Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Horizon Technology Finance Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Megan Bacon, Director of Investor Relations and Marketing. Thank you. You may begin.

Thank you, and welcome to Horizon Technology Finance Corporation first quarter 2023 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 Q1 earnings press release and Form 10-Q 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. Jerry will then discuss our business development efforts, our portfolio events and our markets, and Dan will detail our operating performance and financial condition. We will then take some questions. With the increasingly challenging macroeconomic environment and fallout from the collapse of Silicon Valley Bank and Signature Bank in the first quarter, Horizon and our adviser, Horizon Technology Finance Management, took a measured approach to originations and redoubled efforts to focus on the credit quality of our portfolio companies. There is no question that the venture capital ecosystem has changed and will continue to evolve. While this creates challenges, this also creates opportunities in both the near and long-term for those that can successfully navigate through the challenges. With our experienced team, disciplined investment approach and strong balance sheet, we believe we are positioned to emerge from these challenges as a stronger company. Jerry will provide some additional commentary on the fallout from the state of the macro economy and the banking crisis a little later in our presentation. Turning to our specific results for the quarter. We generated net investment income of $0.46 per share, well in excess of our distribution level due largely to higher interest rates on our floating rate investment portfolio and the growth in our portfolio. Based on our outlook and our undistributed spillover income of $0.81 per share as of March 31, we declared monthly distributions of $0.11 per share through September 2023. We achieved a portfolio yield on our debt investments for the quarter of 16.3%, once again at or near the top of the BDC industry. We raised approximately $7 million…

Thanks, Rob, and good morning to everyone. In Q1, we saw a slight reduction in our portfolio size from year-end to $750 million as of March 31. In the first quarter, we funded eight transactions totaling $40 million, including a $20 million debt investment to a new tech portfolio company focused on education. We expect to remain selective in originating debt investments and have tightened our underwriting profile, given the increased uncertainty related to the venture capital ecosystem. Our onboarding yield of 14.3% during the quarter was above our Q4's yield and continues to reflect our disciplined in structuring and pricing transactions, which will produce strong net investment income. We experienced four loan prepayments and one partial pay down during the quarter, totaling $32 million. We expect prepayments to be lower in the second quarter of 2023, compared to our historic levels given the current volatility in the muted IPO and M&A markets. Our debt portfolio yield of 16.3% for the quarter is a further testament to the value of our floating interest rate structures in a rising rate environment, helping us generate one of the highest portfolio yields in the BDC industry. As of March 31, we held warrant and equity positions in 99 portfolio companies with a fair value of $30 million. As we've consistently noted, structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and our potential generator of additional value. In the first quarter, we closed $52 million in new loan commitments and approvals maintaining our selective approach to new opportunities and ended the quarter with a committed and approved backlog of $187 million compared to $220 million at the end of the fourth quarter. We believe our committed backlog with most of our funding commitments subject to our…

Thanks, Jerry, and good morning, everyone. During the first quarter, the yield generated from our debt investments once again produced NII that more than covered our distributions, while maintaining a strong balance sheet and utilizing our ATM program successfully and accretively raise an additional $7 million of capital demonstrating our continued ability to opportunistically access the equity markets. We believe our focused balance sheet management keeps us well positioned to thoughtfully grow the loan portfolio and create additional shareholder value in the current environment and beyond. As of March 31, we had $112 million in available liquidity consisting of $43 million in cash and $69 million in funds available to be drawn under our existing credit facilities. We currently have $15 million outstanding under our $125 million Keybanc credit facility and $177 million outstanding under our $200 million New York Life credit facility, leaving us with ample capacity to grow the portfolio. Our debt’s equity ratio stood at 1.38:1 as of March 31. Netting out cash on our balance sheet, our leverage was 1.24:1, which was slightly above our target leverage at 1.2:1. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity at March 31 was $177 million. For the first quarter, we earned total investment income of $28 million, an increase of 97% compared to the prior year period. Interest income on investments increased primarily as a result of the higher average size of our debt investment portfolio for the quarter and increases in the variable interest rate on our debt investments. Our debt investment portfolio on a net cost basis stood at $704 million as of March 31, a slight increase from December 31, 2022. For the first quarter of 2023, we achieved onboarding yields of 14.3% compared to…

Thank you. [Operator Instructions] Our first question is from Christopher Nolan with Ladenburg Thalmann.

Hi. Thanks for taking my question. I guess, my real question is how’s the portfolio holding up given following the implosion of Silicon Valley Bank and Signature Bank? Are you seeing change in terms of cash burns and headcount levels and things like that?

Yes. Hi, Chris, this is Jerry. Yes, that is definitely true. I actually, I think some of that was going on before the bank crisis. We are seeing across the board lower liquidity levels at all level of the VC ecosystem, meaning that portfolio companies have less liquidity to work with. Venture capital firms have either less liquidity in their funds, or they’re highly restricted to certain investments that they can make and they’re obviously having to support their portfolio companies longer given exit markets are as muted as they’ve been. So that’s the environment in which we are all living in today, and I think that will continue for some period of time. On a little bit more positive note on that. We’ve also seen at least in our portfolio, our portfolio companies have gotten quite religious about their cash burn, about operating significantly more efficiently as well as being more creative actually in ways to raise liquidity to continue to support their operations and try to continue to create value in a very difficult, I should say, more – not so much difficult, but volatile market. So we expect that to continue. We are working very closely with our portfolio companies, along with their investors who are also, I would say very engaged in wanting to see these companies continue their operating performance. Another bit of positive news, I’m not ready to say it’s a trend yet, but we are beginning to see strategics starting to engage more consistently and starting to look at some of these opportunities, certainly on the life science side and the public biotech sector where valuations have gotten so low that they’re – it’s difficult for those companies to raise money on one hand. On the other hand, their valuations are getting very…

As a follow up, given everything you said about the environment and given the pending acquisition of the manager by Monroe Capital, should we expect Horizon to start doing more off balance sheet type of vehicles?

Hi, Chris. Yes, this is Dan. In the past you can see we’ve had off sheet, balance sheet vehicles that we used to co-invest with the public company. It has been a strategy we’ve looked at before and one we’re going to continue to look at. And as Rob mentioned, it is part of one of the value drivers of the transaction for the advisor and for the shareholders at Horizon to allow additional vehicles and allow us to co-invest with Horizon. So it is a strategic initiative of ours. And so we’ll continue to do that going forward.

That’s it for me. Thank you.

Our next question is from Bryce Rowe with B. Riley.

Thanks. Good morning. Wanted to maybe follow-up on Chris’ line of questioning there. You guys talked about the change in the internal risk rating, certainly understandable to see some credits move into the to the two category or seven credits move into or five credits move into the two category quarter-over-quarter. Can you maybe just help us think about perhaps why those moved in and then help us try to understand, what’s happening within the 3s and 4s to keep them there so to speak? Thanks.

Yes. Hi, this is Jerry. So, given the volatility of fundraising and the ways in which companies today have to – want to manage their liquidity, but also try to use as much value as they have in the company to raise capital from different sources. We’re taking a much more conservative approach to company’s ability to do that given the uncertainty. So it’s – so they’re – as an example, some of those companies that are in our – we’ve moved through a two rated bucket, actually have term sheets. But will they get to a close? It’s not as certain as it would’ve been a year ago. And so – and they will need that liquidity. So that has as we have looked at across our portfolio and looked across how companies are raising money and where the real risks are associated with that. Any company that we felt there was greater uncertainty, whether it was them having to raise money or them in the process of raising money and getting to a close, we moved those companies into the two rated bucket. And I suspect what we’re going to see during the course of this year is we’re going to see companies moving in and out of the two and three rated bucket because they’re starting with lower liquidity across the board, the whole industry. And as they get to a point where there’s going to be an inflection point relative to raising capital, we may move them into the two rated category, but we also – they may get that deal done and then we move them back into a three. So, we’ll probably see more of that kind of activity during the course of the year.

Okay.

I’m sorry. You had also – you also asked – so as it relates to three and four rated credits, there are deals getting done in the marketplace especially on the strategic side, we are seeing a lot of liquidity coming into companies that have really strong IP positions in certain industries. And that would include sustainability, it would include technology and we’re starting to see more on the life science side too. So there is interest. And one thing that might spark actually an IPO market opening is if there is more knowledge based financing getting done, meaning strategics coming in, meaning private venture capital firms that have a great deal of life science experience coming in and start investing be given the low valuations on these kinds of companies, I’m not going to say that’s a trend yet. I don’t see that. But we are seeing some transactions get done. And so companies with really strong IP positions are actually able to continue to raise money either through new venture capital investment or through strategic transactions.

Great. Jerry, that’s a good color. Appreciate the time this morning.

Yes, Bryce.

[Operator Instructions] Our next question is from Ryan Lynch with KBW.

Hey, good morning. I wanted to first start on portfolio company-specific question and the valuation process behind it. You mentioned in your press release, IMV looks like it's filing for bankruptcy in Canada or bankruptcy protection in Canada. From an outsider looking in, when I look at their most recent financials, it looks like they have around, this was as of December 31, $21 million of cash on the balance sheet and $27 million of debt. I would assume over the last four months of that cash balance is now somewhat less than that $21 million of cash. So I was just curious given it's much higher debt balance versus cash balance and the announcement of them filing for bankruptcy protection, your market is pretty close to par. So I would just love to hear kind of what was the thought behind that valuation process and how you guys arrived at your final number?

Sure. Let me just talk a little bit about the company and maybe I'll let Dan get into the valuation a little bit. But Ryan, I appreciate the question. So just to bring everybody up to speed, IMV is publicly traded biotechnology company that traded on NASDAQ. They're located in Canada. They filed for what is essentially a kind of a Chapter 11 bankruptcy in the U.S., it's called Company's Creditors Arrangement Act, AACC – CCAA. And that gives them some protections relative to their ongoing operations. They did not inform us ahead of the filing. We have been in, obviously, discussions with them. They are – they have announced and even in their filing that they are looking at strategic alternatives, and they were doing that well before their filings. So this is a company that we've been working pretty closely with. Again, they did not inform us of their filing on Monday, we found out with the rest of the world. But if you look at – if you happen to go to their website and look at their technology, they've actually had some very positive data on their clinical trials. And so they're just at this inflection point where there is interest in their technology, but they believe that – and this is, again, not discussed with us, but they believe the best way to get a strategic deal probably done over time was through this process. And so that is, as we understand it, why they decided to go this route. I'll let Dan talk a little bit about the valuation.

Yes. Not much more to add as far as the public information and I do appreciate the digging you're doing in. As Jerry mentioned, we have been working with them over a number of quarters, and there's a number of discussions and opportunities that they're looking at. And just like all of our companies, we look to work with them and get to a soft landing. And so there's a number of private discussions that are going on that the public is obviously not privy to. And those based on that information, the public information and additional conversations, we use all of that to fair value the position based on the knowledge we have at the time of our filing and basically how we get to our number.

Okay. But it sounds like there would have to be some sort of strategic deal done in order for you to achieve the recovery where you guys have it marked. It sounds like if it's just I don't know, liquidated or based on the financials, it sounds like there's going to be a much greater loss unless there's a strategic deal done. Is that fair to assume?

Well, they announced in their filing and their public release that they are working on strategic deals.

Okay. The other question I had was – and this is not uncommon for a lot of venture lenders. But I would just love to hear you guys have an unfunded commitment balance of about $166 million, you guys have total liquidity of $112 million. It's not uncommon for a lot of those unfunded commitments to never be committed to over time for various reasons. But I'm just wondering, in this current environment, where capital is so scarce and so important for these venture borrowers, I'm just wondering if you expect to see a higher level of these unfunded commitments being drawn down and funded by your borrowers, number one? And then number two, out of the $166 million of unfunded commitments that you will have on – that you all have today. What number of those are subject to whether it's like a milestone or your approval? And what are sort of like maybe unencumbered commitments where guys borrowers can draw down at their will.

Yes. Good question, something we're obviously paying pretty close attention to. The bottom line is a very small portion of our committed backlog is on some kind of open draw almost – I think it's over 90% is requires certain milestones to be met. And many of those milestones, Brian, are actually pretty far out. So it might be, as an example, meeting 2024 revenue number, at the end of 2024. And there are a number of tranches that could be available based on continually meeting milestones. So again, it's pretty much driven by that. And we've seen companies meet milestones and some of the fundings we did in the last quarter. In fact, were companies that actually met significant milestones and we're happy to fund those transactions. We did have some expired draws where they had to meet a milestone by a certain date, and they didn't meet those. And so the funding – the milestones expired. And so it's – that's kind of how the backlog sits right now. And we – you'll have to see how those milestones do or do not get that and how much of – but a number of them are, in fact, with certainly three and four rated credits in our portfolio that are doing reasonably well. And so our hope is that they meet those milestones because those are value drivers.

Okay. That's helpful. And then I just had one more. You guys are slightly above the upper end of your leverage target range. I know you said you're going to be pretty cautious and selective in the new deals that you guys are funding today, just given the uncertain environment. Obviously, the deals that you're doing today, I think, are probably going to be extremely high quality, very good risk-adjusted return deals. So I'm just wondering though, slightly above your target leverage range, where do you guys foresee you operating at kind of if you look to the back half of 2023. Do you guys intend to kind of still be up at the upper end of the leverage range? Or are you actually looking to bring leverage down to more of the middle or lower end? What are you thinking there?

Yes, Ryan, I think it's fair to say that we will probably be around this range for the remainder of 2023. We're comfortable at this range. There's plenty of regulatory cushion between net 1.24 to the 2:1 regulatory cap.

Okay. All right, I appreciate the time today.

Thank you.

Thank you. There are no further questions. I will now turn the call back to Robert Pomeroy, Chairman and CEO, for closing remarks.

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.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.