Horizon Technology Finance Corporation — Q3 2022 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 that provides secured venture loans and related investments to development-stage companies in technology, life science, healthcare information and services, and sustainability. This filing covers the quarter and nine months ended September 30, 2022; financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total investment income | $23.3 million, versus $16.4 million | $56.0 million, versus $43.1 million |
| Net investment income | $11.1 million, versus $8.0 million | $25.4 million, versus $20.2 million |
| Net increase in net assets from operations | $6.0 million, versus $12.8 million | $17.1 million, versus $25.5 million |
| Net investment income per share | $0.43, versus $0.40 | $1.06, versus $1.02 |
| Distributions declared per share | $0.30, unchanged | $0.90, unchanged |
| Net asset value per share | $11.66 at September 30, 2022 | $11.56 at December 31, 2021 |
Net investment income margins, calculated as net investment income divided by total investment income, were approximately 47.9% for the quarter and 45.4% for the nine-month period. Net investment income increased primarily because of portfolio growth and higher Prime-based rates, partly offset by lower prepayment and other fee income.
- Total investments at fair value were $634.6 million, up from $458.1 million at December 31, 2021. Debt investments represented $609.0 million, or 96.0% of the portfolio.
- The portfolio comprised 57 debt investments and 89 warrant investments. Senior Term Loans represented 89.9% of debt investments at fair value.
- Portfolio sectors at fair value included biotechnology at $146.0 million, medical devices at $109.5 million, software at $105.8 million, consumer-related technology at $105.1 million, and sustainability at $76.1 million.
- Cash and unrestricted money market funds totaled $31.6 million; restricted money market funds totaled $1.6 million. Cash, cash equivalents and restricted cash were $33.2 million at September 30, 2022, versus $44.4 million at September 30, 2021.
- Borrowings were $362.7 million before debt issuance costs and $359.0 million net, compared with $260.3 million before costs and $257.6 million net at December 31, 2021. Asset coverage for borrowed amounts was 185%, above the 150% statutory minimum.
- Available borrowing capacity, subject to facility terms and advance rates, was approximately $28.0 million under the Key Facility and $49.2 million under the NYL Facility.
- Unfunded commitments to portfolio companies were $214.5 million, with a recorded fair-value commitment liability of $2.1 million.
- Operating activities used $160.9 million of cash during the first nine months, principally for investment purchases. Financing activities provided $146.8 million, primarily from debt and equity issuance.
Material changes versus the prior comparable period
- Quarterly investment income rose 42.1% and nine-month investment income rose 30.1%, primarily due to larger average debt portfolios and higher floating rates.
- Quarterly net investment income increased 38.4%; nine-month net investment income increased 26.2%.
- Quarterly net investment gains shifted to an $8.6 million realized loss from a $1.3 million realized gain in the prior-year quarter. The loss was primarily associated with settlement of a debt investment.
- Nine-month realized investment losses increased to $9.5 million from $2.4 million. Unrealized appreciation declined to $1.2 million from $8.1 million.
- Interest expense increased 71.6% for the quarter and 47.9% for the nine-month period, reflecting higher average borrowings and higher funding costs.
- The company issued $57.5 million of 6.25% notes due 2027 and repaid $27.0 million of asset-backed notes during the first nine months. It also raised $67.5 million net from common-stock issuance, including the March 2022 follow-on offering and ATM sales.
- The company originated $348.3 million of new debt investments during the first nine months, compared with $217.3 million in the prior-year period.
- Credit quality improved in certain respects: no investments were on non-accrual status and no debt investments were rated 1 internally at September 30, 2022, compared with one internally rated 1 investment at December 31, 2021.
Outlook, commentary, risks and unusual items
Management stated 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. The company expects to raise additional equity and debt capital opportunistically, subject to market conditions and regulatory limits.
- All outstanding principal of debt investments bore floating rates at September 30, 2022. Management estimates that a 100-basis-point increase in rates would increase annual net assets from operations by approximately $5.2 million before the effect of incentive fees; a 100-basis-point decrease would reduce them by approximately $5.5 million.
- Management identified risks from rising interest rates, inflation, supply-chain disruption, geopolitical conditions, the Russia-Ukraine conflict, economic slowdown, competition, portfolio-company funding needs, regulatory and tax requirements, and the ability to fund unfunded commitments.
- Most investments are valued using Level 3 methodologies and significant unobservable inputs. At September 30, 2022, Level 3 investments had a fair value of $634.3 million, creating valuation uncertainty and potential volatility in NAV.
- Approximately 7.3% of total assets at fair value were non-qualifying assets under the 1940 Act’s 70% qualifying-asset requirement.
- On October 28, 2022, the Board declared monthly distributions of $0.11 per share for December 2022 through February 2023 and a $0.05 per-share special distribution payable in December 2022.
- Subsequent events included a $7.0 million debt investment in Robin Healthcare, a $0.4 million equity investment in Emalex Biosciences, and a $2.5 million debt investment in Sonex Health.
- The company priced a planned securitization of approximately $160 million of loans, expected to issue $100 million of rated notes with a 7.56% coupon and generate approximately $98.8 million of proceeds before fees and expenses. Closing was scheduled for November 9, 2022, subject to customary conditions.
- The Advisor became the company’s valuation designee effective July 29, 2022, with Board oversight and independent valuation-firm review of at least 25% of applicable fair value each quarter.
- The filing reports no material legal proceedings, defaults upon senior securities, or material changes to previously disclosed risk factors. Disclosure controls were judged effective, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the planned $100 million securitization closed on the scheduled date and on what final terms.
- The performance, valuation changes, and repayment status of the largest portfolio exposures, particularly within biotechnology, medical devices, software, consumer-related technology, and sustainability.
- Whether the $214.5 million of unfunded commitments are drawn and whether available liquidity remains adequate after new originations and distributions.
- The effect of continued rate increases on both floating-rate portfolio income and floating-rate borrowing costs, including incentive-fee effects.
- The sustainability of distributions relative to net investment income, taxable income, spillover income, and potential return-of-capital treatment.
- The sensitivity of NAV to Level 3 valuation assumptions, borrower credit deterioration, defaults, and realized investment losses.
- The effect of LIBOR transition on remaining LIBOR-based investments and borrowings.