Horizon Technology Finance Corp quarterly report, Q1 FY2023

Horizon Technology Finance Corporation — Q1 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 and related warrant investments to development-stage companies in technology, life science, healthcare information and services, and sustainability industries. The filing covers the unaudited quarter ended March 31, 2023, compared with the quarter ended March 31, 2022.

Financial performance and position

Metric	Q1 2023	Q1 2022
Total investment income	$28.0 million	$14.2 million
Total expenses	$14.8 million	$8.4 million
Net investment income	$13.0 million	$5.7 million
Net realized gain or loss	$(0.2) million	$0.03 million
Net unrealized appreciation or depreciation	$(7.5) million	$(2.2) million
Net increase in net assets from operations	$5.3 million	$3.5 million
Net investment income per share	$0.46	$0.26
Net increase in net assets per share	$0.19	$0.16
Distributions declared per share	$0.33	$0.30

Total investment income increased 97.4%, primarily from a larger debt investment portfolio and higher benchmark interest rates. Net investment income represented approximately 46% of total investment income, while the net increase in net assets from operations represented approximately 19%.

Investment income included $27.4 million of interest income and $0.6 million of fee income. Interest income included $4.3 million from origination-fee accretion and end-of-term payments.
Annualized dollar-weighted yield was 16.3% on debt investments and 15.5% on all investments, compared with 12.4% and 11.8%, respectively, in Q1 2022.
Interest expense rose to $7.1 million from $3.4 million as average borrowings increased and funding costs rose.
Portfolio fair value was $715.3 million at March 31, 2023, compared with $720.0 million at December 31, 2022. Debt investments represented $684.6 million, or 95.7% of the portfolio.
Total assets were $778.2 million and net assets were $321.7 million at March 31, 2023. NAV per share was $11.34 versus $11.47 at year-end 2022.
Cash and unrestricted money market funds totaled $43.5 million; restricted money market funds totaled $3.0 million.

Cash flow, debt and liquidity

Operating activities provided $12.7 million of cash, versus $55.4 million used in Q1 2022.
Investing activity included $47.0 million of new investment purchases, $39.8 million of principal payments, and $6.5 million of investment-sale proceeds.
Financing activities provided $3.3 million, including $10.0 million of credit-facility advances and $7.2 million of net ATM equity proceeds, partially offset by debt repayments and $9.0 million of distributions paid.
Net borrowings were $439.6 million, before considering unused commitments. Total debt commitments were $577.8 million, with $133.3 million unused at quarter-end.
The Key Facility had $15.0 million outstanding and $47.7 million available for borrowing, subject to terms and advance rates. The NYL Facility had $176.8 million outstanding and $21.1 million available.
Asset coverage for borrowed amounts was 172%, above the 150% statutory requirement.
Unfunded portfolio commitments declined to $166.2 million from $190.0 million at December 31, 2022. Management stated that current cash, operating cash flow and available credit were sufficient for working capital and capital commitments for at least the next 12 months.

Material changes versus the prior comparable period

Investment income nearly doubled, driven by a 49.7% increase in the average debt investment portfolio and higher prime rates.
Average borrowings increased 64.8%, contributing to a 107.9% increase in interest expense.
Net investment income increased 127.1%, but higher unrealized depreciation reduced the overall increase in net assets from operations.
Net unrealized depreciation increased to $7.5 million from $2.2 million, primarily reflecting depreciation on five debt investments and warrant investments.
The portfolio shifted toward software and away from consumer-related investments. Software debt investments increased to $141.9 million of fair value from $117.0 million, while consumer-related debt investments decreased to $93.6 million from $108.2 million.
Debt investment credit quality weakened modestly: the weighted-average internal credit rating declined to 3.0 from 3.1. Investments rated 1 increased to $5.3 million of fair value from $8.3 million at year-end, while investments rated 2 increased to $87.2 million from $26.8 million.

Outlook, management commentary, risks and unusual items

No formal earnings or portfolio guidance was provided. Management expects to raise additional equity and debt capital opportunistically, subject to market conditions and regulatory limits.
The Advisor is subject to a proposed acquisition by an affiliate of Monroe Capital. The transaction and a new investment management agreement were subject to stockholder approval and customary closing conditions, with closing expected around the end of May 2023.
Three debt investments were on non-accrual status at March 31, 2023, with cost of $20.3 million and fair value of $5.3 million. No interest income was recognized from non-accrual investments during the quarter.
The company recognized a $0.2 million realized investment loss, primarily from warrant write-offs, and $7.5 million of net unrealized depreciation.
The incentive fee cap and deferral mechanism reduced current-quarter incentive fee expense by $0.2 million. Total contingent incentive fee liability subject to future recoupment was $1.3 million.
After quarter-end, IMV Inc., a portfolio company, obtained creditor protection in Canada and indicated it would seek recognition under Chapter 15 of the U.S. Bankruptcy Code. The potential financial impact is not quantified in the filing.
Key risks include portfolio-company defaults, valuation uncertainty, rising borrowing costs, liquidity and refinancing risk, unfunded commitments, regulatory and RIC qualification requirements, inflation and supply-chain disruption, financial-institution stress, and the ability of portfolio companies to obtain additional capital.
Approximately 96% of outstanding debt-investment principal was floating-rate. Management estimated that a 100-basis-point increase in rates would increase annual net assets by approximately $6.4 million before incentive-fee effects, while a 100-basis-point decrease would reduce annual net assets by approximately $6.2 million.

Important facts for investors to verify

Whether the proposed Monroe Capital acquisition of the Advisor closed and whether stockholders approved the new investment management agreement.
The ultimate recovery and valuation impact from IMV’s creditor-protection proceedings and the company’s other non-accrual investments.
Whether unrealized portfolio depreciation, internal credit ratings and non-accrual exposure continued to worsen after March 31, 2023.
The availability and borrowing-base capacity of the Key and NYL Facilities, particularly as the Key Facility’s revolving period approaches its June 2024 expiration.
Whether $166.2 million of unfunded commitments can be funded without materially increasing leverage or requiring additional capital raises.
The sustainability of the $0.33 quarterly distribution relative to net investment income, taxable income and available liquidity.
The impact of higher floating-rate funding costs on net investment income and NAV.