Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HRZN > SEC Filings for HRZN > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for HORIZON TECHNOLOGY FINANCE CORP

Form 10-Q for HORIZON TECHNOLOGY FINANCE CORP


6-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this quarterly report on Form 10-Q, except where the context suggests otherwise, the terms "we," "us," "our" and "Horizon Technology Finance" refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Amounts are stated in thousands, except shares and per share data and where otherwise noted.

Forward-Looking Statements

This quarterly report on Form 10-Q, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

our future operating results, including the performance of our existing loans and warrants;

the introduction, withdrawal, success and timing of business initiatives and strategies;

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

the relative and absolute investment performance and operations of our investment advisor, Horizon Technology Management LLC, or the Advisor;

the ability of our Advisor to attract and retain highly talented professionals and to operate effectively at existing staffing levels;

the impact of increased competition;

the impact of investments we intend to make and future acquisitions and divestitures;

the unfavorable resolution of legal proceedings;

our business prospects and the prospects of our portfolio companies;

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

our ability to qualify and maintain qualification as a RIC and as a business development company;

the adequacy of our cash resources and working capital;

the timing of cash flows, if any, from the operations of our portfolio companies;

the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;

the ability of our portfolio companies to achieve their objective;

our ability to cause a subsidiary to become a licensed Small Business Investment Company;

the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or our Advisor;

our contractual arrangements and relationships with third parties;

our ability to access capital and any future financings by us; and

the impact of changes to tax legislation and, generally, our tax position.

We use words such as "anticipates," "believes," "expects," "intends," "seeks" and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in "Risk Factors" and elsewhere in our annual report on Form 10-K for the year ended December 31, 2013, and elsewhere in this quarterly report on Form 10-Q.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, or the SEC, including, periodic reports on Form 10-Q and Form 10-K and current reports on Form 8-K.

Overview

We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and cleantech industries, which we refer to as our "Target Industries." Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as "Venture Loans," to companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as "Venture Lending." We also selectively lend to publicly traded companies in our Target Industries.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally do not have to pay corporate-level federal income taxes on our investment company taxable income and net capital gain that we distribute to our stockholders as long as we meet certain source-of-income, distribution, asset diversification and other requirements.

Compass Horizon Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.

Our investment activities, and our day-to-day operations, are managed by the Advisor and supervised by our board of directors, or the Board, of which a majority of the members are independent of us. Under an investment management agreement, or the Investment Management Agreement, we have agreed to pay the Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into an administration agreement, or the Administration Agreement, with the Advisor under which we have agreed to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement.

Portfolio Composition and Investment Activity



The following table shows our portfolio by asset class as of March 31, 2014 and
December 31, 2013:



                                    March 31, 2014                                   December 31, 2013
                                                       Percentage                                        Percentage
                         # of             Fair          of Total           # of             Fair          of Total
                      Investments        Value         Portfolio        Investments        Value         Portfolio
Term loans                      47     $  206,002             90.2 %              48     $  201,846             91.2 %
Revolving loans                  1         11,922              5.2                 1         11,908              5.4
Total loans                     48        217,924             95.4                49        213,754             96.6
Warrants                        74          6,731              2.9                73          6,036              2.7
Other investments                1            400              0.2                 1            400              0.2
Equity                           4          3,505              1.5                 3          1,094              0.5
Total                                  $  228,560            100.0 %                     $  221,284            100.0 %

Total portfolio investment activity as of and for the three months ended March 31, 2014 and 2013 was as follows:

                                               For the Three Months Ended
                                                        March 31,
                                                  2014               2013
Beginning portfolio                          $      221,284       $  228,613
New loan funding                                     17,926           28,500
Less refinanced balances and participation                -                -
Net new loan funding                                 17,926           28,500
Principal payments received on investments          (11,773 )         (9,962 )
Accretion of loan fees                                  406              548
New loan fees                                          (180 )           (320 )
New equity                                                -               73
Sale of investments                                    (720 )              -
Net realized loss on investments                     (6,913 )            (18 )
Net unrealized appreciation on investments            8,530              420
Other                                                     -              (73 )
Ending Portfolio                             $      228,560       $  247,781

We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.

The following table shows our loan portfolio by industry sector as of March 31, 2014 and December 31, 2013:

                                              March 31, 2014                 December 31, 2013
                                         Loans at       Percentage       Loans at        Percentage
                                           Fair          of Total          Fair           of Total
                                          Value         Portfolio          Value         Portfolio
Life Science
Biotechnology                           $   15,016              6.9 %   $    16,376              7.7 %
Medical Device                              16,599              7.6          14,765              6.9
Technology
Networking                                     981              0.4             963              0.5
Software                                    63,963             29.4          66,583             31.1
Internet and Media                           5,390              2.5           6,019              2.8
Communications                               9,379              4.3           9,359              4.4
Semiconductors                              46,885             21.5          37,450             17.5
Power Management                            15,912              7.3          13,044              6.1
Cleantech
Energy Efficiency                            6,864              3.1          11,403              5.3
Waste Recycling                                680              0.3             680              0.3
Alternative Energy                          11,113              5.1          11,771              5.5
Healthcare Information and Services
Diagnostics                                 11,921              5.5          12,140              5.7
Other Healthcare Related Services            6,914              3.2           6,904              3.2
Software                                     6,307              2.9           6,297              3.0
Total                                   $  217,924            100.0 %   $   213,754            100.0 %

The largest loans may vary from year to year as new loans are originated and existing loans are repaid. Our five largest loans represented 21% and 22% of total loans outstanding as of March 31, 2014 and December 31, 2013, respectively. No single loan represented more than 10% of our total loans as of March 31, 2014 and December 31, 2013.

Loan Portfolio Asset Quality

We use an internal credit rating system which rates each loan on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and while no loss is currently anticipated for a 2 rated loan, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and increased risk. Our internal credit rating system is not a national credit rating system. The following table shows the classification of our loan portfolio by credit rating as of March 31, 2014 and December 31, 2013:

                      March 31, 2014                December 31, 2013
                Loans at       Percentage       Loans at       Percentage
                  Fair          of Loan           Fair          of Loan
                  Value        Portfolio         Value         Portfolio

Credit Rating
4               $  32,858             15.1 %   $   30,385             14.2 %
3                 163,153             74.8        167,231             78.3
2                  18,429              8.5          2,199              1.0
1                   3,484              1.6         13,939              6.5
Total           $ 217,924            100.0 %   $  213,754            100.0 %

As of March 31, 2014 and December 31, 2013, our loan portfolio had a weighted average credit rating of 3.1 and 3.0, respectively. As of March 31, 2014, there were two investments with an internal credit rating of 1, with an aggregate cost of $5.2 million and an aggregate fair value of $3.5 million. As of December 31, 2013, there were five investments with an internal credit rating of 1, an aggregate cost of $23.2 million and an aggregate fair value of $13.9 million.

The reduction in the number and value of 1 rated credits during the first quarter primarily resulted from the settlement of two investments, with an aggregate cost of $12.0 million and an aggregate fair value of $5.8 million, and the upgrade of one investment, with a cost and fair value of $8.4 million, to an internal credit rating of 2.

As of March 31, 2014, there were three investments with an internal credit rating of 2, with an aggregate cost and fair value of $18.4 million. As of December 31, 2013, there was one investment with an internal credit rating of 2, with a cost and fair value of $2.2 million.

The increase in the number and value of 2 rated credits during the first quarter primarily resulted from the upgrade of one investment from a 1 rated credit, as noted above, and the downgrade of one investment, with a cost and a fair value of $8.2 million, from an internal credit rating of 3.

Consolidated Results of Operations

As a BDC and a RIC, we are subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. The consolidated results of operations described below may not be indicative of the results we report in future periods.

Consolidated results of operations for the three months ended March 31, 2014 and 2013 were as follows:

                                                                For the Three Months Ended
                                                                        March 31,
                                                                  2014               2013
Total investment income                                      $        7,534       $     7,368
Total expenses                                                        5,010             4,595
Net investment income before excise tax                               2,524             2,773
Provision for excise tax                                                (40 )               -
Net investment income                                                 2,484             2,773
Net realized loss on investments                                     (5,884 )            (210 )
Net unrealized appreciation on investments                            8,530               420
Net increase in net assets resulting from operations         $        5,130       $     2,983
Average investments, at fair value                           $      221,778       $   230,291
Average debt outstanding                                     $      121,070       $    92,665

Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net income may not be meaningful.

Investment Income

Investment income increased by $0.2 million, or 2.3%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. For the three months ended March 31, 2014, total investment income consisted primarily of $7.2 million in interest income from investments, which included $1.1 million in income from the accretion of origination fees and end-of-term payments, or ETPs. Total investment income increased due to higher fee income offset by a lower average size of the loan portfolio.

For the three months ended March 31, 2013, total investment income consisted primarily of $7.3 million in interest income from investments, which included $1.2 million in income from the accretion of origination fees and ETPs. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio offset by lower fee income, as we had no prepayments in the quarter.

For the three months ended March 31, 2014 and 2013, our dollar-weighted average annualized yield on average loans was 13.6% and 12.8%, respectively. We calculate the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period.

Investment income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for 22% and 23% of investment income for the three months ended March 31, 2014 and 2013, respectively.

As of March 31, 2014 and December 31, 2013, interest receivable was $5.4 million and $4.2 million, respectively, which represents accreted ETPs and one month of accrued interest income on substantially all of our loans.

Expenses

Total expenses increased by $0.4 million, or 9.1%, to $5.0 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Total operating expenses for each period consisted principally of interest expense, base management fee, incentive and administrative fees and, to a lesser degree, professional fees and general and administrative expenses.

Interest expense for the three months ended March 31, 2014 and 2013 was $2.1 million and $1.8 million, respectively. Interest expense for the three months ended March 31, 2014, which includes the amortization of debt issuance costs, increased primarily due to an increase in our average debt outstanding, offset by our lower effective interest rate on borrowings.

Base management fee expense for both the three months ended March 31, 2014 and 2013 was $1.2 million. Base management fee expense for the three months ended March 31, 2014 remained flat compared to the three months ended March 31, 2013, primarily due to a waiver of a base management fee of $0.1 million it would have otherwise earned during the three months ended March 31, 2014. The Advisor waived such fees associated with cash held at the time of calculation. Our Advisor is not obligated to waive the base management fee on cash in future periods.

The performance based incentive fee for the three months ended March 31, 2014 and 2013 was $0.4 million and $0.7 million, respectively, and consisted entirely of incentive fee payable on pre-incentive fee net investment income. Performance based incentive fee for the three months ended March 31, 2014 decreased compared to the three months ended March 31, 2013, primarily due to lower pre-incentive fee net investment income and the Advisor's one-time waiver of $0.1 million of performance based incentive fee it earned for the three months ended March 31, 2014. The Advisor waived $0.1 million of the performance based incentive fee it earned during the three months ended March 31, 2014, in order to offset the $0.1 million increase in the performance based incentive fee caused by the $0.1 million increase in the pre-incentive net investment income, which resulted from the Advisor's waiver of base management fee earned on cash for the three months ended March 31, 2014. Our Advisor is not obligated to waive any performance based incentive fee in future periods.

Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the three months ended March 31, 2014 increased compared to the three months ended March 31, 2013, due to increased legal fees and other costs associated with our debt investments on non-accrual status.

Net Realized Gains and Net Unrealized Appreciation and Depreciation

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized and includes investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the three months ended March 31, 2014, we realized losses totaling $5.9 million primarily due to the resolution of two debt investments that were on non-accrual status. One was settled for a cash payment of $2.7 million and $2.3 million in newly issued preferred stock of the applicable portfolio company, which resulted in a realized loss of $1.7 million and unrealized appreciation of $1.8 million. The other loss related to a debt investment for which the company received substantially all of the assets of the applicable portfolio company through bankruptcy in satisfaction of the debt, which resulted in a realized loss of $4.7 million and unrealized appreciation of $4.4 million.During the three months ended March 31, 2013, we realized losses totaling $0.2 million primarily in connection with the disposal of a portfolio company's warrants.

During the three months ended March 31, 2014, net unrealized appreciation on investments totaled $8.5 million which was primarily due to the reversal of previously recorded unrealized depreciation on two debt investments that were settled in the period, as described above, and one debt investment that returned to accrual status in the quarter which resulted in unrealized appreciation of $1.3 million. During the three months ended March 31, 2013, net unrealized appreciation on investments totaled $0.4 million which was primarily due to the change in fair values of our investment portfolio during the period.

Liquidity and Capital Resources

As of March 31, 2014 and December 31, 2013, we had cash and investments in money market funds of $16.1 million and $26.5 million, respectively. These amounts are available to fund new investments, reduce borrowings, pay operating expenses and pay dividends. In addition, as of March 31, 2014 and December 31, 2013, we had $5.7 million and $6.0 million of restricted investments in money market funds, respectively, which may be used to make monthly interest and principal payments on our asset-backed notes, or the Asset-Backed Notes. Our primary sources of capital have been from our private and public equity offerings, use of our revolving credit facility with Wells Fargo Capital Finance LLC, or the Wells Facility, our term loan facility with Fortress Credit Co LLC, or the Fortress Facility, issuance of our 7.375% senior secured notes due 2019, or the 2019 Notes, and our Asset-Backed Notes.

As of March 31, 2014, there were no outstanding amounts due under our revolving credit facility with Key Equipment Finance, or the Key Facility. As of March 31, 2014, we had available borrowing capacity of $50.0 million under our Key Facility, subject to existing terms and advance rates.

As of March 31, 2014, the outstanding principal balance under the Fortress Facility was $10.0 million. As of March 31, 2014, we had available borrowing capacity of $65.0 million under our Fortress Facility, subject to existing terms and advance rates.

Our operating activities used cash of $5.2 million for the three months ended March 31, 2014, and our financing activities used cash of $6.1 million for the same period. Our operating activities used cash primarily for investing in portfolio companies, offset by principal payments received. Our financing activities used cash primarily to pay down our borrowings and pay first quarter dividends.

Our operating activities used cash of $18.4 million for the three months ended March 31, 2013 and our financing activities provided cash of $17.8 million for the same period. Our operating activities used cash primarily for investing in portfolio companies, offset by principal payments received. Our financing activities provided cash primarily from advances on our Wells Facility offset by dividends paid in the first quarter.

Our primary use of available funds is to make investments in portfolio companies and for general corporate purposes. We expect to raise additional equity and debt capital opportunistically as needed, and subject to market conditions, to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act.

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income. In addition, as a BDC, we are required to meet a coverage ratio of 200%. This requirement limits the amount that we may borrow.

We believe that our current cash and investments in money market funds, cash generated from operations, and funds available from our Key Facility and our Fortress Facility, or Credit Facilities, will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months.

Current Borrowings



A summary of our borrowings as of March 31, 2014 and December 31, 2013 is as
follows:



                                       March 31, 2014                                     December 31, 2013
                          Total            Balance           Unused           Total            Balance           Unused
                        Commitment       Outstanding       Commitment       Commitment       Outstanding       Commitment
Asset-Backed Notes     $     90,000     $      76,405     $          -     $     90,000     $      79,343     $          -
Fortress Facility            75,000            10,000           65,000           75,000            10,000           65,000
. . .
  Add HRZN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HRZN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.