Horizon Technology Finance Corp. (HRZN) - Q2 2020 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2020. Horizon Technology Finance Corp. is an externally managed, closed-end, non-diversified business development company (BDC) and regulated investment company (RIC). The company primarily makes secured debt investments to development-stage companies in technology, life science, healthcare information and services, and sustainability industries. As of June 30, 2020, the company consolidated its joint venture, Horizon Secured Loan Fund I LLC (HSLFI), following the purchase of the remaining equity interests from its partner, Arena.
Key Financial Metrics
| Metric | Q2 2020 (3 Months) | YTD 2020 (6 Months) | YTD 2019 (6 Months) |
|---|---|---|---|
| Total Investment Income | $13.5 million | $23.6 million | $18.8 million |
| Net Investment Income | $6.7 million | $11.0 million | $8.2 million |
| Net Increase in Net Assets from Operations | $7.9 million | $7.2 million | $7.6 million |
| Net Asset Value (NAV) per Share | $11.64 | $11.64 | $11.60 |
| Total Assets | $403.3 million | $403.3 million | $344.0 million (Dec 31, 2019) |
| Total Borrowings (Outstanding) | $193.6 million | $193.6 million | $152.1 million (Dec 31, 2019) |
| Cash and Cash Equivalents | $37.3 million | $37.3 million | $16.3 million (Dec 31, 2019) |
| Distributions Declared per Share | $0.30 | $0.65 | $0.60 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased to $355.9 million from $319.6 million at year-end 2019, driven by new debt investments of $105.6 million in the first half of 2020.
- Income Increase: Total investment income rose 25.9% year-over-year for the six-month period, primarily due to a 35.2% increase in the average size of the debt investment portfolio, partially offset by lower LIBOR rates.
- Realized Gains: The company reported a net realized gain of $2.8 million for the six months ended June 30, 2020, compared to a net realized loss of $3.4 million in the same period in 2019. This improvement was driven by gains from the termination of warrants upon the sale of portfolio companies.
- Unrealized Depreciation: Net unrealized depreciation on investments totaled $6.5 million for the six months ended June 30, 2020, contrasting with $2.8 million of unrealized appreciation in the prior year period. This was largely due to depreciation on five debt investments and one equity investment.
- Expense Waivers: Unlike the prior year period where the Advisor waived $1.8 million in incentive fees, no incentive fees were waived in the first half of 2020.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: Management notes that the global spread of COVID-19 has caused increased market volatility and economic uncertainty, which may materially affect the valuation of portfolio investments and net asset value. The company is assessing potential adverse financial and operational consequences.
- Asset Coverage: As of June 30, 2020, the company's asset coverage ratio was 203%, well above the 150% minimum required under the 1940 Act.
- Liquidity: The company maintains significant liquidity with $37.3 million in cash and cash equivalents. It has $80.0 million of unused commitment capacity under its Key Facility and $86.8 million under the NYL Facility.
- Capital Markets: The company sold 1.7 million shares under its At-The-Market (ATM) program during the first half of 2020, raising approximately $21.1 million in net proceeds. A stock repurchase program allowing up to $5.0 million in repurchases was extended through June 30, 2021, though no repurchases were made in the period.
- Interest Rate Risk: The company is exposed to interest rate risk as most debt investments bear floating rates. A 100 basis point increase in interest rates would increase net assets by approximately $0.2 million, while a 100 basis point decrease would decrease net assets by approximately $0.2 million.
Key Facts for Investor Verification
- Non-Accrual Status: As of June 30, 2020, three debt investments were on non-accrual status with a cost of $20.6 million and a fair value of $14.2 million.
- Credit Quality: The weighted average internal credit rating of the debt portfolio was 2.9 (on a scale of 1 to 4, where 4 is highest), down from 3.1 at year-end 2019. Two investments held a rating of 1 (deteriorating credit quality).
- Concentration: The five largest debt investments represented 25% of total debt investments at cost. No single investment exceeded 10% of total debt investments.
- Unfunded Commitments: The company has $75.9 million in unfunded commitments to extend credit to portfolio companies.
- Spillover Income: As of June 30, 2020, the company had undistributed spillover income of $0.42 per share.