Horizon Technology Finance Corp quarterly report, Q2 FY2023

Horizon Technology Finance Corporation — Q2 2023 Form 10-Q Summary

Business context and reporting period

Horizon Technology Finance Corporation is an externally managed, non-diversified business development company and regulated investment company. It primarily provides secured venture loans to development-stage companies in technology, life science, healthcare information and services, and sustainability. This filing covers the quarter and six months ended June 30, 2023; financial statements are unaudited and presented in thousands except per-share data.

Key financial metrics

Metric	Three months ended June 30, 2023	Six months ended June 30, 2023
Total investment income	$28.1 million	$56.2 million
Net investment income	$16.1 million	$29.1 million
Net realized investment loss	$(16.5) million	$(16.7) million
Net unrealized appreciation (depreciation)	$0.6 million	$(6.9) million
Net increase in net assets from operations	$0.2 million	$5.5 million
Net investment income per share	$0.54	$1.00
Distributions declared per share	$0.33	$0.66

Net investment income margin, calculated as net investment income divided by total investment income, was approximately 57.2% for the quarter and 51.8% for the six-month period.
Net assets were $355.4 million at June 30, 2023, compared with $318.4 million at December 31, 2022. NAV per share declined to $11.07 from $11.47.
Total investments at fair value were $715.4 million, including $683.3 million of debt investments, $25.5 million of warrants, $5.3 million of equity, and $1.3 million of other investments.
Cash and unrestricted money market funds totaled $50.3 million; restricted money market funds totaled $2.9 million. Total cash, cash equivalents and restricted cash were $53.2 million.
Borrowings outstanding, net of debt issuance costs, were $418.0 million, compared with $434.1 million at year-end 2022. Asset coverage for borrowed amounts was 184%, above the statutory 150% minimum.
Operating cash flow was $7.2 million for the first six months of 2023, versus $(110.7) million in the comparable 2022 period. Financing activities provided $15.5 million, and cash, cash equivalents and restricted cash increased by $22.7 million.
Debt investment dollar-weighted annualized yield was 16.3% for both the quarter and six-month period, compared with 14.2% and 13.4%, respectively, in the prior-year periods.

Material changes versus prior comparable periods

Quarterly investment income increased 51.3% to $28.1 million; six-month investment income increased 71.2% to $56.2 million. Growth reflected a larger average debt portfolio and higher Prime-based rates.
Quarterly net investment income increased 87.3% to $16.1 million; six-month net investment income more than doubled to $29.1 million. The increase was partly supported by $3.1 million and $3.3 million of incentive-fee expense deferrals for the quarter and six months, respectively.
Quarterly total expenses rose 19.8% to $11.9 million, while six-month expenses rose 46.1% to $26.7 million. Interest expense increased materially because of higher average borrowings and higher borrowing costs.
Net realized losses increased substantially, primarily from the settlement of three debt investments after portfolio companies ceased operations or sold assets for less than the cost of the loans.
The portfolio shifted toward software and healthcare-related investments, while biotechnology fair value declined. Debt investments remained approximately 95.5% of total portfolio fair value.
The company issued 3.25 million common shares in a June 2023 follow-on offering for net proceeds of $38.9 million and sold 1.05 million shares through its ATM program during the first six months for net proceeds of approximately $12.3 million.
The Key Facility commitment increased to $150 million, with an accordion feature potentially increasing total commitments to $300 million. The NYL Facility commitment increased to $250 million and its maturity was extended to 2029.
Effective June 30, 2023, Monroe Capital-affiliated MCH Holdco acquired the Advisor. The new Investment Management Agreement retained the same economic terms as the prior agreement.

Guidance, outlook, risks and unusual items

No formal earnings or portfolio guidance is provided. Management states that current cash, operating cash generation and available credit facilities are expected to be sufficient for working capital and capital commitments for at least the next 12 months.
Unfunded commitments to portfolio companies totaled $143.4 million at June 30, 2023, down from $190.0 million at year-end 2022. These commitments are generally subject to milestones and other conditions and may expire without being drawn.
Two investments were on non-accrual status, with aggregate cost of $25.6 million and fair value of $15.3 million. No interest income was recognized from non-accrual investments during the periods presented.
Approximately 95% of outstanding debt investment principal was floating-rate. Management estimates that a 100-basis-point increase in rates would increase annual investment income by approximately $6.4 million, before incentive-fee effects; a 100-basis-point decrease would reduce it by approximately $6.1 million.
Fair value measurement is concentrated in Level 3 assets: $713.2 million of total investments used significant unobservable inputs. Actual realizable values could differ materially from reported fair values, particularly in a forced liquidation.
Key risks include portfolio-company failures, limited operating histories and financing needs, credit losses, concentration in venture-stage borrowers, rising funding costs, inflation, supply-chain and geopolitical disruption, reduced access to capital markets, financial institution instability, and the ability to maintain BDC and RIC status.
Subsequent events included additional funding to existing portfolio companies, debt-to-equity conversions involving Evelo and Better Place, and a $5.0 million investment in new portfolio company Tallac Therapeutics.
On July 28, 2023, the Board declared monthly distributions of $0.11 per share for September, October and November 2023.

Most important facts for investors to verify

Whether the $16.5 million quarterly realized loss and the six-month $6.9 million unrealized depreciation indicate broader deterioration in portfolio credit quality.
The status, collateral coverage and recovery prospects of the two non-accrual investments and the single investment rated “1” under the company’s internal credit system.
The sustainability of the $0.33 quarterly distribution relative to net investment income, taxable income, cash receipts, PIK income and end-of-term payments.
The $4.4 million contingent liability for deferred incentive fees and the potential impact on future distributions and net investment income.
Available borrowing capacity after applying collateral and advance-rate restrictions, particularly the limited $3.0 million availability under the NYL Facility.
Near-term debt maturities, refinancing requirements and compliance with the 150% asset-coverage requirement.
Valuation assumptions for the largely Level 3 portfolio, including market yields, probability weightings, equity values and warrant assumptions.
Effects of the Advisor’s acquisition by Monroe Capital on investment sourcing, co-investment opportunities, governance and conflicts of interest.