Ladies and gentlemen greetings and welcome to the Horizon Technology Finance Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Megan Bacon, Director, IR and Marketing. Please go ahead.

Thank you, and welcome to Horizon Technology Finance Corporation's fourth quarter 2022 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q4 earnings press release and Form 10-K are available on the company's website at horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call, the company will make certain forward-looking statements, including statements with regard to the future performance of the company. Words such as believes, expects, anticipates, intends or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are detailed in the risk factor discussion in the company's filings with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2022. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Rob Pomeroy.

Welcome, everyone, and thank you for your interest in Horizon. As we always do on our quarterly calls, I will update you on our performance and our current overall operating environment. Today, I will also provide an update on our advisors' exciting new strategic development. Jerry will then discuss our business development efforts, our portfolio events in our markets and Dan will detail our operating performance and financial condition. We will then take some questions. Horizon and our advisor, Horizon Technology Finance Management, performed well in the fourth quarter, capping off a strong 2022 in the face of a challenging macroeconomic environment. Our earnings exceeded our distributions for the quarter and year. We grew the size of our portfolio to over $700 million. We bolstered our balance sheet, and we maintained solid credit quality. We are very pleased with how we successfully navigated through 2022, and I'm proud of our advisors and its team's efforts throughout the year as they further validated the earnings power of our portfolio, our predictive pricing strategy and our disciplined investment approach. Turning to our accomplishments in 2022. Our portfolio at year-end stood at $720 million, an increase of 57% from the end of 2021. Our significant growth resulted from both our advisers' ability to originate high-quality venture debt investments and the increasing power of the Horizon brand in the venture debt community. We finished the year with a committed and approved backlog of $220 million, which provides us with a solid base of opportunities to grow our portfolio in 2023. We generated net investment income of $1.46 per share, well in excess of our distribution level for the year, due largely to higher interest rates on our floating rate investment portfolio and the growth in our portfolio. I would note that last quarter, based…

Thanks, Rob, and good morning to everyone. Despite continued macroeconomic headwinds in Q4, we grew our portfolio by $85 million in the quarter and $262 million for the year, ending 2022 with a record high portfolio of $720 million. In the fourth quarter, we funded 10 transactions totaling $104 million, including $73 million in debt investments to 4 new portfolio companies consisting of investments in 2 new tech companies and 2 new life science companies, providing further diversification to our portfolio. Our onboarding yield of 13.3% during the quarter was above Q3 yield and continues to reflect our discipline in structuring and pricing transactions, which will produce strong net investment income. We experienced 1 loan prepayment and 1 partial paydown during the quarter totaling $8 million. We expect prepayments to continue to be lower in the first half of 2023 compared to our historic levels as the IPO and M&A markets remain muted. Our debt portfolio yield of 14.5% for the quarter was a testament to the value of our floating interest rate structures in a rising rate environment, which helped us generate one of the highest portfolio yields in the BDC industry. As of December 31, we held warrant and equity positions in 98 portfolio companies with a fair value of $32 million. As we've consistently noted, structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and an additional value generator. In the fourth quarter, we closed $133 million in new loan commitments and approvals while we maintained our selective approach to new opportunities and ended the year with a committed and approved backlog of $220 million compared to $252 million at the end of the third quarter. We're pleased with the size of our committed backlog as it positions us to…

Thanks, Jerry, and good morning, everyone. As Rob and Jerry mentioned, the fourth quarter capped off a very solid year for Horizon. We significantly grew our portfolio and once again generated NII that more than covered our distributions while further strengthening our balance sheet and maintaining stable credit quality. To recap 2022, we grew our portfolio by 57% to $720 million. In February, we expanded the capacity of our New York Life credit facility by $100 million to $200 million and extended its maturity date to June 2028. In March, we successfully raised over $34 million in net proceeds from our common stock offering. We further strengthened our balance sheet in June by completing our 6.25% notes offering, which raised over $50 million in net proceeds. In November, we closed $100 million loan securitization with a 7.56% coupon rate, which freed up capacity in our KeyBank credit facility and increased our capacity to make new debt investments. Finally, we successfully and accretively sold nearly 4 million shares through our ATM program during the year, raising over $50 million. This includes receiving net proceeds of approximately $17 million from the program in the fourth quarter, demonstrating our continued ability to opportunistically access the equity markets. We believe our thoughtful and proactive balance sheet management keeps us well positioned for additional growth and shareholder value creation in 2023. As of December 31, we had $91 million in available liquidity, consisting of $28 million in cash and $63 million in funds available to be drawn under our existing credit facility. In addition, there was only $5 million outstanding under our $125 million KeyBank credit facility and $177 million outstanding on our $200 million New York Life credit facility, leaving us with ample capacity to grow the portfolio. Our debt-to-equity ratio stood at 1.38:1…

[Operator Instructions] Our first question comes from the line of Ryan Lynch from KBW.

The first one I had was regarding the transaction of the Advisor. So in my experience in the BDC sector, the external manager has typically been majority owned by the founders and executives. And in this case, that would be you and Jerry. I'm not asking you to reveal any personal financial information, but can you confirm that if you and Jerry are the majority shareholders of the private manager. Can you give shareholders comfort that the liquidity vet in the private manager doesn't signal a potential change in Horizon's management in the mid near or immediate term?

Thanks, Ryan. This is Rob. As we've said in the press releases, and we said in our script, we're all staying and we have long-term strong incentives to continue to grow Horizon, the public company as we also grow the Horizon platform, we're not going to any place.

Okay. The other question I had was, was this deal shop around? Or was this an exclusive talk with Monroe?

We're really not going to comment on the process. This was a mutually opportunistic opportunity for them to get into a business that they've been looking at for a long time. And we saw an attractive large platform to move our franchise to -- with strong capabilities to help us grow and raise capital for both the public company and our overall platform.

Okay. I guess then moving to just the fourth quarter results, a couple of questions with that. It looks like you guys made a new investment in -- I'm not sure if I'm saying this right, but Evelo Biosciences in the fourth quarter. It's a fairly large investment of about $45 million. It's marked at par in the fourth quarter. it looked like there were some pretty big misses in some of these trials and they cut their headcount by a huge amount and now the stock is down significantly down to $0.62. Was the results and the trial data that they posted in the first quarter? Was that taken into consideration when you guys made the investment? And is that new data that was published in the first quarter of 2023. Has that been reflected in the fair value of your investment in the fourth quarter?

Ryan, this is Jerry. So we -- a fellow did put out a press release on all of the public company. So I can talk about it a little bit. yes, they had a disappointing results on a Phase II trial for dermatitis. They didn't meet the endpoints of the protocol for the clinical trial for that. That was disappointing to all stakeholders and certainly to us, too. But to get to your specific question, yes, we took that into consideration that, that was a possible outcome when we underwrote. This is a platform technology, if you read the press releases, and they just put out another one just the other day, by the way, on clinical update. They actually have a number of ongoing clinical trials, including a Phase II trial for psoriasis, which is a pill, which would be a market change because there is no appeal for psoriasis right now. And they also have a topical Phase III trial for psoriasis underway. So they have multiple clinical trials going on at the company and activity at the company. Their platform is a technology that addresses diseases related to inflammatory indications, and there is a significant unmet need in that particular area. So there's a lot going on there. I would also note that -- and again, this is public information. The Flagship ventures, while the company is public is a majority shareholder here. They own a significant amount of the company. They've been extremely supportive of the company. They were the ones that actually developed the technology. And in case you're not familiar with Flagship, they're one of the biggest life science investors in the United States back to companies like Moderna and things like that. So the underwriting went well beyond just what could potentially happen in 1 clinical trial.

Okay, understood. Just my last question then, is kind of just a broader question on the VC lending landscape, not necessarily specific to your portfolio, but -- with the significant amount of -- with a significant decline in the level of exit activity occurring in the VC markets as well as valuations going lower, how do you foresee the level of new venture investments being made in the space, either to new companies or maybe more importantly, supporting existing companies with additional rounds of capital. Obviously, venture capital has -- there's been a lot of capital raised, but do you think that they're going to be active in deploying it when they're not really receiving any capital or very little capital back from exits?

Yes. That's the right question right there. And there's kind of a tug and pull going on. On one side of the equation, there is a lot of capital committed to VC funds. And ultimately, the VCs need to -- are going to need to get that capital invested. So there's going to be pressure, I think maybe not in the first half of this year, but by the second half to really start doing that. It was actually an interesting article from Bain. I think was yesterday or the day before, they just raised 2 very large funds. And their quote was -- something to the effect -- I'm paraphrasing here that they're going to lean forward into the market right now. They think valuations are good, and they're going to be investing. So you've got that on one side of it. On the other side, to your also good point, the IPO market is still very much distracted with everything else that's going on in the economy, and there are very few IPOs getting done. And M&A is not actually in much better shape. There has been some M&A activity. One of the things we have noticed. First of all, high-quality companies still are raising capital. We have a handful of companies in our own portfolio that have raised $75 million or more in 2022. As it relates to kind of everybody else, fundraising is still happening, but instead of the -- let's grow our business, raise a big round. It's going to get us through 18 months, and a significant growth work [ph]. What we're more seeing today is companies being far more focused on getting to cash flow positive. They're raising smaller rounds. So it's not so much getting to a big event like an IPO or an M&A. It's about getting to kind of better market conditions. So we see a lot of companies that are raising 6, 9, 12 months of capital where -- a really good market. They may raise more than that and be really focused on the growth part of it. So we are seeing companies still being supported by investors for the most part. There are some idiosyncratic situations that obviously can be impacted by -- in part by kind of the macro situation. But I think that's what we're going to see for the first half of this year. We'll see continued investment. They want to keep their portfolios companies funded and keep them on some kind of track, but it isn't necessarily a big growth track and kind of waiting for better market conditions, better valuations, more M&A and a better IPO market. And that's the world we're living in right now. And so we obviously are aware of both the macro, and who the investors are and things like that.

[Operator Instructions] Our next question comes from the line of Bryce Rowe from B. Riley.

Wanted to ask about balance sheet leverage. Obviously, you all -- you finished the year over your -- over the high end of your target. You're now at 1.28x from a net debt perspective. Just any thoughts on continuing to, I guess, operate at above the target? Do you feel comfortable doing that? Or should we expect you all to try to move back down into that target range over the course of '23?

Yes. Bryce, we do watch that very closely and just want to point out that's just a snapshot at a point in time at the end of the quarter. And that will fluctuate up and down throughout the quarter. But being at 1.28x net of cash is a place that, yes, it's slightly above what we say our target is 1.2. But we're very comfortable at that level with the cushion between 1.28 and the regulatory cap of 2x. So I would say you could expect to be around that level throughout 2023.

Okay, that's helpful. And then maybe just a bit of [indiscernible] question around portfolio yield and pricing. When you get a change in the prime rate. Can you remind us when that change in rate goes into effect for your various loans? I would assume that it might vary loan by loan, but just curious if there is a general practice there.

You are correct. It does vary loan by loan. But generally, it will be either at the time that the rate changes in effect or the first of the month following the rate change.

Okay. And then maybe last one for me. From a -- again, on the yield side of things, when we're looking at where floors are today, do you have a good sense for kind of what the weighted average [indiscernible] pricing for on your loans is?

Yes, we do. With a significant amount of our portfolio funded at 3.25% prime rate and the longer period with lower prepayments, we're looking at the floor rate, which will continue to grow as the portfolio changes as we put new loans on at the higher prime. It's around 3.75% on average.

Our next question comes from the line of Vilas Abraham from UBS.

Can you guys comment a little bit on the negative migration in the quarter, particularly the couple of one-rated credits that picked up there?

Yes. Basically, we had 2 transactions that had kind of idiosyncratic events specific to the companies, one related to a strategic deal that was about to get done and then didn't. So we downgraded that, and it's still very early in the process. So we felt it would be appropriate to market down, and we'll see how that goes. We'll be working on both of those transactions over the coming quarters. Hopefully, we can get something resolved by the third quarter in both of them. So really, it was nothing more than that. And we have to work them. We took a conservative approach relative to the valuation given the macroeconomic circumstances, a better market that may have been better or more opportunities for the companies to do to get something else more positive done, but that didn't happen yet. So that's where we are today with them.

Okay. And then maybe just more broadly, as you look across the industries in your portfolio, are you seeing any particular industries more stressed than others? Or are kind of all dealing in a similar fashion with the broader pressures?

Yes. Yes, that's a good question. I think the reality is that it's not one specific industry, which, at times in our business, it has because there can be some cycles in life science as an example that is very specific to that market versus more broader macro issues. What we're seeing is that the dislocation in the broader markets is causing kind of a slowdown, take your time take a step back kind of environment where it's not so much that anyone is concerned about a specific market or even a specific company. But they're taking a very slow approach to when the market is going to change. So I think that in this case, just as macro environments have kind of lowered the tide for all boats, I think when the market turns around, you'll see it will raise most boats because there really hasn't been any specific event in any of the markets that we serve that would suggest that something is going on in those markets that are outside of macro dislocation events.

Okay. And one of the things that founders and venture-backed companies started doing early last year was kind of trying to control their cash burn, right? And as you kind of think about how that's progressed to this point? What inning do you think we're in, in these companies getting to where they need to be to adapt to the new environment here?

Yes. Again, a pretty good question because usually what happens -- and this is a historical perspective, having been doing this for 30 years. By the time you're asking the kind of questions you're asking, 90% of the cuts and reduction in burn have already taken place. And that's what we're seeing in our market. We saw in the fourth quarter kind of -- the whole venture ecosystem kind of slow down companies were very inwardly focused on cutting their costs, reducing expenses. So we think a lot of that, in fact, has happened -- and even in the new opportunities we're seeing, the companies have already kind of gone through a process where they've cut costs. and they're managing their business, trying with a focus on getting to cash flow breakeven versus on significant growth. So a lot of that has happened. And I think during the first half of this year, most of the transactions that we will see will be companies that have already kind of gone through that. And now the venture capitalist and the investors in these companies that are focused on what the next step is for the company getting back to kind of a growth scenario over time. maybe not in the first half of this year but going forward. And so that's really what we have definitely seen a lot of that already happen.

Okay, that's helpful. And if I could squeeze one more in here on the synergies with the advisor. I think you mentioned that there are some expense saves that could be realized here. Can you quantify that at all or give any timing around that?

Yes. The answer really is, not yet. But the transaction just announced spent a lot of time working on it, but we don't have any definitive answers for that at this time.

Ladies and gentlemen, there are no further questions in the queue. I would like to turn the conference over to Robert Pomeroy, Chairman and CEO, for closing comments.

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again soon. This will conclude our call. Thank you.

Thank you. The conference of Horizon Technology Finance Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.