Horizon Technology Finance Corp Q4 FY2023 earnings call

• 2023 was challenging for the venture debt market, but net investment income exceeded distributions and reached record levels.
• Net asset value declined due to underperformance of stressed investments in the portfolio, linked to issues in the venture capital ecosystem.
• Raised equity in 2023 through an overnight offering and an at-the-market program.
• Adviser sold to Monroe Capital, providing access to Monroe's platform.
• In Q4, funded $63 million in six investments, including loans to new and existing portfolio companies.
• Onboarding yield was 13.8% in Q4, debt portfolio yield was 16.8% in Q4 and 16.6% for the full year.
• Committed and approved backlog was $218 million at year-end, up from $202 million at the end of Q3.
• Worked on finding innovative solutions for stressed investments and focused on credit quality.

In 2023, Horizon Technology Finance Corporation generated net investment income of $1.98 per share. The portfolio size was $709 million in the fourth quarter. The debt portfolio yield was 16.8% in the fourth quarter and 16.6% for the full year. The committed and approved backlog was $218 million at year-end. The portfolio had warrant and equity positions in 99 portfolio companies with a fair value of $32 million. The net asset value was $9.71 per share as of December 31, 2023.

• Expect modest prepayments in Q1 2024 due to normal seasonal trends and weak IPO/M&A markets.
• Anticipate gradual improvement in the venture capital environment in 2024, with certain segments like AI solutions-driven and life science companies expected to see increased investor interest.
• Plan to remain selective in new originations near term but expect potential portfolio growth mid to back half of 2024.
• Board declared monthly distributions of $0.11 per share through June 2024 and a special distribution of $0.05 per share in April.

• Stress in the venture capital ecosystem, including collapse of Silicon Valley Bank, tightening capital availability, closed IPO markets, and declining valuations.
• Macroeconomic uncertainties such as inflation and interest rates.
• Unrealistic valuations, higher interest rates, and regulatory scrutiny impacting M&A activity.
• Potential impact on portfolio companies' ability to raise capital and perform well.

Q: Could you provide updates on Nexii Building and HIMV?

A: Nexii is in the CCAA process (equivalent of Chapter 11), terms adjusted to align with the process, and it's operating and signing new contracts. HIMV's assets were acquired by BioVaxys, with plans to develop the assets internally and find partners.

Q: Why was there a lack of ATM use in the quarter?

A: It was prudent to be out of the market in the quarter based on capital needs and activity assessment.

Q: Thoughts on stressed assets and the DC market?

A: Stressed assets face issues due to VC portfolio valuation struggles and idiosyncratic company management, but there are green shoots like more IPOs and M&A activity.

Q: Outlook for leverage ratio?

A: Target leverage is net of cash 1.2x, and the outlook is to stay within that range.

Q: Thoughts on further dividend supplements?

A: Each quarter, distribution is discussed with the Board, and based on spillover income and outlook, special distributions may continue.

Q: Excise tax consideration in spillover?

A: Excise tax is a factor, but at 4%, it's not a significant expense, and spillover is considered in relation to American BDC requirements.