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Horizon Technology Finance(HRZN) - 2019 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section provides the consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for Horizon Technology Finance Corporation Consolidated Financial Statements The consolidated financial statements present the financial position, operational results, and cash flows for Horizon Technology Finance Corporation as of and for the periods ended September 30, 2019, and December 31, 2018 Consolidated Statements of Assets and Liabilities Total assets increased to $325.0 million by September 30, 2019, driven by higher investments, while net asset value per share remained stable at $11.67 Consolidated Statements of Assets and Liabilities (in thousands, except per share data) | Metric | September 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Investments at Fair Value | $281,519 | $248,441 | | Total Assets | $324,951 | $266,749 | | Total Liabilities | $156,807 | $132,492 | | Total Net Assets | $168,144 | $134,257 | | Net Asset Value Per Common Share | $11.67 | $11.64 | Consolidated Statements of Operations Net investment income significantly increased to $5.8 million for Q3 2019 and $14.0 million for the nine months, reflecting improved operational performance Key Operational Data (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $11,375 | $7,797 | $30,150 | $22,285 | | Net Expenses | $5,602 | $4,395 | $16,132 | $12,383 | | Net Investment Income | $5,773 | $3,402 | $14,018 | $9,902 | | Net Increase in Net Assets from Operations | $5,206 | $4,259 | $12,769 | $9,792 | | Net Investment Income per Share | $0.42 | $0.30 | $1.08 | $0.86 | | Distributions Declared per Share | $0.30 | $0.30 | $0.90 | $0.90 | Consolidated Statements of Changes in Net Assets Net assets grew from $134.3 million to $168.1 million for the nine months ended September 30, 2019, primarily due to operational income and stock issuance - Key drivers for the increase in net assets during the first nine months of 2019 were net income from operations ($14.0 million), net proceeds from stock issuance ($33.3 million), and net unrealized appreciation on investments ($2.6 million)15 Consolidated Statements of Cash Flows Net cash used in operating activities was $40.3 million, offset by $44.7 million from financing activities, resulting in a $4.4 million net increase in cash for the nine months Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(40,307) | $(7,730) | | Net Cash Provided by Financing Activities | $44,674 | $7,045 | | Net Increase (Decrease) in Cash | $4,367 | $(685) | | Cash at End of Period | $16,958 | $5,909 | Consolidated Schedules of Investments The investment portfolio's fair value reached $281.5 million, primarily comprising debt investments diversified across technology and life science sectors Total Portfolio Investments (in thousands) | Date | Cost | Fair Value | | :--- | :--- | :--- | | September 30, 2019 | $281,377 | $281,519 | | December 31, 2018 | $250,921 | $248,441 | - The investment portfolio is primarily concentrated in debt investments, which constitute 146.9% of net assets as of September 30, 201920 - The largest sector concentrations are Technology (71.4% of net assets) and Life Science (66.6% of net assets)20 Notes to the Consolidated Financial Statements These notes detail accounting policies, related party transactions, investment specifics, fair value measurements, borrowings, and financial highlights Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, investment strategy, asset quality, and liquidity, comparing results for the periods ended September 30, 2019, and 2018 - The company's investment objective is to maximize total return by generating current income from secured debt investments (Venture Loans) and capital appreciation from associated warrants212 - On October 30, 2018, stockholders approved reducing the asset coverage requirement from 200% to 150%, allowing the company to increase its leverage213 Portfolio Composition and Investment Activity The investment portfolio's fair value was $281.5 million, with debt investments making up 89.9%, and $117.8 million in net new debt investments originated Portfolio Composition by Investment Type (Fair Value) | Investment Type | Sept 30, 2019 (%) | Dec 31, 2018 (%) | | :--- | :--- | :--- | | Debt investments | 89.9% | 87.1% | | Warrants | 3.5% | 3.8% | | Other investments | 0.3% | 3.1% | | Equity | 1.2% | 0.7% | | Equity interest in HSLFI | 5.1% | 5.3% | - For the nine months ended September 30, 2019, the company funded $135.3 million in new debt investments and received $83.6 million in principal payments and early pay-offs218 Debt Investment Asset Quality The debt portfolio maintained a weighted average credit rating of 3.1, with 75.7% of investments rated as standard risk Debt Investment Portfolio by Credit Rating (Fair Value) | Credit Rating | Sept 30, 2019 (%) | Dec 31, 2018 (%) | | :--- | :--- | :--- | | 4 (Highest Quality) | 17.0% | 19.3% | | 3 (Standard Risk) | 75.7% | 71.8% | | 2 (Increased Risk) | 6.8% | 8.9% | | 1 (Deteriorating) | 0.5% | 0.0% | - As of September 30, 2019, one debt investment with a fair value of $1.5 million was on non-accrual status and rated 171222 Horizon Secured Loan Fund I LLC (HSLFI) HSLFI, a joint venture, held $47.1 million in total assets, generating a 12.7% annualized yield on debt investments for Q3 2019 - As of September 30, 2019, the company had an unfunded commitment of $11.1 million to HSLFI out of an original $25.0 million commitment224 HSLFI Key Metrics | Metric | As of/For Q3 2019 | | :--- | :--- | | Total Assets | $47.1 million | | Total Investments (Fair Value) | $42.9 million | | Dollar-weighted annualized yield | 12.7% | | Number of portfolio companies | 7 | Consolidated Results of Operations Total investment income and net investment income significantly increased for both Q3 and the nine months ended September 30, 2019, driven by portfolio growth and fee income Comparison of Results of Operations (in thousands) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $11,375 | $7,797 | $30,150 | $22,285 | | Net Investment Income | $5,773 | $3,402 | $14,018 | $9,902 | | Net Increase in Net Assets | $5,206 | $4,259 | $12,769 | $9,792 | - The dollar-weighted annualized yield on debt investments increased to 17.7% in Q3 2019 from 15.0% in Q3 2018, reflecting higher accelerated fees from prepayments242243 - For the nine months ended September 30, 2019, the Advisor waived $1.8 million in performance-based incentive fees, compared to a waiver of $0.6 million in the same period of 2018261262 Liquidity and Capital Resources The company had $36.4 million in cash and $110.0 million in unused credit, with sufficient liquidity for the next 12 months, supported by recent equity offerings - The company established a $50.0 million At-The-Market (ATM) sales agreement on August 2, 2019, and sold approximately 0.9 million shares for $10.4 million in net proceeds by September 30, 2019269270 Borrowings Outstanding (in thousands) | Facility | Sept 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Key Facility | $15,000 | $90,500 | | Asset-Backed Notes | $100,000 | $0 | | 2022 Notes | $37,375 | $37,375 | | Total Borrowings (net) | $149,920 | $126,853 | - As of September 30, 2019, the company had unfunded credit commitments of $37.8 million to its portfolio companies288 Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, with a 100 basis point rate increase projected to boost net assets by $2.1 million annually Annual Impact of Interest Rate Changes on Net Assets (in thousands) | Change in Basis Points | Change in Net Assets | | :--- | :--- | | Up 300 | $7,253 | | Up 100 | $2,054 | | Down 100 | $(613) | | Down 300 | $(722) | - As of September 30, 2019, 99% of the outstanding principal amount of the company's debt investments bore interest at floating rates, primarily based on a LIBOR index319 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019324 - There were no material changes in internal control over financial reporting during the most recently completed fiscal quarter325 PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and exhibits Legal Proceedings Neither the company nor its Advisor is currently involved in any material legal proceedings - As of the filing date, there are no material legal proceedings involving the company or its Advisor327 Risk Factors The company faces increased financial risk due to reduced asset coverage requirements, allowing for greater leverage and potentially higher management fees - The Small Business Credit Availability Act (SBCAA) allowed the company to reduce its asset coverage requirement from 200% to 150% following stockholder approval on October 30, 2018, enabling it to incur greater leverage329 - Increased leverage may amplify financial risk and could result in higher base management fees, as the fee is calculated on gross assets, including borrowed funds329 Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the reporting period - None332 Defaults Upon Senior Securities No defaults on senior securities occurred during the reporting period - None333 Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable334 Other Information No other material information is reported for the period - None335 Exhibits This section lists all exhibits filed, including required CEO and CFO certifications - The exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906337