Horizon Technology Finance Corporation (HTFC) is a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services, and sustainability industries. With an experienced management team and a proven track record, HTFC has weathered various market cycles, demonstrating its ability to navigate the ever-changing venture lending landscape.

Business Overview

HTFC's portfolio size reduced to $647 million in the second quarter of 2024, as modest originations were more than offset by prepayments and normal portfolio amortization, as well as fair value adjustments. The company funded four debt investments totaling $11 million, one of which was to a new portfolio company and the remainder to existing portfolio companies. While the market for quality new venture loans remained soft for much of the first half of the year, HTFC's focus in the second quarter was to carefully seek new opportunities and continue to support its existing portfolio.

More recently, HTFC is seeing increased market activity and is building its pipeline with companies across its target sectors, which possess disruptive technology in large and important markets and are supported by quality investors who have made recent investments. The company is increasingly confident that it will return to portfolio growth beginning in the third quarter of 2024.

HTFC's onboarding debt investment yield of 13.7% during the second quarter remained high compared to its historic levels, and the company expects to continue generating strong onboarding yields with its current pipeline of opportunities. The company's debt portfolio yield of 15.9% for the quarter was once again one of the highest yielding debt portfolios in the BDC industry, demonstrating the profitability of its venture lending strategy and its execution across various market cycles and interest rate environments.

As of June 30, 2024, HTFC held warranted equity positions in 99 portfolio companies with a fair value of $29 million. Structuring investments with warrants and equity rights is a key component of the company's venture debt strategy and a potential generator of shareholder value.

Financials

In the second quarter of 2024, HTFC achieved net investment income (NII) of $12.9 million, which more than covered its distributions. The company's total investment income for the quarter was $25.7 million, compared to $28.1 million in the prior year period, primarily due to lower interest income on its debt investment portfolio. Total expenses for the quarter were $12.4 million, compared to $11.9 million in the second quarter of 2023, with the increase primarily attributable to higher interest expense.

HTFC's annual net income for the year ended December 31, 2023, was -$17.2 million, while its annual revenue was $83.8 million. The company's annual operating cash flow and free cash flow for the same period were both $50.1 million.

The company's undistributed spillover income as of June 30, 2024, was $1.28 per share, and its Board of Directors declared monthly distributions of $0.11 per share for October, November, and December of 2024. HTFC remains committed to providing its shareholders with distributions that are covered by its net investment income over time.

As of June 30, 2024, HTFC's net asset value (NAV) was $9.12 per share, compared to $9.65 as of March 31, 2024, and $11.70 as of June 30, 2023. The $0.52 reduction in NAV on a quarterly basis was primarily due to paid distributions and adjustments to fair value, partially offset by net investment income and accretive sale of equity.

Liquidity

HTFC has taken significant steps to enhance its capital resources in the quarter, including completing amendments to its key bank and New York Life credit facilities, reducing its cost of capital, increasing its credit availability, and extending its investment periods. Additionally, the company added a new $100 million credit facility, which increases its overall capacity. HTFC also continued to opportunistically access its ATM program, successfully and accretively selling over $1.5 million in shares in the quarter and raising $17 million.

As of June 30, 2024, HTFC had $150 million in available liquidity, consisting of $117 million in cash and $33 million in funds available to be drawn under its existing credit facilities. The company's debt-to-equity ratio stood at 1.36:1 as of June 30, 2024, and its net leverage was 1:1, well within its target leverage. Based on its cash position and borrowing capacity, HTFC's potential new investment capacity as of June 30, 2024, was $386 million.

Outlook

Looking ahead, HTFC remains optimistic about sourcing and originating new venture loans to grow its portfolio in the coming quarters. The company's pipeline remains robust at $1.7 billion as of today, and it is increasingly confident that it will return to portfolio growth in the back half of 2024. While the company will continue to navigate the ever-changing venture capital environment, it is focused on credit quality and providing its portfolio companies with support to ensure optimal outcomes.

HTFC's management team has an average tenure in the venture lending business of over 20 years, and the company has experienced supporting its companies through difficult times and maximizing the value of its stressed investments. The company believes it is starting to see the beginnings of a recovery in the venture ecosystem, and it remains optimistic about its prospects, with a strong portfolio yield, earnings that have covered its distributions for over six years, and a growing pipeline of quality new customer opportunities.

Conclusion

In conclusion, HTFC's expertise, resilience, and disciplined approach to venture lending have enabled it to navigate the challenges of the current market environment. With a focus on credit quality, portfolio growth, and shareholder value creation, the company is well-positioned to capitalize on the opportunities that lie ahead in the venture lending landscape.