 3 to - I guess, I guess, 3 to 5 individuals over the next 12 months or so. We’re not in a sprint to get it done; we’re focusing on the right caliber individuals. We’re really keenly focused on individuals that have sector expertise or stage expertise that we’re looking for. So it’s a methodical process of--just like investing, it’s controlled hiring. I mean we’re constantly interviewing people. We’re very selective on how we interview, our expectations for those candidates is quite high, and we have a very, very solid team in place here that those new individuals have to have the caliber and the expertise, and the experience our existing legacy team does. We have higher experiencing originators and they are not going to tolerate marginal guys who are not going to be contributing pretty quickly on day one, so it’s a high threshold.

Next questioner in queue is Aaron Deer with Sandler O’Neill.

Actually just following up on that-- your previous response about the timing of the fundings. You mentioned that a lot it comes in the back half of the quarter, is that part of what is giving me the confidence, that you're going to kind of start in on a net down basis here given the pay downs to [indiscernible] earlier in the quarter, that you think that you’re going to be able make up so much ground here by the end of the quarter?

Well, let's be clear. I think you look at Page 10 of the earnings release, I believe it is-- on page 10, we give you an outline that as, unlike other BCs who will give you visibility already, that we have closed commitments so far in Q2, representing $47 million of closed commitments already. And we have signed terms in the quarter of approximately $130 million already in-house. So I also have $125 billion dollars of unfunded commitments. So the $40 million, we will absorb that quite easily. And we deploy that capital within a quarter or so afterwards. The $40 million is what the answer is causing the $0.015 to $0.02 decline in our Q2 outlook because of the interest expense and the early payouts of these assets, it will take us a quarter to 2 quarters to complete deploy the capital out there. But I’m not worried about given our pipeline that-- I don’t think I've disclose it, but I will say now we have about $1.35 billion pipeline right now transactions. So my concern is I don’t have enough staff onboard to go through all these opportunities that we have that we’re looking and we need to attack. I have the opposite problem. I’m not worried about deal flow, I’m worried about insuring that we continue to scale our team with the right level of investor professionals that we’re looking for.

That’s great. And then on the-- circling back to the yield discussion, the guidance you gave seemed a little low, I just wanted to put a little bit more color on that if you can give kind of where - what the year-to-date or the first quarter pay downs. So what the yield was on those paydowns relative to what they knew that-- that’s been onboard, that it is coming on.

Jessica has that...

Yes, I don’t have that information and I can get it shortly.

But I don’t think that-- remember, when I refer to our yields going down, it’s because we’re maintaining discipline on senior secured first lien, not senior secured second lien or last out.

So I just...

Not all senior, senior.

Right, I understand, I’m just trying to what the delta is between what’s coming off versus what’s coming on.

We’ll get you the answer, but I suspect it will be about 100 basis points delta. But I'll give you an answer.

Our final questioner comes from Greg Mason.

I just want to follow-up on, as you’re talking about the early versus mid to late stages, I think you talked about the people you were looking at. But in terms of the opportunities in early to mid, where do you think the opportunities for new investments are? I know last quarter you said you thought early was actually getting more attractive relative to your historical view?

Well, let me be clear. I mean that that’s true, but this may be painfully obvious, but I feel I need to make this statement. An early stage deal is only $2 million to $3 million transaction in size while a mid-stage deal expansion has probably $7 million to $12 million, and a later stage deal or a latter-stage company is going to be in the $12 million to $20 million in size. So you got a factor by stage you're going from 2X to 3X in terms of capital. So one late stage deal is probably 2 to 3 mid stage deals and 5 early stage deals. So it requires a lot more throughput. And you’ve got to call through a lot of more companies. There is a lot of early-stage companies out there. That doesn’t make them all good. Unlike a bank, we’re not interested in market share. I have no idea on what market share means where you invest. So we’re focused on quality companies and companies that have good management teams and have good venture support. With that is a more methodical process to build the portfolio out to move the needle significantly as a year processed to re-balance it by stages. It's a slow, methodical process because of the smaller transaction side, it takes a lot more small deals that move one-- to move the needle.

Thank you. And at this time there no additional questions in the queue. I’d like to turn the program back over to management for any additional or closing remarks.

Thank you, operator. And thank you everyone for your continued support and interest and belief in Hercules. If you would like to arrange a meeting, or just have questions, still free contact our investor relationships department. I also would like to remind you that but we’re participating in the JMP Conference next Tuesday in San Francisco and the Wells Fargo Conference in May 23 in New York City, which will be happening with me and investors. If you have an interest in meeting with us on either of the 2 conferences, please let us know, and we’ll try to arrange for scheduling. Again, thank you very much for your being our shareholders and for your continued support on Hercules and thank you for the team for the hard work and dedication. Thank you operator.

Thank you sir. Ladies and gentlemen this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.