Horizon Technology Finance Corporation — 2Q22 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 receives warrants from development-stage companies in life science, technology, healthcare information and services, and sustainability industries. The filing covers the unaudited three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total investment income | $18.6 million, up 37.8% | $32.8 million, up 22.8% |
| Net investment income | $8.6 million, up 40.5% | $14.3 million, up 18.1% |
| Net realized gain/(loss) on investments | $(0.9) million | $(0.9) million |
| Net unrealized gain/(loss) on investments | $(0.04) million | $(2.3) million |
| Net increase in net assets from operations | $7.6 million, or $0.31 per share | $11.1 million, or $0.48 per share |
| Distributions declared | $0.30 per share | $0.60 per share |
| Net investment income per share | $0.35 | $0.62 |
Six-month net investment income before excise tax was $14.5 million, versus $12.2 million in the prior-year period. Total expenses increased to $18.3 million from $14.5 million, primarily because of higher interest expense, base management fees, and incentive fees. The filing does not present a consolidated GAAP revenue or operating margin measure; net investment income represented approximately 46% of total investment income for the six-month period.
- At June 30, 2022, total assets were $667.9 million, investments at fair value were $577.5 million, and net assets were $290.6 million.
- NAV per common share was $11.69, compared with $11.56 at December 31, 2021.
- The portfolio comprised 55 debt investments with a fair value of $551.6 million, 86 warrant investments valued at $25.2 million, and smaller equity and other investments.
- Senior Term Loans represented 92.4%, or $509.8 million, of debt investments at fair value.
- Six-month cash flow from operating activities was negative $110.7 million, reflecting $253.7 million of investment purchases, partially offset by $87.5 million of principal payments and $43.4 million of investment-sale proceeds.
- Financing activities provided $141.4 million, including proceeds from the 2027 Notes, equity issuance, and credit-facility advances. Cash, money market funds, and restricted cash totaled $77.9 million at June 30, 2022.
Debt, Liquidity, and Capital Resources
| Borrowing | Outstanding at June 30, 2022 | Unused Commitment |
|---|---|---|
| Key Facility | $74.5 million | $50.5 million |
| NYL Facility | $136.8 million | $63.3 million |
| Asset-Backed Notes | $49.8 million | None |
| 2026 Notes | $57.5 million | None |
| 2027 Notes | $50.0 million | None |
Total borrowings outstanding, net of unamortized debt issuance costs, were $364.8 million, compared with $257.6 million at December 31, 2021. Reported asset coverage for borrowed amounts was 179%, above the 150% statutory requirement. The company reported $189.5 million of unfunded commitments to portfolio companies, including $157.8 million due within one year, subject to borrowing conditions and milestones. Management stated that current cash, operating cash flow, and available credit facilities should be sufficient for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- The investment portfolio expanded materially: fair value increased to $577.5 million from $458.1 million at year-end 2021, while debt investments increased to $551.6 million from $437.3 million.
- New debt investments totaled $253.7 million for the first six months, versus $118.7 million in the prior-year period.
- Average borrowings increased 41.3% for the first six months, while average debt investments increased 37.5%.
- Investment income increased, but the dollar-weighted annualized yield on debt investments declined to 13.4% from 15.0% for the first six months; the all-investment yield declined to 12.8% from 14.2%.
- Six-month net investment income per share was unchanged at $0.62, while net increase in net assets per share declined to $0.48 from $0.65 because of unrealized depreciation and different realized investment results.
- The company issued $50.0 million of 6.25% 2027 Notes in June 2022 and completed a March follow-on equity offering that generated $34.3 million of net proceeds. In July 2022, the 2027 Notes over-allotment option added approximately $7.3 million of gross proceeds.
- Non-accrual investments increased from one investment with a $6.9 million fair value at year-end 2021 to two investments with a combined $4.9 million fair value at June 30, 2022. No interest income was recognized from non-accrual investments in 2022.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to continue raising equity and debt capital opportunistically, subject to market conditions and regulatory leverage limits, and intends to distribute substantially all investment company taxable income to maintain RIC status.
- Credit risk is significant because the portfolio consists largely of development-stage companies with limited operating histories and continuing capital needs. Two investments were rated 1 under the company’s internal credit system, representing $14.8 million of cost and $4.9 million of fair value.
- Approximately 95.5% of the investment portfolio at fair value consisted of debt investments. Five largest debt investments represented 22% of total debt investments, creating some concentration risk, although no single investment exceeded 10%.
- All outstanding debt investment principal was at floating rates. Rising rates may increase investment income but also increase borrowing costs; the filing estimates that a 100-basis-point increase would raise annual investment income by $5.7 million and interest expense by $0.8 million, before incentive fees.
- Most investments are Level 3 fair values based on discounted cash-flow and other models. Level 3 investments totaled $577.4 million, making NAV sensitive to management assumptions, market yields, borrower performance, and liquidity conditions.
- Management identified inflation, supply-chain disruption, geopolitical events including the Russia-Ukraine conflict, economic slowdown, competition, regulatory changes, LIBOR transition, and portfolio-company funding needs as risks.
- The company recognized a $1.2 million realized loss related to a controlled affiliate and a $2.3 million six-month net unrealized depreciation on investments.
- Subsequent to quarter-end, Horizon funded investments of $2.0 million, $14.0 million, $2.5 million, and $20.0 million, including investments in BrightInsight, Optoro, and Slingshot Aerospace. It also released liens on MacuLogix assets in connection with a sale and valued the related asset at $3.6 million.
- The Board declared monthly distributions of $0.10 per share for September through November 2022. Undistributed spillover income was $0.53 per share at June 30, 2022.
Important Facts for Investors to Verify
- Reconcile total borrowings, available borrowing capacity, debt maturities, interest-rate exposure, and compliance with the 150% asset-coverage requirement.
- Review the two non-accrual investments, internal credit ratings, collateral coverage, and any subsequent recoveries or restructurings.
- Assess whether the $189.5 million of unfunded commitments can be funded without materially increasing leverage or requiring additional capital.
- Evaluate the sustainability of distributions relative to net investment income, taxable income, spillover income, and the proportion of income from non-cash ETPs and other accrued items.
- Review Level 3 valuation assumptions, particularly market yields, probability weightings, warrant valuations, and the effect of changing portfolio-company performance.
- Monitor the July 2022 financings and portfolio investments, the MacuLogix asset sale, and the transition from LIBOR-based rates.
- Confirm future credit-facility and unsecured-note maturities, covenants, refinancing needs, and the effect of rising funding costs on net investment income.